IPCC Notes - Partnership Accounts

PARTNERSHIP ACCOUNTS P a g e | -1
CHAPTER:1 FUNDAMENTALS
Special Aspects of Final Accounts of Partnership
1. Fixed and Fluctuating Capital Account
T!e pa"tne" o# a #i"$ !a%e t!e option to decide &!et!e" t!ei" capital
account $a' "e$ain #ixed o" #luctuating. T!i apect i not $uc!
"ele%ant in a ole t"ading (uine) &!e"e t!e capital account i uuall'
#luctuating. Sta(ilit' in capital (alance i i$po"tant in a #i"$) (ecaue
t!e capital in%et$ent i uuall' one o# t!e $a*o" apect o# pa"tne"+
(uine "elation!ip. ,!en t!e capital account a"e aid to (e -#ixed+
it i$plie t!at t!e capital account &ill "e$ain tead' #o" a "eaona(l'
long ti$e. .n ot!e" &o"d t!e dail' ite$ o# c"edit and de(it to pa"tne"
&ill not (e "eco"ded in t!e capital account. T!e' &ill open cu""ent
account in eac! pa"tne"+ na$e. T!ee cu""ent account a"e "ega"ded
a u(idia"' capital account. Dail' t"anaction "elated to a pa"tne"
a"e "eco"ded in !i cu""ent account) intead o# capital account. T!u
t!e cu""ent account /eep on c!anging a t!e t"anaction a"e poted
into it) &!ile t!e capital (alance ta' t!e a$e. Ho&e%e") i# t!e"e i
an' additional capital in%et$ent (' a pa"tne" o" capital &it!d"a&al)
ot!e" t!an $ino" "outine d"a&ing) it &ill (e "eco"ded in t!e capital
account) not in t!e cu""ent account. .n t!e e%ent o# "ec!eduling o#
capital t"an#e" can (e $ade #"o$ cu""ent account to capital o" %ice
%e"a to ad*ut t!e capital (alance.

,!en t!e capital account a"e #luctuating t!e"e &ill not (e a cu""ent
account in t!e na$e o# pa"tne". All t"anaction "elated to a pa"tne")
uc! a ala"' to a pa"tne") inte"et on capital) additional capital
in%et$ent and i$ila" ite$ a"e di"ectl' c"edited to t!e capital
account o# pa"tne". D"a&ing) inte"et on d"a&ing capital &it!d"a&al
etc. a"e de(ited to t!e capital account. T!u t!e (alance in t!e capital
account /eep on c!anging &it! e%e"' t"anaction poted into it.

T!e #ollo&ing co$pa"ati%e ta(le !o& t!e di##e"ence (et&een #ixed
and #luctuating capital account:

Fixed Capital Fluctuating Capital
1. Opening and Cloing
(alance in t!e capital
account &ill "e$ain t!e
a$e.
0. Cu""ent Account &ill (e
opened in t!e na$e o#
pa"tne" &!en capital a"e
Opening and cloing (alance "a"el' "e$ain t!e a$e.

Cu""ent account a"e not "e1ui"ed.

All "egula" t"anaction "elated to pa"tne" a"e "eco"ded in t!ei"
capital account.
#ixed.
2. Regula" t"anaction "elated
to pa"tne" a"e not ente"ed
in t!e capital account.
3. Fixed capital account
al&a' !a%e c"edit (alance
Fluctuating capital account can o$eti$e !a%e de(it (alance

T!e #ollo&ing account &it! i$agina"' #igu"e !o& t!e di##e"ence
(et&een Fixed and Fluctuating Capital Account.

a. Fixed Capital
Illustration 1.01
A("a!
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Capita
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Accou
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A("a!a
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. Fluctuating Capital

A("a!a$+
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4 Note: 5pening (alance o# capital account in pa"t 6(7 include cu""ent
account (alance alo.
0. Di%iion o# P"o#it a$ong Pa"tne"
P"o#it $a/ing and p"o#it !a"ing a"e t!e $ain o(*ecti%e o# pa"tne"!ip
(uine. ,!en t!e pa"tne" do not !a%e an' pecial condition
"ega"ding t!e p"o#it dit"i(ution t!e ta/ o# p"o#it !a"ing i a i$ple)
one8tep ope"ation o# di%iding t!e p"o#it in t!e gi%en "atio. 9ut in actual
p"actice t!e pa"tne" a"e co$pelled to include $an' condition uc! a
inte"et on capital) inte"et on d"a&ing) ala"ie) co$$iion on p"o#it
etc. T!e pu"poe o# t!ee pecial condition i to #ai"l' co$penate
ext"a capital) ext"a e##o"t o" i$ila" additional #acto" cont"i(uting to
t!e p"o#ita(ilit' o# t!e #i"$. T!u t!e p"o#it dit"i(ution (eco$e little
$o"e co$plex. A p"o#it and lo app"op"iation account i p"epa"ed &it!
#ull detail o# p"o#it dit"i(ution. T!i i p"epa"ed a a upple$enta"'
account to t!e p"o#it and lo account) p"io" to p"epa"ing t!e (alance
!eet.

Illustration 1.0!
A : 9 a"e e1ual pa"tne" in a #i"$ &it! capital o# R.;<)=== and
R.<=)=== on 1
t
>anua"' 0==0. A i entitled to a ala"' o# R.03)=== pe"
annu$ and 9 i entitled to a ala"' o# R.1?)=== pe" annu$. T!e' !a%e
&it!d"a&n <=@ o# t!ei" ala"ie du"ing t!e 'ea". A and 9 a"e entitled to
co$$iion at t!e "ate o# <@ and 2@ "epecti%el' on t!e net p"o#it
a#te" ala"'.
Net p"o#it du"ing t!e 'ea" 0==0 (e#o"e pa"tne"+ ala"' a$ounted to
R.?3)===. P"epa"e:
a. P"o#it and Lo App"op"iation Account
(. Capital Account o# pa"tne" 6au$ing capital a"e #luctuating7
c. Capital Account and Cu""ent Account o# pa"tne" 6au$ing
capital a"e #ixed7

Profit "
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Note: &!en p"o#it !a"ing "atio i not gi%en in t!e 1uetionA it !ould (e
!a"ed e1uall'.

a. When capital accounts are fluctuating.

Capital
Accoun
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b. When capital accounts are fixed

Capital
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Illustration 1.0&
A : 9 ta"ted (uine on 1
t
>anua"' 0==1 &it! capital o# R.;<)===
and R. <=)=== "epecti%el'. 5n 21
t
Dece$(e" 0==1) t!e d"a&ing
account o# A !o&ed a de(it (alance o# R.?)=== and t!at o# 9 !o&ed
a de(it (alance o# R.<)===. T!e pa"tne"!ip deed p"o%ided #o" inte"et
on capital BC@. .nte"et on d"a&ing i to (e c!a"ged B2@ on t!e
cloing (alance o# t!e 'ea" i""epecti%e o# t!e date o# d"a&ing.

T!ei" #i"$ ea"ned a p"o#it o# R.00)11= #o" t!e 'ea" 0==1. P"epa"e p"o#it
and lo app"op"iation account and capital account o# t!e pa"tne".

Profit "
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Appropri
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Capi
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8 6 8 6

Illustration 1.0'
A : 9 ta"ted (uine &it! R.1<)=== eac! on 1
t
>anua"') 0==1. A
$ade $ont!l' d"a&ing o# R.;<= and 9 $ade $ont!l' d"a&ing o#
R.<== #"o$ t!e (uine. T!ei" p"o#it #o" t!e 'ea" 0==1 a$ounted to
R.1?)===. T!e pa"tne" a"e entitled to inte"et on capital BC@ p.a.
No inte"et i c!a"ged on d"a&ing.
P"epa"e p"o#it and lo app"op"iation account and t!e capital account
o# pa"tne".

Profit "
#oss
Appropri
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A(s
Capital
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%(s
Capital
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Illustration 1.0)
A : 9 ta"ted (uine &it! capital o# R.;<)=== and R.<=)===
"epecti%el'. T!e' !a%e ag"eed to !a"e p"o#it and loe in t!e "atio
2:0. A i entitled to ala"' o# R.10)=== p.a. and 9 i entitled to
R.1?)=== p.a. .nte"et at a #lat "ate o# <@ &ould (e c!a"ged on t!e
d"a&ing exceeding t!e a$ount o# ala"' allo&ed. .nte"et on capital i
allo&ed B 10@.
T!e total d"a&ing o# A a$ounted to R.0=)=== and 9 R.02)===. P"o#it
p"io" to pa"tne"+ ala"' a$ounted to R.33)===.
P"epa"e p"o#it and lo app"op"iation account and t!e capital account
o# pa"tne".

Profit "
#oss
Appropri
ation A$c
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A(s
Capital
Accoun
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P
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A
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%(s
Capital
Account
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2. Pat Ad*ut$ent
&.1. Omission of Interest on Capital $ Interest on Dra*ings
T!i tep i al$ot li/e "ecti#ication o# e""o" t!at 'ou tudied lat
'ea". Let u #i"t conide" o$iion o# inte"et on capital. .nte"et on
capital i ta/en out o# t!e a%aila(le net p"o#it and dit"i(uted to
pa"tne". T!e"ea#te" t!e (alance o# net p"o#it i dit"i(uted in t!e
p"o#it !a"ing "atio. So) &!en t!e inte"et on capital i o$itted in t!e
#i"t place it $ean t!at t!e enti"e net p"o#it i dit"i(uted.

$ow 3ow o we correct it7
Si$ple) ta/e out t!e total a$ount "e1ui"ed #o" pa'ing inte"et on
capital #"o$ t!e capital account o# pa"tne" in t!e p"o#it !a"ing
"atio) and gi%e it (ac/ to t!e$ a inte"et.

83at is t3e -se o& ta9ing o-t &ro# partners an gi%e t3e# bac9 t3e
sa#e7
,e uuall' do not gi%e (ac/ exactl' &!at &e ta/e out. T!e p"o#it
!a"ing "atio pla' a %e"' i$po"tant "ole !e"e. See t!e next
illut"ation. ,e ta/e out t!e total inte"et di%ided e1uall' #"o$ t!e
t!"ee pa"tne") and "edit"i(ute t!e$ a inte"et acco"ding to capital
(alance. T!e point to notice !e"e i) t!at t!e"e i no de#inite
"elation!ip (et&een p"o#it !a"ing "atio and capital (alance. .n t!e
illut"ation t!e pa"tne" a"e !a"ing p"o#it and loe e1uall' e%en
t!oug! t!ei" capital a"e not e1ual.

Illustration 1.0+
A) 9 and C &!o a"e e1ual pa"tne" in a #i"$ !a%e capital o# R.2=)===A
R.2=)=== and R.1<)=== "epecti%el'. T!e p"o#it #o" t!e 'ea" 0==1 &a
dit"i(uted e1uall'. Ho&e%e") inte"et on capital B1=@ &a o$itted.
Pa a *ou"nal ent"' to "ecti#' t!e e""o".
A

2)===
0)<==

)00,Cr.-
%

2)===
0)<==

)00 ,Cr.-
C

1)<==
0)<==

1.000,Dr-

Journal Entry
C:s Capital acco-nt Dr5 1,000
To (:s Capital acco-nt 500
To B:s Capital acco-nt 500
/Capital a;-st#ent &or recti&ication o& o#ission1
Illustration 1.0/
A) 9 and C !a"ing p"o#it and loe in t!e "atio 0:0:1 !ad capital o#
R.<=)=== eac!.. T!e p"o#it #o" t!e 'ea" 0==1 &a dit"i(uted &it!out
p"o%iding #o" inte"et on capital B1=@ a ag"eed in t!e Pa"tne"!ip
Deed. Pa a *ou"nal ent"' to "ecti#' t!e e""o".
%

<)===
C)===

1.000,Dr.-
C

<)===
2)===

!.000,Cr-
0otal

Jo-rnal <ntry
(:s Capital (cco-nt Dr51,000
B:s Capital (cco-nt Dr51,000
To C:s Capital (cco-nt 2,000
/Capital a;-st#ent &or recti&ication o& o#ission1
Illustration 1.01
A) 9 and C !a%e dit"i(uted t!ei" p"o#it #o" t!e 'ea" 0==1 in t!e "atio
0:1:1. Ho&e%e" t!e' le#t out t!e inte"et B1=@ on t!ei" #ixed capital
o# R.3=)===) R)3=)=== and R. 0=)=== "epecti%el'. Pa a *ou"nal
ent"' to "ecti#' t!e o$iion.

A
3)===
<)===
1)===6D".7
9

3)===
0)<==

1)<==6C".7
C

0)===
0)<==

<==6D"7

Journal Entry
(:s C-rrent (cco-nt Dr5 1,000
C:s C-rrent (cco-nt Dr5 500
To B:s C-rrent (cco-nt 1,500
/(;-st#ent &or recti&ication o& o#ission

Note: ,!en capital a"e #ixed) all ad*ut$ent !ould (e done t!"oug! cu""ent account.
Illustration 1.02
A) 9 and C !a%e dit"i(uted t!ei" p"o#it #o" t!e 'ea" 0==1 in t!ei" p"o#it
!a"ing "atio 0:1:1 a#te" c"editing inte"et on capital B1=@ intead o#
?@ on t!ei" #ixed capital o# R.3=)===) R.3=)=== and R.0=)===
"epecti%el'. Pa *ou"nal ent"' to "ecti#' t!e e""o".
A

?==
1)===

!00,Cr.-
%

?==
<==

&00,Dr.-
C
Journal Entry
B:s C-rrent (cco-nt Dr5300
To (:s C-rrent (cco-nt 200
To C:s C-rrent (cco-nt 100
/(;-st#ent &or recti&ication o& o#ission1
Illustration 1.10
A) 9 and C ta"ted (uine &it! capital o# R.1==)=== R.?=)=== and
R.C=)=== "epecti%el'. T!e' ag"eed to !a"e p"o#it and loe e1uall'.
T!ei" pa"tne"!ip deed p"o%ided #o" inte"et on capital B 1=@. .nte"et
on d"a&ing !a%e (een eti$ated to (e R.0<= on A) R.0== on 9 and
R.1<= on C. .nte"et on capital !ad (een c"edited to pa"tne" at ?@
intead on 1=@. .nte"et on d"a&ing !ad (een co$pletel' o$itted.
Pa a *ou"nal ent"' to "ecti#' t!e a(o%e e""o".
A

D0)===
80<=

813==

&)0,Cr.-
%

D1)C==
80==

81)3==

C

&)0,Dr-

Journal Entry
C:s Capital (cco-nt Dr5 350
(:s Capital (cco-nt 350
/Capital a;-st#ent &or recti&ication1
&.! Redistriution of Profit in a Different Ratio
Illustration 1.11
A 9 and C !a%e dit"i(uted t!ei" p"o#it and loe in t!e "atio 2:0:1.
T!e' !a%e decided to !a"e p"o#it and loe e1uall' &it! e##ect #"o$
t!e lat t!"ee 'ea". T!e p"e%iou t!"ee 'ea"+ p"o#it !a%e (een
R.01)===) R.1?)=== and R. 03)===. Eou a"e "e1ui"ed to pa a *ou"nal
ent"' to gi%e e##ect to t!e a(o%e a""ange$ent.
A

21)<==
01)===

1=)<==6D".7
%

01)===
01)===

=
C

1=)<==
01)===

1=)<==6C"7
Journal Entry
/(;-st#ent to e&&ect reistrib-tion o& pro&it1

353 6#ission o& 6-tstaning <0penses an Inco#es
5uttanding expene and outtanding inco$e !a%e di"ect e##ect on
t!e net p"o#it. 5uttanding expene i an expene in t!e #i"t place and
a lia(ilit' a &ell. ,!en it i o$itted it $ean a !ig!e" p"o#it i
dit"i(uted to pa"tne" and a lia(ilit' i not p"o%ided in t!e (oo/.
5uttanding inco$e !a t!e oppoite e##ect. Recti#ication o# t!ee
e""o" i a i$ple p"ocedu"e.

i7 .# t!e nu$(e" o# ite$ i le) co""ect it (' paing i$ple
"ecti#ication ent"') (' de(iting outtanding inco$e) c"editing
outtanding expene and paing t!e di##e"ence into capital
account. T!i &a' 'ou a"e c"eating aet account in t!e (oo/ #o"
t!e outtanding inco$e) c"eating lia(ilit' account #o" t!e
outtanding expene) and t"an#e""ing t!e net lo o" gain into
capital account.
ii7 ,!en t!e nu$(e" o# ite$ in%ol%ed i $o"e o" &!en it i
peci#icall' a/ed in t!e 1uetion) 'ou !ould open a profit and
loss ad3ustment account.
iii7 P:L ad*ut$ent account can (e a#el' au$ed a a co$(ined
capital account o# pa"tne". ,!en 'ou &ant de(it pa"tne"+ capital
account 'ou can de(it P:L ad*ut$ent account intead.
i%7 ,!en t!e"e i an outtanding expene) &e uuall' de(it capital
account and c"edit outtanding expene account. No& 'ou de(it
P:L ad*ut$ent account #o" an' outtanding expene and c"edit it
#o" t!e outtanding inco$e.
%7 T!e net (alance o# p"o#it and lo ad*ut$ent account i
t"an#e""ed to t!e capital account o# pa"tne" in t!e p"o#it !a"ing
"atio.
Illustration 1.1!
A) 9 and C !a%e dit"i(uted t!ei" p"o#it #o" t!e 'ea" ended 21
t
Dece$(e") 0==1 in t!ei" p"o#it !a"ing "atio o# 0:1:1. Ho&e%e" it &a
#ound out in >anua"') 0==0 t!at outtanding expene o# R.2)<==A and
p"epaid expene R.1)<== !a%e (een le#t out &!ile p"epa"ing t!e
p"o#it and lo account #o" t!e 'ea" 0==1.
Eou a"e "e1ui"ed to "ecti#' t!i e""o" (':
a7 Paing >ou"nal Ent"' 6&it!out P"o#it and Lo Ad*ut$ent Account7
(7 T!"oug! P"o#it and Lo Ad*ut$ent Account.
a. Recti#ication &it!out opening P:L Ad*ut$ent Account
A %
C"edit 5uttanding Exp 6R.2<==7 and Dr.4
Cr.4
1);<=
;<=
8888888888888888888888888
1)===6D"7
?;<
2;<
88888888888888888888888888
<==6D".7

Rectification 5ntr67
*repai <0penses (cco-nt Dr5 1,500
(:s Capital (cco-nt Dr5 1,000
B:s Capital (cco-nt Dr5 500
To 6-tstaning <0penses 3500
/=ecti&ication o& o#ission1

(. Recti#ication t!"oug! P:L Ad*ut$ent Account
Journal Entries
*ro&it an loss a;-st#ent acco-nt Dr5 3,500
To Outstanding Expenses
3,500
/6-tstaning e0penses bro-g3t into boo9s1
....................................................................................
.
Prepaid expenses account r.!,500
To *ro&it an ,oss (;-st#ent (cco-nt 1,500
/6#ission o& prepai e0penses bro-g3t into boo9s1
....................................................................................
.
"#s $apital "ccount r. !,000
%#s $apital "ccount r. .500
$#s $apital "ccount r. 500
To *ro&it an ,oss (;-st#ent (cco-nt 2,000
/$et balance in acco-nt trans&erre1
Profit and #oss Ad3ustment Account
Amount Particulars Amount
3,500

By *repai
e0pense
By $et
a;-st#ent

( 1,000
B 500
C 500
3,500

Illustration 1.1&
A) 9 and C !a%e dit"i(uted t!ei" p"o#it #o" t!e 'ea" ended 21
t
Dece$(e") 0==1 e1uall' a p"o%ided in t!e pa"tne"!ip deed. Ho&e%e"
it &a u(e1uentl' #ound out t!at co$$iion "ecei%ed and c"edited
in P: L account included R. C)=== "ecei%ed in ad%ance and inte"et
acc"ued on in%et$ent R.3)<== a"e unaccounted.
Pa a *ou"nal ent"' to gi%e e##ect to t!e a(o%e ite$ in t!e (oo/ and
p"epa"e p"o#it and lo ad*ut$ent account.
Journal Entries
*+, (;-st#ent acco-nt Dr5 6,000
To Co##ission =ec: in (%ance 6,000
/6#ission o& a%ance inco#e recti&ie1
.....................................................................................
.
(ccr-e Interest (cco-nt Dr5 ),500
To *+ , (;-st#ent (cco-nt ),500
/6#ission o& accr-e inco#e recti&ie1
.....................................................................................
.
(:s Capital (cco-nt Dr5 500
B:s Capital (cco-nt Dr5500
C:s Capital (cco-nt Dr5500
To *+, (;-st#ent (cco-nt 1,500
/$et i&&erence trans&erre1
Profit and #oss Ad3ustment Account
6,000

By (cc5 Interest
By $et
a;-st#ent

( 500
B 500
C 500

&,000
3. Fua"antee o# P"o#it
So$eti$e pa"tne" ag"ee to gua"antee $ini$u$ p"o#it to a pa"tne" a
a pecial p"i%ilege. T!e"e can (e $an' "eaon #o" g"anting uc! a
p"i%ilege. Att"acting a "eputed indi%idual) &!o i un&illing to (ea" t!e
"i/ o# inco$e #luctuation to (eco$e a pa"tne") i one o# uc! "eaon.
.# t!e !a"e o# p"o#it #o" uc! a pa"tne" #all !o"t o# t!e $ini$u$
a$ount gua"anteed) t!e ot!e" pa"tne" &ill ad*ut t!at !o"tage #o"$
t!ei" !a"e o# p"o#it acco"ding to t!e ag"eed condition. .# t!e !a"e o#
p"o#it o# t!e pa"tne" !olding gua"antee p"i%ilege co$e e1ual o" $o"e
t!an t!e gua"anteed u$) t!at actual !a"e &ill (e gi%en &it!out an'
ad*ut$ent.

Illustration 1.1'
A) 9 and C !a%e ag"eed to !a"e t!ei" p"o#it and loe in t!e "atio
2:2:0 in &!ic! C i gua"anteed a $ini$u$ p"o#it o# R.10)===. T!e
di%ii(le p"o#it #o" t!e 'ea" 0==1 a$ounted to R.30)===. S!o&
dit"i(ution o# p"o#it.
Profit "
#oss
Appropr
iation
A$c
P
a
"
t
i
c
u
l
a
"
A
$
o
u
n
t
P
a
"
t
i
c
u
l
a
"
A
$
o
u
nt
T
o

(
>
s

C
a
p
i
t
a
l

1
5
,
4
5
0
B
y

*

+

,

(
c
c
o
-
n
t
)
2,
0
0
0
l
e
s
s

a
;
-
s
t
e

t
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C

4
5
0
1
5
,
0
0
0

T
o

B
>
s

C
a
p
i
t
a
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1
5
,
4
5
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l
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s
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a
;
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t
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4
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1
5
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0
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0

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>
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a
p
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t
a
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1
0
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5
0
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3
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0
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0
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I& t3e entries o& e-ction an s-btraction see# con&-sing, yo-
can irectly p-t C>s s3are o& 12,000 in 3is na#e an i%ie t3e
balance a#o-nt o& 30,000 in t3e ratio 3?3 /e@-ally15 T3e ne0t
ill-stration is one t3at way5 B-t re#e#ber w3en yo- o t3is way in
t3e e0a#ination on>t &orget to s3ow t3e steps/wor9ings to
con%ince t3e e0a#iner t3at yo- 9now t3e concept clear5

Illustration 1.1)
A) 9 and C !a"ing p"o#it and loe in t!e "atio o# 2:0:1 in &it! C
!a%ing a $ini$u$ gua"antee o# R.?)===. T!e p"o#it a%aila(le #o"
dit"i(ution at t!e end o# t!e 'ea" &a #ound to (e R.30)===. S!o&
dit"i(ution o# p"o#it.

Profit "
#oss
Appropr
iation
A$c
P
a
"
t
i
c
u
l
a
"
A
$
o
u
n
t
P
a
"
ti
c
u
l
a
"
A
$
ou
nt
T
o
(
>
s
C
a
p
it
a
l
2
0
,
)
0
0
B
y

*
+

,
(
c
c
o
-
n
t
)2
,0
00
/
3
)
,
0
0
0
0
3
/
5
1

T
o
B
>
s
C
a
p
it
a
l
1
3
,
6
0
0

/
3
)
,
0
0
0
0
2
/
5
1

T
o
C
>
s
C
a
p
it
a
l
8
,
0
0
0

)
2
,
0
0
0
)2
,0
00
Ao- can i%ie )2,000 in t3e ratio 3?2?1 an t3en rearrange t3e
a#o-nt5 B-t 3ere we are irectly creiting C>s s3are an i%iing t3e
balance o& =s53),000 in t3e ratio 3?25

Illustration 1.1+
A) 9 and C a"e pa"tne" !a"ing p"o#it and loe in t!e "atio 0:1:1)
&it! capital o# R.3=)===) R.2=)=== and R.0=)=== "epecti%el'. C+
$ini$u$ p"o#it a#te" inte"et on capital BC@ !a (een gua"anteed to
(e not le t!an R.1=)===. A : 9 !a%e ag"eed t!at i# C+ p"o#it #all
(elo& t!e gua"anteed u$ uc! de#icienc' &ould (e !a"ed (' t!e$
e1uall'. T!e net p"o#it (e#o"e inte"et on capital i eti$ated to (e
R.2?)3==. P"epa"e p"o#it and lo app"op"iation account.

Bere yo- cannot aopt irect istrib-tion as in t3e pre%io-s case since t3e partners will bear
t3e loss e@-ally5 83en yo- istrib-te balance o& pro&it a&ter paying t3e partner wit3 g-arantee,
t3e loss is a-to#atically gets istrib-te in t3e pro&it s3aring ratio5 I& any ot3er ratio is to be
applie &or s3aring t3e loss, yo- #-st aopt >s-btraction an aition> #et3o5

Profit " #os
Appropriati
on A$c
P
a
r
t
i
c
u
l
a
r
s
A
m
o
u
n
t
P
ar
ti
cu
la
rs
Am
ou
nt
T
o

I
n
t
e
r
e
s
t

o
n

C
a
p
i
t
a
l
s
?

(
2
,
)
0
0
B
y
*
+
,
(
cc
o
-
nt
38,
)0
0

B
1
,
8
0
0

C
1
,
2
0
0

*
r
o
&
i
t

t
o

(

1
6
,
5
0
0

,
e
s
s
?

C
>
s

"
3
a
r
e

(
;
5

8
4
5
1
5
,
6
2
5

*
r
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&
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t

s
3
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r
e

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o

B

8
,
2
5
0

,
e
s
s
?

C
>
s

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3
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r
e

(
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5

8
4
5
4
,
3
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5

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r
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&
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t

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3
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r
e

t
o

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3
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1
,
4
5
0
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3
8
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)
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38,
)0
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Illustration 1.1/
&it! capital o# R.3=)===) R.2=)=== and R.0=)=== "epecti%el'. C+
$ini$u$ p"o#it a#te" inte"et on capital BC@ !a (een gua"anteed to
(e not le t!an R.1=)===. A : 9 !a%e ag"eed t!at i# C+ p"o#it #all
(elo& t!e gua"anteed u$ uc! de#icienc' &ould (e !a"ed (' t!e$ in
t!e "atio 2:0. T!e net p"o#it (e#o"e inte"et on capital i eti$ated to
(e R.2?)3==. P"epa"e p"o#it and lo app"op"iation account.

Profit " #os
Appropriati
on A$c
P
a
r
t
i
c
u
l
a
r
s
A
m
o
u
n
t
P
ar
ti
cu
la
rs
Am
ou
nt
T
o

I
n
t
e
r
e
s
t

o
n

C
a
p
i
t
a
l
s
?

(
2
,
)
0
0
B
y
*
+
,
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-
nt
38,
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0

B
1
,
8
0
0

C
1
,
2
0
0

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(

1
6
,
5
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0

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0
5
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5
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0

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3
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B

8
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2
5
0

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4
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4
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1
,
4
5
0
1
0
,
0
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0

3
8
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)
0
0
38,
)0
0

Illustration 1.11
&it! capital o# R.3=)===) R.2=)=== and R.0=)=== "epecti%el'. A !a
pe"onall' gua"anteed t!at !e !all (ea" t!e de#icienc' i# C+ !a"e o#
p"o#it a#te" inte"et on capital o# pa"tne" BC@ #all (elo& R.1=)===.
T!e net p"o#it (e#o"e inte"et on capital i eti$ated to (e R.2?)3==.
P"epa"e p"o#it and lo app"op"iation account.

Profit " #os
Appropriatio
n A$c
P
a
r
t
i
c
u
l
a
r
s
A
m
o
u
n
t
Pa
rti
cu
la
rs
Am
ou
nt
T
o

I
n
t
e
r
e
s
t

o
n

C
a
p
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t
a
l
s
?

(
2
,
)
0
0
By
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+,
(c
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t
38,
)00

B
1
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8
0
0

C
1
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2
0
0

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6
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)00

<. Accounting #o" >oint Li#e Polic'
A pa"tne" ceae to (e a pa"tne" eit!e" (' "eti"e$ent o" deat!. At t!e
ti$e o# "eti"e$ent o" deat! o# a pa"tne" t!e continuing pa"tne") !a%e
to ettle !i due. Since "eti"e$ent i a p"e8planned e%ent p"ope"
a""ange$ent #o" t!i ettle$ent can (e $ade. Deat! co$e
unexpectedl'. T!e #i"$ u##e" t!e lo o# an expe"ienced pa"tne" and it
!a t!e added (u"den o# ettling a !uge a$ount o# capital and ot!e"
due to t!e deceaed pa"tne". Unli/e "eti"e$ent) deat! o# a pa"tne"
"eult in a #inancial e$e"genc') a t!e a$ount due cannot (e dela'ed
#o" long ti$e. Unle ade1uate p"ecaution a"e $ade) t!i e$e"genc'
can tu"n into deep #inancial c"ii.
6Pleae "e#e" C!apte" 3 G Reti"e$ent o# Pa"tne" #o" detail on >oint Li#e
Polic'7
Interest on Capital
.nte"et i allo&ed on pa"tne"+ capital onl' i# t!e"e i a peci#ic
ag"ee$ent in t!e pa"tne"!ip deed. ,!en inte"et i allo&ed on
pa"tne"+ capital it !ould (e calculated on t!e (ai o# pe"iod o#
capital in%et$ent. Suppoe a pa"tne" $a/e additional in%et$ent
a#te" t!"ee $ont! #"o$ t!e ta"ting o# a 'ea") inte"et on t!i
additional capital i allo&ed #o" nine $ont! onl') not #o" t!e #ull 'ea".
Illustration 8 1.12
t
>anua"' 0==1) &it! capital o# R.<=)===
eac!. A int"oduced additional capital o# R.0<)=== on 1
t
>ul' 0==1 and
9 int"oduced t!e a$e a$ount on 1
t
5cto(e" 0==1.
Calculate inte"et on capital B10@) pa'a(le to A and 9 at t!e end o#
t!e 'ea".
Interest on capital 8 A
5pening capital #o" 10 $ont! 6<=)=== x 10@7 H
C)===
5n Additional Capital C $ont! 60<)===x 10@xCI107 H
1)<==
Total inte"et pa'a(le to A
;)<==
Interest on capital 8 %
5n opening capital #o" 10 $ont! 6<=)=== x 10@7 C)===
5n additional capital #o" 2 $ont! 60<)===x10@x2I107 ;<=

C);<=
Illustration 1.!0
5n 1
t
>anua"' 0==1 t!e capital account o# A : 9 !o&ed (alance o#
R.;=)=== and R.<=)=== "epecti%el'. A int"oduced additional capital
o# R.<=)=== on 21
t
Ma"c! 0==1 and 9 int"oduced additional capital o#
R.2=)=== on 1
t
Septe$(e") 0==1. .nte"et on capital i allo&ed B 10@
p.a.
Calculate inte"et on capital pa'a(le at t!e end o# 0==1.

83en interest is allowe on t3e net #ont3ly balance o& capital
acco-nt, interest on rawings will not be c3arge, beca-se t3e
rawings beco#es e-ction &ro# capital, an t3e interest on capital
is a-to#atically re-ce5
Interest on A9s Capital
5n 5pening capital #o" 10 $ont! 6;=)=== x 10@7 H ?)3==
5n Additional Capital J $ont! 6<=)===x 10@xJI107 H 3)<==
Total inte"et pa'a(le to A 10)J==
Interest on %9s Capital
5n opening capital #o" 10 $ont! 6<=)=== x 10@7H C)===
5n additional capital #o" 3 $ont! 62=)===x10@x 3I107 H 1)0==
;)0==
Illustration 1.!17 A : 9 ta"ted (uine &it! R.1==)=== eac! on 1
t
>anua"') 0==1. A int"oduced additional capital o# R.<=)=== on 1
t
>ul'
and 9 int"oduced R.<=)=== on 1
t
Septe$(e". A &it!d"e& R.10)===)
d"a&n in 3 intall$ent o# R.2=== eac! at t!e end o# eac! 1ua"te". 9
&it!d"e& R.1)=== pe" $ont!) at t!e end o# eac! $ont!.
.nte"et on capital i allo&ed on t!e net $ont!l' (alance o# capital
account B10@ p.a. Calculate inte"et pa'a(le to A : 9.
.n t!i 1uetion inte"et i allo&ed on t!e net $ont!l' (alance o#
capital. 9ut &!at i t!i $ont!l' (alanceK . it opening (alance o"
cloing (alanceK T!e idea (e!ind inte"et on net (alance i to gi%e
inte"et on t!e exact a$ount o# capital ued in t!e (uine. Suppoe
A added 1=)=== at t!e end o# >anua"' ) !e i not entitled to inte"et on
t!i a$ount in t!e $ont! o# >anua"') i$pl' (ecaue it &a not ued in
>anua"'. ,e cannot #"a$e a t!at inte"et i allo&ed on t!e opening
(alance o" cloing (alance. T!e $ain point to "e$e$(e" !e"e i t!at
t!e inte"et i allo&ed onl' on t!e capital ued.
:et ;onthl6 %alances in Capital accounts of A " %
;onth Interest
On
>anua"' 1==)===
Fe("ua"' 1==)===
Ma"c! 1==)===
April 2/.000
Ma' J;)===
>une J;)===
<ul6 1''.000
Augut 133)===
Septe$(e" 133)===
Octoer 1'1.000
No%e$(e" 131)===
Decemer 1'1.000
0otal 1.''+.000

A9s Capital Account
"pril D 100,000.3,000 on 31
st
Earc3
July D =s524,000.3,000 on 30
t3
J-ne C 50,000 on 1
st
J-ly
October D 1)),000 ' 3000
ece'ber 31
st
'3,000 3as no e&&ect on t3is year:s
interest
%9s Capital Account
(epte'ber D 23,000 ' 1,000 C 50,000

Interest
Allo*ed to A
1''+000 x 1! =. for 1 month Rs. 1'.'+0
Interest
Allo*ed to %
1&&'.000 x 1! =. for 1 month Rs. 1&.&'0

Illustration 1.!!. T!e cloing (alance in t!e capital account o# A
: 9 5n 21
t
Dec. 0==1 &e"e R.;?)=== and R.C<)=== "epecti%el'.
Du"ing t!e 'ea" A int"oduced R.1<=== on 1
t
>ul' 0==1 and &it!d"e&
B R.1)=== at t!e end o# eac! $ont!. 9 int"oduced additional capital
o# R.0<)=== on 21
t
Ma"c!) 0==1 and &it!d"e& R.;)=== on 2=
t!
>une
and R.2)=== on 2=
t!
Septe$(e". Calculate inte"et on capital B C@
p.a. to (e c"edited to eac! pa"tne" on 21
t
Dece$(e") 0==1 (aed on
t!e net $ont!l' capital.
=ea t3e @-estion care&-lly5 T3e capital balances gi%en 3ere are not t3e opening balances,
b-t t3e closing balances o& 2001, an yo- 3a%e t3e etails o& wit3rawals -ring 20015 $ow
yo- #-st re)erse to t3e beginning o& t3e year an calc-late t3e #ont3ly balances to arri%e
at t3e correct interest on capital5
5pening Capital H Cloing Capital D d"a&ing G additional capital.
5pening Capital o# A H ;?)=== D 10)=== 8 1<)=== H ;<)===
5pening Capital o# 9 H C<)=== D 1=)=== G 0<)=== H <=)===
:et ;onthl6 %alances in Capital Accounts of A " %
A9s Capital %9s
Capital
;onth Interest
On
>anua"' ;<)===
Fe("ua"' ;3)===
Ma"c! ;2)===
Ap"il ;0)===
Ma' ;1)===
>une ;=)===
>ul' ?3)===
Augut ?2)===
Septe$(e" ?0)===
5cto(e" ?1)===
No%e$(e" ?=)===
Dece$(e" ;J)===
0otal 2!'.000

Interest allo*ed to A > 2!'.000 x += x 1$1! > Rs. '.+!0
Interest allo*ed to % > //'.000 x += x 1$1! > Rs. &.1/0
Interest on Drawings
Illustration 1.!& Follo&ing i t!e detail o# d"a&ing $ade (' A :
9 #"o$ t!ei" #i"$ du"ing t!e 'ea" 0==1. Calculate inte"et on d"a&ing
B C@ p.a. to (e de(ited to t!ei" account at t!e end o# t!e 'ea".
A(s Dra*ings Rs. %(s
Dra*ing
s
Rs.

218180==1 1)<== 0?8080==1
218280==1 <== 18380==1
18<80==1 0)=== 18;80==1
2=8J80==1 1)=== 181=80==1
2181080==1 1)=== 181080==1
C)===

T3is @-estion clearly s3ows t3e e&&ect o& perio o& rawing on t3e a#o-nt o& interest
c3arge5
"ee t3at bot3 t3ese partners 3a%e wit3rawn t3e sa#e a#o-nt -ring t3e year 20015
B-t t3e interests c3arge are i&&erent, beca-se o& i&&erence in perio o& rawing5

Interest on A9s dra*ings Interest on %9s
dra*ings

5?ui@alent Amount
1 month Aithdra*n
1C)<== 1)===
3)<== 1)<==
1C)=== 1)===
2)=== 1)<==
= 1)===

'0.000 +.000

Interest on A9s dra*ings > '0.000 x += x 1$1! > Rs.
!00
Interest on %9s dra*ings > &).000 x += x 1$1! > Rs.
1/)

Illustration 1.!'
T!e cloing (alance in t!e d"a&ing account o# A) 9 and C !o&
R.10)=== eac! on 21
t
Dece$(e") 0==1. T!e' &it!d"e& t!i a$ount in
$ont!l' intall$ent o# R.1)===. A+ d"a&ing &e"e $ade at t!e
(eginning o# eac! $ont!) 9 on 1<
t!
and C at t!e end o# eac! $ont!.
Calculate inte"et on d"a&ing BC@ p.a. to (e de(ited to t!e$ on 21
t
Dece$(e" 0==1.

.nte"et on A+ D"a&ing H 10)=== x C@ x C.<I10 H R.2J=
.nte"et on 9+ D"a&ing H 10)=== x C@ x CI10 H R.2C=
.nte"et on C+ D"a&ing H 10)=== x C@ x <.< I10 H R.22=

Commission to Partners
Co$$iion i allo&ed to a pa"tne" #o" !i e"%ice i# all pa"tne" ag"ee
to uc! a pa'$ent. Again) in t!e a(ence o# a peci#ic condition in t!e
pa"tne"!ip deed) a pa"tne" i not entitled to an' ala"' o" co$$iion
#o" !i e"%ice "ende"ed to t!e #i"$.
,!en co$$iion i allo&ed it $a' (e tated a -pa'a(le on t!e p"o#it
efore c!a"ging co$$iion+ o" -pa'a(le on t!e p"o#it after c!a"ging
co$$iion+. .# co$$iion i pa'a(le on t!e p"o#it (e#o"e c!a"ging
co$$iion) it i$pl' $ean t!at t!e co$$iion i to (e calculated at
t!e gi%en pe"cent on t!e gi%en a$ount o# p"o#it. 9ut i# it i a ce"tain
pe"centage a#te" c!a"ging uc! co$$iion) t!e a$ount o#
co$$iion !ould (e exactl' t!e pe"centage peci#ied on t!e (alance
o# p"o#it a#te" deducting uc! co$$iion) not t!e total a$ount. T!e
#ollo&ing illut"ation &ill cla"i#' t!e point.
T3e iea o& co##ission on t3e net pro&it Fbefore c3arging s-c3 co##ission: an Fafter
c3arging co##ission: so-ns con&-sing FB-tler <nglis3:5 B-t rea it %ery care&-lly5 T3is Fbe&ore
c3arging: conition is e0actly w3at we all nor#ally -nerstan5 I& t3e pro&it is 100 an 10G
co##ission is allowe it si#ply #eans t3e co##ission is =s510 an t3e balance o& pro&it
a%ailable is =s5205 T3e tro-ble 3are is to ta9e o-t 10G o& t3e pro&it le&t a&ter ta9ing o-t s-c3
co##ission5 Does t3is so-n con&-sing again7 In t3e abo%e e0a#ple =s510 is not 10G o& t3e
balance o& pro&it o& =s5205 T3is is t3e proble#5 $ow 3ow to sol%e it7 =e#e#ber t3at t3e
co##ission is 10G o& t3e balance o& pro&it, w3ic3 #eans i& t3e balance is 100 t3en
co##ission is 105 In ot3er wors it is not to be calc-late as 10 o-t o& 100 b-t as 10 o-t o&
1105
"t-y care&-lly 3ow B:s co##ission is calc-late in ill-stration 1525
Illustration 1.!)
A : 9 a"e e1ual pa"tne" in a #i"$. T!ei" pa"tne"!ip deed p"o%ided #o"
co$$iion to A B<@ o# t!e net p"o#it (e#o"e c!a"ging an'
co$$iion. 9 i entitled to <@ co$$iion on t!e p"o#it a#te" c!a"ging
all co$$iion. Net p"o#it (e#o"e an' uc! co$$iion &a R.30)===.
Calculate co$$iion and p"o#it !a"e o# eac! pa"tne".
Co$$iion pa'a(le o# to A H <@ o# 30)=== ie. R.0)1==.
Co$$iion pa'a(le to 9 H <@ o# t!e NIP a#te" all co$$iion.
Net p"o#it a%aila(le a#te" c!a"ging A+ co$$iion H R.2J)J== 630)=== G
0)1==7
,!ic! i 9+ co$$iion D -NIP a#te" all co$$iion+
No& 9+ co$$iion i to (e <@ o# t!e (alance a#te" deducting 9+
co$$iion.
.# 9+ co$$iion i R.<) t!e (alance a%aila(le !ould (e R.1==
,!ic! $ean t!e total !ould (e 1=<.
Again) i# t!e total a%aila(le i 1=<) 9 &ill get a co$$iion o# < and t!e
(alance o# R.1== &ill "e$ain. ie. #o" e%e"' 1=<) 9 &ill get a
co$$iion o# R.<.
T!e"e#o"e 9+ co$$iion i R.2J)J== x <I1=< H R.1)J==
Notice t!at t!e (alance a%aila(le i R.2?)=== and 9+ co$$iion o#
R.1)J== i exactl' <@ o# R.2?)===.
Calc-lation o& Capital =atio
Capital "atio !ould (e unde"tood a in%et$ent "atio. Mone' i
conide"ed an i$po"tant &o"/ing #acto" in t!e (uine. ,!en t!e
capital cont"i(ution o# a pa"tne" i !ig!e") it alo $ean t!at !i $one'
&o"/ed $o"e in $a/ing t!e p"o#it. .n calculating t!e capital "atio t!e
a$ount and t!e pe"iod o# in%et$ent a"e to (e conide"ed. Suppoe A
cont"i(ute 1=)=== in >anua"' and 9 cont"i(ute t!e a$e a$ount on
1
t
>ul') AL capital !a &o"/ed dou(le t!at o# 9 due to ea"lie"
in%et$ent) e%en t!oug! (ot! t!e a$ount a"e t!e a$e at t!e end o#
t!e 'ea". T!e"e#o"e) capital "atio !ould (e (aed on t!e a$ount o#
capital $ultiplied (' t!e nu$(e" o# $ont! t!e in%et$ent "e$ained
&it! t!e #i"$.
Illustration 1.!+
A ta"ted (uine on 1
t
>anua"' 0==1) &it! a capital in%et$ent o#
R.<=)===. 9 *oined on 1
t
Ma' &it! a capital cont"i(ution o# R.;<)===
and C *oined &it! 1
t
>ul' &it! R.<=)=== a capital.
T!e' $ade a p"o#it o# R.0<)=== in t!e #i"t 'ea". Dit"i(ute p"o#it in t!e
capital "atio.

Date :
A$ount
Mont!
#o" &!ic!
$one' &a ued
E##ecti%e A$ount
A on 1
t
>an
R.<=)===
10 C==)===

% on 1
t
$a'
R.;<)===
? C==)===

C on .t >ul'
R.<=)===
C 2==)===

Capital Ratio (et&een A) 9 : C H C=====:C=====:2===== ie. !7!71
Illustration 1.!/
t
>anua"' 0==1. T!e' !a%e decided to
!a"e p"o#it and loe in t!e capital "atio. Calculate t!ei" capital "atio
#o"$ t!e #ollo&ing detail

A(s
Capita
l
Accou
nt
P P
a
"
t
i
c
u
l
a
"
A
$o
un
t
ET
o

C
a
s
3

'

D
r
a
w
i
n
g
5
5
2 J
a
n

1
B
y

C
a
s
3
C
<
)
=
=
=

6T
o

C
a
s
3

'

D
r
a
w
i
n
g
5
1 J
-
l

1
B
y

C
a
s
3
5
5
a
l
5

C
a
p
5
3
=
)
=
=
=

DT 8
1 1
=
<
)
=
=
=

%(s
Capit
al
Acco
unt
D
a
t
e
P
a
r
t
i
c
u
l
a
r
s
A
m
o
u
n
t

D
a
t
e
P
a
r
t
i
c
u
l
a
r
s
A
m
o
u
n
t

J
a
n

1
B
y

C
a
s
3
<
=
)
=
=
=
(
p
r

1
T
o

C
a
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3

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T!i 1uetion i &o"/ed out t&ice. T!e #i"t an&e" i (aed on t!e capital (alance
$ultiplied (' t!e nu$(e" o# $ont! #o" &!ic! uc! (alance a"e $aintained. E%en t!oug!
t!i $et!od loo/ %e"' i$ple) 'ou $a' $a/e $ita/e in calculating t!e nu$(e" o#
$ont! #o" &!ic! t!e capital (alance a"e $aintained a t!e"e a"e no de#inite e1uence
o" o"de" #ollo&ed in t!e 1uetion.
Mot o# t!e (oo/ #ollo& t!e #i"t $et!od. . ugget t!e econdA (ecaue t!e"e i %e"'
little c!ance o# $ita/e t!i &a'.

Re$e$(e" t!at t!e date o# int"oduction o" &it!d"a&al i i$po"tant. Capital #o" a $ont!
$ean capital a%aila(le #o" ue in t!at $ont!. .# capital i &it!d"a&n at t!e (eginning o# a
$ont!) it $ean t!at t!e "e$aining (alance onl' i a%aila(le #o" t!at $ont!. 9ut i# t!e
capital i &it!d"a&n at t!e end o# t!e $ont! t!at &it!d"a&al !a no e##ect on t!e capital
#o" t!at $ont!.
An&e" 6i7 #o" M.1.0;
A(s Capital
Date : A$ount Actual 9alance Mont! E##ecti%e A$ount
>an 1 5p Cpital D
C<)===
C<)=== 0 12=)===
Ma" 1 D"a&ing 8
J)===
<C)=== 3 003)===
>ul 1 Addl Cap D
3=)===
JC)=== 2 0??)===
No% 1 D"a&ing 8
1=)===
?C)=== 2 0<?)===
200.000

%(s Capital
Date : A$ount Actual 9alance Mont! E##ecti%e A$ount
5p Cpital D
<=)===
<=)=== 2 1<=)===
D"a&ing 8
1J)<==
2=)<== 2
Addl Cap D 0<)=== <<)<== 0 111)===
Sept1 Addl Cap D 1=)<== CC)=== 1
D"a&ing 8 <)<== C=)<== 2 1?1)<==
+00.000
Capital Ratio H J==:C==
> &7!
An&e" 6ii7 #o" M.1.0;
Eont3
%al.8 A %al B %
>an
Fe(
Ma"
Ap"
Ma'
>un
>ul
Aug
Sep
5ct
No%
Dec

C<)===
C<)===
<C)===
<C)===
<C)===
<C)===
JC)===
JC)===
JC)===
?C)===
?C)===
?C)===

<=)===
<=)===
<=)===
2=)<==
2=)<==
2=)<==
<<)<==
<<)<==
CC)===
C=)<==
C=)<==
C=)<==

Total
200.000 +00.000

Illustration 1.!1 T!e capital account o# A : 9 on 21 Dece$(e"
0==; !o& (alance o# R.3?);<= and R.<C)===. T!e capital account
#o" t!e 'ea" 0==; a"e gi%en (elo&. Calculate capital "atio 6"atio in
&!ic! t!ei" $one' &a ued in (uine7.

A % Particulars A
10)<== 888 >an 1 8 9' Ca!
888 13)=== Ap" 1 9' Ca!
?);<= 888 Sept 1 9' Ca!
1=)=== 1=)===
To (al cId 3?);<= <C)===
10.000 10.000

Mont! 9al.8 A 9al G 9
>an
Fe(
Ma"
Ap"
Ma'
>un
>ul
Aug
Sep
5ct
No%
Dec
<=)===
2;)<==
2;)<==
2;)<==
2;)<==
2;)<==
0?);<=
0?);<=
<?);<=
3?);<=
3?);<=
3?);<=
0<)===
0<)===
11)===
31)===
31)===
31)===
31)===
31)===
CC)===
<C)===
<C)===
<C)===
Total <==)=== <==)===

Capital Ratio H 1:1
;anager Admitted as a Partner

Illustration 1.!2
A : 9 !a"ing p"o#it and loe e1uall' !a%e decided to ad$it t!ei"
$anage" C a a ne& pa"tne". T!e' !a%e ag"eed to gi%e !i$ 1I<
t!
!a"e
in #utu"e p"o#it a &ell a t!e p"o#it #o" t!e p"e%iou t!"ee 'ea". Hi
ala"' #o" t!e lat t!"ee 'ea" i to (e ad*uted againt !i p"o#it !a"e.
T!e p"o#it #o" t!e lat t!"ee 'ea" &e"e R.;C)===A R.?2)=== and
R.?1)=== and !i ala"' &a R.1)<== p.$.
Recalculate t!e p"o#it dit"i(ution and pa a *ou"nal ent"' to ad*ut t!e
a$e in account.


Total P"o#it #o" t!e lat
t!"ee 'ea"
Sala"' to Manage" #o"
t!"ee 'ea"

03=)===
<3)===

Total P"o#it #o"
"edit"i(ution
0J3)===

A %
6D".7
6D".7

6C".7
10=)===

11;)C==

10=)===

11;)C==

0)3==6D"7 0)3==6D"7 3)?== 6C"7.
Journal entry
(:s Capital (cco-nt Dr 52 )00
B:s Capital (cco-nt Dr5 2,)00
To C:s Capital (cco-nt ),800
/*ro&it rea;-st#ent1
Illustration 1.&0
A : 9 !a"ing p"o#it and loe in t!e "atio 0:1) !a%e decided to ad$it
t!ei" $anage" C a a pa"tne") gi%ing !i$ 1I3
t!
!a"e in p"o#it &it!
"et"opecti%e e##ect #o" t!e pat t!"ee 'ea". Hi ala"' du"ing t!i
pe"iod i to (e ad*uted againt !i p"o#it !a"e. T!e p"o#it #o" t!e lat
t!"ee 'ea" !a%e (een R.3?)===A R.32)=== and R.33)===. Hi ala"'
&a R.1)0== p.$.
Recalculate t!e p"o#it dit"i(ution and pa a *ou"nal ent"' to gi%e
e##ect to t!e a$e in account.

t!"ee 'ea"
Sala"' to Manage" #o"
t!"ee 'ea"

12<)===
32)0==

Total P"o#it #o"
"edit"i(ution

1;?)0==

A %
J=)===

?J)1==
3<)===

33)<<=
200 ,Dr.- ')0 ,Dr.-

Journal entry
(:s Capital (cco-nt Dr 5200
B:s Capital (cco-nt Dr5 )50

Illustration 1.&1 A : 9 a"e pa"tne" !a"ing p"o#it and loe in t!e
"atio 0:1. 5n 21
t
Dece$(e")0==1 t!e' !a%e decided to ta/e C) t!ei"
$anage" a pa"tne" #o" 1I3t! !a"e &it! "et"opecti%e e##ect #"o$ 1
t
>anua"' 1JJJ. A $anage" !e !ad (een paid annual ala"' o#
R.1?)===) &!ic! i "educed to annual ala"' o# R.C)=== a pa"tne". He
!ad ad%anced a loan o# R.<=)=== to t!e #i"$ at 1=@ inte"et &!ic! i
con%e"ted a !i capital ca""'ing inte"et BC@ pe" annu$. P"o#it and
loe #o" t!e lat t!"ee 'ea" a"e a #ollo&:
1JJJ R. <3)===
0=== R.1J)===
0==1 R.3;)===
Recalculate t!e p"o#it dit"i(ution and pa ad*ut$ent ent"' to gi%e
e##ect to t!e a$e.

t!"ee 'ea"
Exce Sala"' to
Manage" 610===x27
Exce inte"et paid to C

10=)===
2C)===
C)===
Total P"o#it #o"
"edit"i(ution
1C0)===

A 9
P"o#it al"ead' dit"i(uted 610====at 0:17

D?1)===

8?=)===
8

D3=)<==

83=)===
8

D3=)<==
8

82C)===
8 C)===

1.000,Cr- )00,Cr- 1.)00 ,Dr-
Journal Entry
C:s Capital (cco-nt Dr51,500
To (:s Capital (cco-nt 1,000
To B:s Capital (cco-nt 500

Calc-lation o& Capital Contrib-tion
Illustration 1.&!
A : 9 !a"ing p"o#it and loe e1uall' !a%e ag"eed to ad$it C a a
pa"tne" #o" 1I3
t!
!a"e #"o$ 1
t
>anua"') 0==0 &!o ag"eed to pa'
p"opo"tionate !a"e o# t!e total capital o# t!e #i"$ a#te" necea"'
ad*ut$ent and app"op"iation at t!e end o# t!e 'ea" 0==1. T!e capital
account o# A : 9 on 1
t
>anua"' 0==1 tood at R.3=)=== and R.2=)===
"epecti%el'. D"a&ing du"ing t!e 'ea" 0==1 a$ounted to R.2)=== (' A
and R.3)=== (' 9.
Calculate t!e capital to (e in%eted (' C.

C+ S!a"e i N o# t!e total Capital o# t!e #i"$.
T!e"e#o"e) co$(ined capital o# A: 9 i 2I3
t!
o# t!e total capital.

Net Capital o# A 63=)===8
2===7
Net Capital o# 9 62=)===8
3===7

Total capital o# A : 9
2;)===
0C)===

C2)===
Ie5 3/)
t3
o& t3e total capital D 63,000
Total capital D 63000 !)/3 D 8),000

C!apte":0 Recontitution 5# Pa"tne"!ip
6C!anging Ratio o" Ad$iion o# a Ne& Pa"tne"7
A pa"tne"!ip (uine $a' unde"go e%e"al t"uctu"al c!ange du"ing it li#eti$e.
Ne& pa"tne" $a' *oin o" exiting one $a' lea%e t!e (uine. ,!ile $a/ing uc!
$a*o" c!ange in t!e t"uctu"e o# (uine) pa"tne" ca"e#ull' e%aluate t!ei"
account. T!e' !a%e to "eet t!e 'te$ on a co""ect ta"ting point. T!e' c!ec/ t!e
%alue o# aet and lia(ilitie appea"ing in t!e (oo/. .# t!e"e a"e dic"epancie
t!e' !a%e to (e "ecti#ied (e#o"e int"oducing a $a*o" c!ange. Recontitution o# a
pa"tne"!ip (uine can ta/e place unde" t!e #ollo&ing ituation:
Ad$iion o# a ne& pa"tne"
C!anging p"o#it !a"ing "atio a$ong exiting pa"tne"
Reti"e$ent I deat! o# a pa"tne"
A$alga$ation o# t&o pa"tne"!ip #i"$
T!e $ot i$po"tant accounting ad*ut$ent i "eetting o# old account. .t i a
co$$on ad*ut$ent in all cae o# "econtitution. .n t!i c!apte" 'ou &ill #ind
"econtitution (' ad$iion and "econtitution (' c!anging "atio. Recontitution ('
ad$iion i $o"e i$po"tant on exa$ination point o# %ie&. T!e #ollo&ing a"e t!e
co$$on ad*ut$ent at t!e ti$e o# "econtitution o# a pa"tne"!ip (uine.
1. Re%aluation o# aet and lia(ilitie
0. Dit"i(ution o# "ee"%e and accu$ulated p"o#it
2. Calculation o# ne& "atio) ac"i#icing "atio and gaining "atio
3. T"eat$ent o# good&ill
<. Read*ut$ent o# capital account
1. Re@aluation of Assets and #iailities
Aet and lia(ilitie a"e o#ten !o&n in t!e account at t!ei" !ito"ical %alue "at!e"
t!an "ealia(le %alue. Due to cone"%ati$ t!e pa"tne" uuall' do not "e%ie t!e
%alue o# aet e%en &!en t!ei" actual $a"/et %alue a"e $uc! !ig!e" t!an (oo/
%alue. Si$ila"l' inade1uate dep"eciation) c!ange in tec!nolog' etc. $a/e t!e (oo/
%alue o# ce"tain aet $o"e t!an t!ei" "ealia(le %alue. .t i not p"actical #o" t!e
pa"tne" to /eep on c!anging t!e (oo/ %alue o# t!ei" aet e%e"' ti$e t!e"e i a
c!ange in t!ei" $a"/et %alue. T!e di##e"ence (et&een (oo/ %alue and $a"/et %alue
i not a p"o(le$ a long a t!e pa"tne"!ip (uine goe on no"$all'. 9ut &!en
t!e' c!ange t!e t"uctu"e o# t!e pa"tne"!ip in t!e #o"$ o# "e%iion in p"o#it !a"ing
"atio) ad$iion o# a ne& pa"tne") "eti"e$ent o" deat! o# a pa"tne") a$alga$ation o#
t&o pa"tne"!ip #i"$ o" a(o"ption o# a #i"$ (' anot!e") t!e %alue o# aet and
lia(ilitie a"e to (e "eaeed and di##e"ence i# an') !ould (e accounted.

Ahat is the purpose of re@aluationC
,!en t!e "ealia(le %alue o# aet o" lia(ilit' i di##e"ent #"o$ t!e (oo/ %alue t!e"e
i a p"o#it o" lo !idden in t!e di##e"ence in %alue. T!e pa"tne" !ould dit"i(ute all
t!e p"o#it and loe in t!e exiting p"o#it !a"ing "atio (e#o"e c!anging t!e "atio. .#
t!e "atio "e$ain unc!anged t!e"e i p"acticall' no ue in eti$ating t!e !idden
p"o#it o" lo. Ho&e%e") i# t!i p"o#it o" lo i not dit"i(uted p"io" to c!anging p"o#it
!a"ing "atio o$e pa"tne" &ill loe and ot!e" gain due to t!e c!ange in "atio.
Fo" exa$ple: A:9) &!o &e"e e1ual pa"tne" pu"c!aed land #o" R.1=)=== in >an
1J;<. T!e' decided to !a"e p"o#it and loe in t!e "atio 0:1 #"o$ 1
t
>anua"' 0==1.
T!e actual $a"/et %alue o# land on 1
t
>anua"' &a R.;=)===A &!e"ea t!e (oo/
!. Distriution of Reser@es and Accumulated Profits
Dit"i(ution o# "ee"%e and accu$ulated p"o#it i t!e #i"t tep in an'
"eo"ganiation p"oce. T!e' include gene"al "ee"%e) c"edit (alance
in P : L account o" an' ot!e" #und t!at a"e "etained in t!e (uine.
T!ee a"e p"o#it ea"ned in t!e pat) (ut not ta/en out (' t!e pa"tne")
o" p"o#it /ept aide. T!e"e#o"e) &!en t!e pa"tne" decide to c!ange
t!ei" #utu"e p"o#it !a"ing "atio) t!e pat p"o#it "etained in t!e a(o%e
account !ould (e dit"i(uted to pa"tne" in t!e old "atio a a #i"t
tep.

&. Calculating ne* ratio. sacrificing ratio and gaining ratio
,!en a ne& pa"tne" co$e into t!e (uine) old pa"tne" !a%e to gi%e
!i$ !i p"o#it !a"e #"o$ t!ei" po"tion. T!u c!ange in p"o#it !a"ing
"atio i an i$po"tant apect to (e conide"ed on "econtitution ('
ad$iion. .n acade$ic accounting) c!ange in p"o#it !a"ing "atio can
(e p"eented in %a"iou &a'. T!e exiting pa"tne" $a' decide to
c!ange t!ei" p"o#it !a"ing "atio #o" %a"iou "eaon. ,!en t!e p"o#it
!a"ing "atio i "e%ied a$ong exiting pa"tne") t!e"e oug!t to (e a
pa"tial ac"i#ice o# p"o#it !a"e (' o$e pa"tne" in #a%ou" o# ot!e".
T!e ac"i#ice o# one o" a g"oup o# pa"tne" (eco$e t!e gain o# t!e
"e$aining pa"tne". Follo&ing i t!e #o"$ula #o" calculating ac"i#icing
"atio:

Sacrificing ratio > Old ratio B ne* ratio

,!en t!e p"o#it !a"ing "atio i "e%ied it i i$po"tant to calculate t!e
ac"i#icing "atio and gaining "atio. T!ee "atio a"e "e1ui"ed to ad*ut
t!e %alue o# good&ill o# a #i"$ &it!out "aiing good&ill account in t!e
(oo/.

Faining "atio i t!e oppoite o# ac"i#icing "atio. T!i i t!e "atio gain to
t!e exiting pa"tne" o# a #i"$ &!en t!e' "e%ie t!e p"o#it !a"ing "atio)
o" &!en t!e p"o#it !a"e o# t!e deceaed o" "eti"ed pa"tne" i !a"ed ('
t!e ot!e" pa"tne". T!i "atio i calculated (' deducting t!e old "atio
#"o$ t!e ne& "atio. T!e ne& !a"e &ill (e !ig!e" t!an t!e old &!en
t!e"e i a gain.

Daining ratio > :e* ratio B old ratio

5xamples of ratio calculations on reconstitution 6
admission

a. 0he ne* partner9s share is mentioned *ithout specif6ing
the old partner9s profit sharing arrangement.
.n t!i cae it i to (e au$ed t!at t!e p"o#it a%aila(le a#te" pa'ing
t!e ne& pa"tne"+ !a"e i to (e di%ided (' t!e old pa"tne" in
t!ei" old p"o#it !a"ing "atio. .n ot!e" &o"d t!e e%en t!oug! t!e
o%e"all p"o#it !a"ing "atio c!ange) t!e old "atio i till
$aintained (et&een t!e old pa"tne") &it!in t!e ne& "atio.

Illustration !.1
Calculate ne* profit sharing ratio in the follo*ing cases:

i7 A " % sharing profits and losses e?uall6 admit C for 1$)
th
share in future profits
C+ S!a"e o# p"o#it H 1I<
t!
o# t!e p"o#it o# t!e #i"$.
9alance o# p"o#it a%aila(le #o" A : 9 H 3I<
t!
o# t!e p"o#it) &!ic! i
!a"ed (' t!e$ e1uall'.
A+ Ne& !a"e H 3I< x 1I0 H 3I1=
9+ Ne& !a"e H 3I< x O H 3I1=
Ratio (et&een A9C H 3I1=:3I1=:1I<
H !7!71

ii7 A " % sharing profits and losses in the ratio &71 admit C
for 1$)
th
share in future profits.
C+ !a"e o# p"o#it H 1I<
9alance a%aila(le #o" A : 9 H 181I< H 3I< o# t!e p"o#it &!ic! i
!a"ed (' t!e$ in t!e "atio 2:1
A+ Ne& !a"e H 3I< x 2I3 H 2I<
9+ Ne& !a"e H 3I< x N H 1I<
Ne& Ratio H 2I< : 1I< : 1I<
H &7171

iii7 A "% sharing profits and losses in the ratio &7! admit C
for 1$)
th
share in future profits.
C+ S!a"e H 1I<
9alance a%aila(le #o" A : 9 H 3I< &!ic! i !a"ed (' t!e$ in t!e
"atio 2:0
A+ ne& !a"e H 3I< x 2I< H 10I0<
9+ ne& !a"e H 3I< x 0I< H ?I0<
C+ !a"e H 1I<
Ne& p"o#it !a"ing "atio H 10I0< : ?I0< : 1I<
1!717)

i%7 A " % sharing profits and losses in the ratio !$& and 1$&
admit C into partnership gi@ing him 1$'
th
share in future
profits
C+ !a"e o# p"o#it H 1I3
9alance a%aila(le #o" A : 9 H 2I3
A+ ne& !a"e H 2I3 x 0I2 H 0I3
9+ ne& !a"e H 2I3 x 1I2 H 1I3
Ne& p"o#it !a"ing "atio H 0I3:1I3:1I3 ie. !7171

%7 A " % *ho are e?ual partners admit C for 1$+
th
share in
future profits
C+ !a"e o# p"o#it H 1IC
9alance a%aila(le to A : 9 H <IC
A+ ne& !a"e H <IC x 1I0 H <I10
9+ ne& !a"e H <IC x 1I0 H <I10
Ne& p"o#it !a"ing "atio H <I10: <I10: 1IC
H )7)7!
0he old partners gi@e part of their share to the ne* partner
,focus on the old partner7

.llut"ation .0.0
Calculate p"o#it !a"ing "atio and ac"i#icing "atio in t!e #ollo&ing cae:

i- A " % *ho are e?ual partners admit C for *hich A
surrenders E of his share and % surrenders 1$'
th
of his
share in fa@our of C
a. A+ 5ld !a"e H 1I0
(. Po"tion u""ende"ed #o" C 1I0 o# 1I0
i.e. 1I0x1I0 H 1I3
c. 9alance a%aila(le #o" A H 1I3 6a8(7
d. 9+ old !a"e H 1I0
e. Po"tion u""ende"ed #o" C H 1I3
t!
o# 1I0
i.e. 1I0x1I 3 H 1I?
#. 9alance a%aila(le #o" 9 H 2I? 61I081I?7
g. C+ !a"e H A+ cont"i(ution D 9+ cont"i(ution
i.e. 1I3 D1I? H 2I?
g. Ne& p"o#it !a"ing "atio H 1I3:2I?:2I?
i.e. !7&7&
ii- A " % sharing profits and losses in the ration &7! admit C
for *hich each partner surrenders E of his respecti@e
share.
a. A+ 5ld !a"e H 2I<
(. Po"tion u""ende"ed #o" C 1I0 o# 2I<
i.e. 2I<x1I0 H 2I1=
c. 9alance a%aila(le #o" A H 2I1=6a8(7
d. 9+ old !a"e H 0I<
e. Po"tion u""ende"ed #o" C H 1I0 o# 0I<
ie. 0I<x1I0 H 0I1=
#. 9alance a%aila(le #o" 9 H 0I1=6d8e7
i.e. 2I1=D0I1=H <I1=
!. Ne& p"o#it !a"ing "atio H 2I1=:0I1=:<I1=
i.e. &7!7)

iii- A " sharing profits and losses in the ratio &7! admit C
into partnership for *hich A surrenders 1$'
th
of his share
and % surrenders 1$! of his share.
(. Po"tion u""ende"ed #o" C 1I3
t!
o# 2I<
i.e. 2I<x1I3 H 2I0=
c. 9alance a%aila(le #o" A H JI0=6a8(7
i.e. 0I<x1I0 H 0I1=
i.e. 2I0=D0I1=H ;I0=
!. Ne& p"o#it !a"ing "atio HJI0=:0I1=:;I0= i.e. 27'7/

i@- A " % sharing profits and losses in the ratio '71 ha@e
admitted C 6 surrendering 1$! of their respecti@e shares.
(. Po"tion u""ende"ed #o" C 1I0 o# 3I<
i.e. 3I<x1I0 H 3I1=
c. 9alance a%aila(le #o" A H 3I1=6a8(7
i.e. 1I<x1I0 H 1I1=
i.e. 3I1=D1I1=H <I1=
!. Ne& p"o#it !a"ing "atio H 3I1=:1I1=:<I1=
i.e. '717)
0he ne* partner ac?uires his share from old partners ,focus on the ne*
partner9s share-

Illustration.!.&
Calculate sacrificing ratio and ne* profit sharing ratio in the follo*ing cases7
i- A " % sharing profits and losses e?uall6 admit C into partnership for 1$&
future profits. of *hich !$&
rd
is ac?uired from A and 1$&
rd
is ac?uired from %
a. C+ !a"e H 1I2
"d
o# #utu"e p"o#it
(. A+ cont"i(ution 6ac"i#ice7 H 0I2
"d
o# 1I2
"d
i.e. 0I2 x 1I2 H 0IJ
c. 9alance a%aila(le #o" A H A+ old !a"e G A+ ac"i#ice
i.e. 1I0 G 0IJ H <I1?
d. 9+ cont"i(ution H1I2
"d
o# 1I2
"d
i.e. 1I2 x 1I2 H 1IJ
e. 9alance a%aila(le #o" 9 H 9+ old !a"e G 9+ Cont"i(ution
i.e. 1I0 G 1IJ H ;I1?
C+ !a"e H 0IJ D1IJ H 2IJ
#. Ne& p"o#it !a"ing "atio H <I1? : ;I1? : CI1?
i.e. )7/7+
g. Sac"i#icing Ratio H 0IJ : 1IJ ie.!71

ii- A " % sharing profits and losses in the ratio !71 admit C as a ne* partner. C
ac?uired 1$11
th
from A and 1$2 from %
a. A+ cont"i(ution 6ac"i#ice7 to C H 1I1? o# t!e total p"o#it
(. 9alance a%aila(le #o" A H A+ old !a"e G A+ cont"i(ution I ac"i#ice
i.e. 0I2 G 1I1? H 11I1?
c. 9+ cont"i(ution H1IJ
d. 9alance a%aila(le #o" 9 H 9+ old !a"e G 9+ Cont"i(ution
i.e. 1I2 G 1IJ H 0IJ
e. C+ !a"e H 1I1? D1IJ H 2I1?
#. Ne& p"o#it !a"ing "atio H <I1? : ;I1? : CI1?
i.e. 117'7&
g. Sac"i#icing "atio H 1$1171$2 i.e.17!

iii- A " % sharing profits and losses in the ratio &7! admit C for 1$'
th
share *hich is
ac?uired e?uall6 from A and %
A+ Cont"i(ution 6ac"i#ice7 to C H O o# N H1I?
9+ Cont"i(ution 6ac"i#ice7 to C H O o# N H 1I?
A+ ne& !a"e H 2I< G1I? H 1JI3=
9+ ne& !a"e H 0I< G1I? H 11I3=
Ne& "atio H 1JI3=:11I3=:1=I3=
Sac"i#icing "atio H 1I? :1I? ie. 1:1

i@- A " % sharing profits in the ratio &71 admit C for 1$)
th
share in future profits. C
ac?uires /$1
th
of his share from a and 1$1
th
from %
A+ cont"i(ution to C H ;I?
t!
o# 1I<
ie. ;I3=
9+ Cont"i(ution to C H 1I?
t!
o# 1I<

0he entire sacrifice is made 6 one partner
Illustration.!.'
Calculate ne* profit sharing ratio in the follo*ing cases7
i- A : 9 !a"ing p"o#it and loe e1uall' ad$it C #o" 1I3
t!
!a"e.
9 !a $ade t!e enti"e ac"i#ice #o" C+ !a"e o# p"o#it.
9+ ne& !a"e H 1I0 G 1I3 H 1I3
Ne& p"o#it !a"ing "atio H 1I0:1I3:1I3
ii- A : 9 !a"ing p"o#it and loe in t!e "atio 2:0 ad$it C #o" 1I<
t!
!a"e in #utu"e p"o#it &!ic! i #ull' cont"i(uted (' A.
A+ cont"i(ution H 1I<
A+ ne& !a"e H 2I< G1I< H 0I<
Ne& p"o#it !a"ing "atio H 0I<:0I<:1I<
iii- A : 9 &!o a"e e1ual pa"tne" ad$it C into pa"tne"!ip. 9 !a
cont"i(uted O o# !i !a"e in #a%ou" o# C
Ne& p"o#it !a"ing "atio H 0:1:1
i@- A : 9 &!o a"e !a"ing p"o#it and loe in t!e "atio 2:1 ad$it c
(' cont"i(uting O o# A+ !a"e in #a%ou" o# C.
A+ cont"i(ution #o" C H O o# P H 2I?
Ne& p"o#it !a"ing "atio H 2I? : 1I3: 2I? H 2:0:2

@- A : 9 !a"ing p"o#it and loe in t!e "atio 0:1 ad$it C ('
cont"i(uting 1I2
"d
po"tion o# A+ !a"e o# p"o#it.
A+ cont"i(ution 6C+ !a"e7 H 1I2
"d
o# 0I2
"d
H 0IJ
A+ ne& !a"e H 0I2 G 0IJ H 3IJ
Ne& p"o#it !a"ing "atio H 3:2:0

c. An entirel6 ne* profit sharing ratio is gi@en

Illustration.!.)7
Calculate sacrificing ratio in the follo*ing cases
i- A : 9 !a"ing p"o#it and loe e1uall' ad$it C into
pa"tne"!ip and decide to !a"e #utu"e p"o#it and loe in t!e "atio
2:0:0
A+ ac"i#ice H 1I0 G 2I; H;I13 8 CI13 H 1I13
9+ ac"i#ice H 1I0 G0I; H ;I13 G 3I13 H 2I13
Sac"i#icing "atio H 1:2

ii- A " % sharing profits and losses in the ratio &71 admit C
and decide to share future profits and losses in the ratio
&7!7'
A+ ac"i#ice H 2I3 8 2IJ H 0;I2C G 10I2C H 1<I2C
9+ ac"i#ice H 1I3 G 0IJ H JI2C G ?I2C H 1I2C
Sac"i#icing "atio H 1<:1

iii- A " % sharing profits and losses in the ratio &7! admit C
and change their profit sharing as &7!7&.
A+ ac"i#ice H 2I<82I? H 03I3=81<I3= H JI3=
9+ ac"i#ice H 0I< G 0I? H 1CI3= G 1=I3= H CI3=
Sac"i#icing "atio H J:C ie.2:0

i@- A "% ha@ing e?ual partnership admit C and change their
profit sharing as '7&7!
A+ ac"i#ice H 1I0 8 3IJ H JI1? G ?I1? H 1I1?
9+ ac"i#ice H 1I0 G 2IJ H JI1? G CI1? H 2I1?
Sac"i#icing "atio H 1:2

@- A : 9 !a"ing p"o#it and loe in t!e "atio 3:2
ad$it C and decide to !a"e #utu"e p"o#it and loe e1uall'.
A+ ac"i#ice H 3I; G 1I2 H 10I01 G ;I01 H <I01
9+ ac"i#ice H 2I; G 1I2 H JI01 G ;I01 H 0I01
Sac"i#icing "atio H <:0

At t!e ti$e o# "econtitution (' ad$iion) t!e old pa"tne" gene"all'
ac"i#ice #o" t!e ne& pa"tne". .n ot!e" &o"d) ne& pa"tne" i t!e gaining
pa"tne" and t!e old pa"tne" a"e t!e ac"i#icing pa"tne". Ho&e%e"
&!en t!e pa"tne" "et"uctu"e t!e enti"e p"o#it !a"ing a""ange$ent
e%en o$e o# t!e old pa"tne" could tu"n out to (e gaining pa"tne".
83en reconstit-tion ta9es place by c3anging ratio a#ong e0isting
partners /wit3o-t any a#ission or retire#ent1 sacri&ice by one or
#ore partners will #atc3 wit3 t3e gain o& ot3er partners5
Calculation o# ac"i#ice and gain a"e igni#icant #o" e%e"al ot!e"
ad*ut$ent on "econtitution.

83at abo-t a sit-ation w3ere t3ere is sacri&ice as well as gain5 I& yo-
si#ply apply t3e &or#-la wit3o-t 9nowing w3at e0actly is sacri&ice or
gain t3ere will be lot o& con&-sion w3ile wor9ing o-t t3e proble#s5 In
#any cases yo-r co##on sense is #ore -se&-l t3an t3e te0t boo9
principles5 Hor e0a#ple i& yo- &in t3e new s3are o& a partner is less
t3an 3is ol s3are &or w3ate%er reason, it is calle "(C=IHIC< an i& t3e
new s3are is 3ig3er t3an t3e ol it is calle I(I$5 $ow yo- ecie 3ow
to &in o-t sacri&icing ratio or gaining ratio5

Shortcut to calculate sacrificing ratio and gaining
ratio
,!en t!e"e i a "e%iion o# p"o#it !a"ing "atio (' exiting pa"tne")
t!e"e &ill (e ac"i#ice a &ell a gain &it!in t!e a$e pa"tne"!ip.
T!e"e#o"e it i eaie" to tic/ to one #o"$ula. Ta/e t!e "eult o# ne&
"atio $inu old "atio. .# t!e "eult i negati%e it i ac"i#iceA and poiti%e
it i gain.

Notice t!e tep once again:
a. ,"ite t!e ne& "atio in t!e #i"t line 6(ecaue . li/e to ee ac"i#ice
a negati%e and gain a poiti%e nu$(e"7
b. ,"ite t!e old "atio in t!e econd line 6"e$e$(e" to ad*ut t!e
"atio to add up to t!e a con%enient total7
c. Deduct t!e old #"o$ ne&
. Negati%e "eult indicate ac"i#iceA poiti%e "eult indicate gain
a. Old and ne* ratios are gi@en
Illustration !.0+
A)9)C and D !a"ing p"o#it and loe in t!e "atio 3:2:0:1 !a%e
decided to !a"e #utu"e p"o#it and loe in t!e "atio 0:1:1:1. Find
out t!e ac"i#ice o" gain in t!e a""ange$ent.
6Note: ,!en 'ou !a%e to co$pa"e t&o di##e"ent "atio) it &ill (e eaie" i# (ot! add
up to t!e a$e total7

A
Ne& Ratio6ad*uted out o# 1=7 3
5ld Ratio 3
6Sac7 IFain =

9+ Sac"i#ice 1I1=A A+ Fain 1I1=
Illustration !.0/
A) 9) C and D !a"ing p"o#it and loe in t!e "atio 2:2:0:0 !a%e

A
Ne& Ratio6"e%ied to add up to 1=7 3
5ld Ratio 2
Sac IFain 1
A+ Fain 1I1=A D+ Sac"i#ice 1I1=

Illustration !.01

A
Ne& Ratio 2
5ld Ratio6con%e"ted to add up to 1=7 2
Sac IFain =

C+ gain 1I1=A D+ ac"i#ice 1I1=

Illustration !.02

% C D
0 1 1
1 0 1
1 81 =

9+ Fain 1ICA C+ ac"i#ice 1IC

Illustration !.10
decided to !a"e #utu"e p"o#it and loe e1uall'. Find out t!e
ac"i#ice o" gain in t!i a""ange$ent.

C D
< <
3 0
1 2

A+ Sac"i#ice 2I0=A 9+ Sac"i#ice 1I0=A C+ Fain 1I0=A D+ Fain 2I0=

Illustration !.11
A) 9) C and D !a"ing p"o#it and loe e1uall' !a%e decided to
!a"e #utu"e p"o#it and loe in t!e "atio 0:0:1:1. Find out t!e
ac"i#ice o" gain in t!e a""ange$ent.

% C D
3 0 0
2 2 2
1 81 81

A+ Fain 1I10A 9+ gain 1I10A C+ ac"i#ice 1I10A D+ ac"i#ice 1I10

Illustration !.1!
A) 9 and C !a"ing p"o#it and loe in t!e "atio 3:2:2 !a%e decided
to !a"e #utu"e p"o#it and loe in t!e "atio 0:0:1. Find out t!e
ac"i#ice o" gain in t!e a""ange$ent.

A
Ne& Ratio 3
5ld Ratio 3
Sac IFain =

9+ gain 1I1=A C+ ac"i#ice 1I1=
Partners9 sacrifice is specified
Illustration !.1&
to c!ange t!ei" "atio) to gi%e $o"e p"o#it !a"e to C &!o !a ag"eed
to &o"/ a $anaging pa"tne". 9ot! A and 9 !a%e ag"eed to ac"i#ice
1I3
t!
o# t!ei" "epecti%e !a"e in #a%ou" o# C. &o"/ out t!e ne& "atio
and t!e ac"i#icing "atio.

A+ old !a"e 2IC
A+ ac"i#ice H 1I3
t!
o# 2IC
H 2IC x 1I3 H 1$1
A+ ne& "atio H 2IC G 1I? H 2I?

9+ old !a"e H 0IC
9+ ac"i#ice H 1I3
t!
o# 0IC
H 0IC x 1I3 H 1$1!
9+ ne& !a"eH 0IC G 1I10 H 2I10

C+ ne& !a"e H 1IC D1I? D1I10
H 3I03 D 2I03 D 0I03
H JI03
Ne& p"o#it !a"ing "atio o# A9 and C H 2I? : 2I10 : JI03
H J : C : J

Sac"i#icing "atio o# A : 9 H 1I? : 1I10 H 2I03 : 0 I 03 H 2:0

C+ Fain H 2I03 D 0I03 H <I03

Illustration !.1'
to "ea""ange t!ei" p"o#it !a"ing "atio. A : 9 !a%e ag"eed to
cont"i(ute 1I<
t!
o# t!ei" "epecti%e !a"e in #a%ou" o# C. Find out t!e
ac"i#ice o" gain t!e a""ange$ent.

A+ old !a"e 2IC
A+ ac"i#ice H 1I<
t!
o# 2IC
H 2IC x 1I< H 2$&0
A+ ne& "atio H 2IC G 2I2= H 10I2=

9+ old !a"e H 0IC
9+ ac"i#ice H 1I<
t!
o# 0IC
H 0IC x 1I< H 0$&0
9+ ne& !a"eH 0IC G 0I2= H ?I2=
C+ ne& !a"e H 1IC D2I2= D0I2=
H <I2= D 2I2= D 0I2=
H 1=I2=

Ne& p"o#it !a"ing "atio o# A9 and C H 10 : ? : 1=
H C : 3 : <

Sac"i#icing "atio o# A : 9 H 2 : 0

C+ Fain H t!e total ac"i#ice $ade (' A : 9A ie. 2I2= D 0I2= H <I2=

Illustration !.1)
t!at C+ #utu"e !a"e o# p"o#it !all (e dou(led. A : 9 !a%e ag"eed to
ac"i#ice t!i po"tion e1uall'. ,o"/ out t!e detail o# ne& p"o#it
!a"ing a""ange$ent.

A+ old !a"e 2IC
A+ ac"i#ice H 1I0 o# 1IC H 1I10
A+ ne& "atio H 2IC G 1I10 H <I10

9+ old !a"e H 0IC
9+ ac"i#ice H 1I0 o# 1IC H 1I10
9+ ne& !a"eH 0IC G 1I10 H 2I10

C+ ne& !a"e H 1IC D1I10 D1I10 H 0IC

Ne& p"o#it !a"ing "atio o# A9 and C H <I10 : 2I10 : 0IC
H < : 2 : 3

Sac"i#icing "atio o# A : 9 H 1I10 : 1I10
Illustration !.1+
A) 9 : C !a"ing p"o#it and loe in t!e "atio 0:1:1 !a%e decided to
!a"e #utu"e p"o#it and loe e1uall'. T!ei" good&ill &a eti$ated
to (e &o"t! R.1?)===. Pa ad*ut$ent ent"' #o" t"eating good&ill.

Ans*er i ,using ratios-
Sacrifice $ Dain
A % C
C 2 2
3 3 3
! 1 1

A !a a ac"i#ice o# 0I10 po"tion o# good&ill o" &!ic! i R.2)===
61?)=== x0I107
T!i i (eco$e t!e gain o# 9 and C e1uall'.

Ad3ustment entr6:
B:s Capital (cco-nt Dr5 1,500
C:s Capital (cco-nt Dr51,500
/T3e gaining partner:s #argin o& gain is a;-ste to sacri&icing
partner1

An&e" ii 6uing t!e %alue o# good&ill di"ectl') in place o# "atio7

A % C
J=== 3<== 3<==
C=== C=== C===
C". 2===. D". 1<== D". 1<==

. t!in/ t!e econd $et!od i eaie". Eou need not &o""' a(out #inding out t!e "atio and
dit"i(uting t!e$. 9ut i# t!e 1uetion &ant 'ou to &"ite t!e "atio a pa"t o# an&e") 'ou
!a%e no c!oice ot!e" t!an t!e #i"t. So lea"n (ot!.

Illustration !.1/
A : 9 !a"ing p"o#it and loe in t!e "atio 0:0:1 !a%e decided to
!a"e #utu"e p"o#it and loe e1uall'. T!ei" good&ill &a eti$ated
to (e &o"t! R.2=)=== and &!ic! t!e' do not &ant to "e$ain in t!e
(oo/. Pa necea"' >ou"nal ent"ie.

A % C
C C 2
< < <
1 1 0

Ad3ustment entr6:
C:s Capital (cco-nt Dr5),000
To B:s Capital (cco-nt 2,000
partners1

Illustration !.11
A : 9 !a"ing p"o#it and loe in t!e "atio e1uall' !a%e decided to
!a"e #utu"e p"o#it and loe in t!e "atio 0:0:1. T!ei" good&ill &a
eti$ated to (e &o"t! R.1?)===. Pa necea"' >ou"nal ent"ie.

A % C
< < <
C C 2
1 1 !

Ad3ustment entr6:
B:s Capital (cco-nt Dr 1,200
To C:s Capital (cco-nt 2,)00

partners1

'. Accounting for Dood*ill

;eaning of Dood*ill

Dood*ill is the monetar6 @alue assigned to the ad@antages of
a reputed usiness in comparison *ith a ne* one. .t indicate
t!e ext"a ea"ning capacit' o# t!e (uine. Food&ill i an intangi(le
aet. 9ut it i not a #ictitiou aet. Food&ill !a a "ealia(le %alue. .t
i ac1ui"ed in a g"adual conitent p"oce o# good (uine. .deal
location) expe"ience o# ta##) "eputation o# o&ne") #ait!#ul cuto$e"
etc. cont"i(ute to t!e c"eation o# good&ill.
Uuall' good&ill i not !o&n in (oo/ due to cone"%ati$. Ho&e%e")
it i eential to ae t!e %alue o# good&ill and pa app"op"iate
ent"ie in t!e (oo/ p"io" to an' c!ange in p"o#it !a"ing o" o&ne"!ip
t"uctu"e. .# t!i tep i igno"ed &!ile $a/ing an' "ea""ange$ent in
p"o#it !a"ing o" o&ne"!ip t"uctu"e) o$e pa"tne" &ill loe and o$e
ot!e" &ill $a/e undue gain) ince good&ill i a %alua(le !idden aet
o# t!e (uine.
:ature of Dood*ill
1. Food&ill i an intangi(le aet
0. Food&ill i a %alua(le aet.
2. Food&ill gene"ate ext"a inco$e #o" t!e (uine
3. .t i ac1ui"ed in a g"adual p"oce
*ollo+ing are the 'a,or situations in +hich the good+ill of the
fir' is to be esti'ated.
a. C!ange in p"o#it !a"ing "atio
(. Ad$iion o# a ne& pa"tne"
c. Reti"e$ent o" deat! o# a pa"tne"
d. A$alga$ation o# t&o pa"tne"!ip #i"$
Factors Influencing Dood*ill
T!e"e a"e e%e"al #acto" t!at in#luence t!e #o"$ation o# good&ill. T!e
#ollo&ing a"e o$e o# t!e i$po"tant #acto" !elping t!e #o"$ation o#
good&ill in a (uine.
1. Fonest usiness dealings
A #i"$ (uild up it "eputation o%e" a long pe"iod (' conitent
good dealing &it! t!e cuto$e". 5nce t!e cuto$e" ta"t
identi#'ing a (uine #o" clean and !onet dealing t!e' &ould
p"e#e" to ta' &it! t!e #i"$) &!ic! in tu"n !elp t!e #i"$ to ea"n
!ig!e" p"o#it.
0. Dood ?ualit6 of products
A $anu#actu"ing conce"n $aintaining a %e"' good 1ualit' in t!ei"
p"oduction &ill g"aduall' (uild up "eputation) &!ic! &ill !elp t!e$
&!ile launc!ing ne& p"oduct. Si$ila"l' t"ading conce"n dealing
onl' in good 1ualit' p"oduct &ill g"aduall' (uild up t!ei"
"eputation.
2. Ideal #ocation
Food location o# t!e (uine i anot!e" #a%ou"a(le #acto"
en!ancing t!e p"o#ita(ilit' and t!e"e(' good&ill o# t!e (uine. A
(uine &!ic! i cent"all' located &ill natu"all' att"act $o"e
(uine and $o"e p"o#it.
3. Special sGill or 0echnical Hno*8ho*
T!e (uine (uild up /ill in dealing &it! t!ei" p"oduct line)
dealing &it! t!e client+ peci#ic "e1ui"e$ent) p"o(le$
aociated &it! t!e geog"ap!ical location o# t!ei" (uine
etc. t!"oug! expe"ience. T!e p"o(le$ a"e &ide and %a"ied)
and olution a"e alo e1uall' di%e"e. T!u t!e actual
expe"ience !elp de%elop /ill in dealing &it! i$ila" ituation
in #utu"e) &!ic! i natu"all' p"o$ote e##icienc' and good&ill
o# t!e (uine.
<. ;onopol6 of %usiness
So$e eta(li!ed (uine conce"n $anage to (uild up t!ei"
$onopol' i$pl' (' (eing t!e #i"t one in t!e $a"/et. T!i
ena(le t!e$ to eta(li! it poition in and to o$e extent)
"et"ict #utu"e co$petition. E%en t!oug!) $onopolie a"e
undei"a(le #"o$ t!e cuto$e"+ point o# %ie&) t!e' a"e
una%oida(le and !a"$le at a li$ited cale.

Met!od o# Qaluation o# Food&ill
Follo&ing a"e t!e $ot co$$onS $et!od adopted #o" %aluation o#
Food&ill.
a. A@erage Profit ;ethod
A%e"age p"o#it $et!od) a t!e na$e ugget) i (aed on t!e a%e"age
p"o#it o# t!e (uine. Unde" t!i $et!od) a%e"age p"o#it #o" t!e pat
t!"ee o" #ou" 'ea" a ag"eed (' t!e pa"tne" &ill (e ta/en. Food&ill i
eti$ated a t&ice o" t!"ice o# t!i a%e"age p"o#it.
Illustration !.12
(BC earne pro&its o& =s520, 000, =s515,000 an =s525,000 in t3e past
t3ree years5 T3ey 3a%e ecie t3at t3e Ioowill to be esti#ate at
twice t3e a%erage pro&it &or t3e past t3ree years5 <sti#ate Ioowill5

A%e"age p"o#it H 3<===
Qalue o# Food&ill (eing t&ice t!e a%e"age H 3<=== x0 H J=)===
. Super Profit ;ethod
T!e exitence o# Food&ill i "ecognied in a #i"$ onl' &!en it
p"o#ita(ilit' i (e'ond t!e le%el o# a ne& #i"$. Suc! exce p"o#it
ea"ned (' t!e #i"$ i te"$ed a upe" p"o#it. Food&ill unde" upe"
p"o#it $et!od i calculated in one o# t!e #ollo&ing &a':
i. (i'ple (uper Profit

Illustration !.!0
T3e net pro&it earne by (BC in t3e pre%io-s year was =s550,0005 T3e
capital e#ploye by t3e &ir# is =s5)00,0005 T3e nor#al rate o& ret-rn
&or si#ilar b-siness is 10G on capital5 Ioowill is consiere to be t3e
%al-e o& 3 years p-rc3ase o& "-per *ro&it5
Calc-late Ioowill5
Capital E$plo'ed H 3==)===
No"$al "ate o# "etu"n H 1=@
No"$al p"o#it on t!e capital e$plo'ed H 3==)=== x 1=@ H R. 3=)===
Actual p"o#it H R.<=)===
Supe" p"o#it H <==== G 3==== H 1=)===
Food&ill (eing 2 'ea" pu"c!ae o# upe" p"o#it H R.2=)===
ii. ")erage (uper Profit

Illustration !.!1
T3e &ir# (BC earne =514,500, =s522,500 an =s520,000 in t3e last
t3ree years5 T3e #o-nt o& capital e#ploye by t3e &ir# was
=s5150,000 an t3e nor#al rate o& ret-rn &or si#ilar b-siness is 10G5
Ioowill is consiere 5 ti#es t3e %al-e o& a%erage s-per pro&its5
Calc-late goowill5

A%e"age p"o#it #o" t!e lat t!"ee 'ea" H R.0=)===
No"$al p"o#it on t!e capital e$plo'ed H R.1<)===
A%e"age upe" p"o#it H R.<)===
Qalue o# Food&ill H <=== x < H R. 0<) ===
iii. $apitalisation of (i'ple (uper Profit

Illustration !.!!
(BC earne a pro&it o& =s520,000 -ring t3e year 20015 T3e capital
e#ploye by t3e &ir# was =s5120,000 an t3e nor#al rate o& ret-rn on
si#ilar b-siness is 10G5 Calc-late goowill by capitalising s-per pro&it5
Actual P"o#it H R.0=)===
No"$al p"o#it on capital in%et$ent H 10==== x 1=@ H R.10)===
Supe" p"o#it H 0=)=== G10)=== H R.?)===
Capitalied %alue o# upe" p"o#it H?==== x 1== I 1= H R.?=)===
c. Capitalisation ;ethod ,Dood*ill ased on capital sa@ed-
Capitaliation $et!od conide" good&ill a t!e %alue o# capital a%ed
due to !ig!e" p"o#ita(ilit'. Unde" t!i $et!od t!e a$ount o# e##ecti%e
capital i eti$ated on t!e (ai o# $a"/et condition. T!i e##ecti%e
capital i al&a' !ig!e" t!an t!e actual capital due to (ette"
p"o#ita(ilit'. T!e exce o# e##ecti%e capital o%e" t!e actual capital i
"ega"ded a capital a%ed &!ic! i conide"ed t!e good&ill o# t!e #i"$.
Capitaliation o# upe" p"o#it and capitaliation o# actual p"o#it and
eti$ation o# capital a%ed a good&ill a"e p"acticall' t!e a$e.

Illustration !.!&
(BC earne a pro&it o& =s520,000 on a capital in%est#ent o&
=s5145,0005 $or#al rate o& ret-rn is 10G5 Ioowill is consiere t3e
%al-e o& capital sa%e base on nor#al rate o& ret-rn5
<sti#ate t3e %al-e o& Ioowill5
6T!i u$ i &o"/ed out in t&o &a' to illut"ate t!at (ot! t!e $et!od
a"e a$e7
5stimation of Capital Sa@ed
Actual p"o#it H R.0=)===
Eti$ated capital #o" ea"ning t!i p"o#it H R.0==)===
Actual capital e$plo'ed H R.1;<)===
Capital a%ed H 0==)=== G 1;<)=== H Rs.!).000
Capitalisation of Super Profit
Actual p"o#it H R.0=)===
No"$al p"o#it on capital e$plo'ed H 1;<)=== x 1=@ H R. 1;)<==
Supe" p"o#it H 0=)===81;)<== H R.0)<==
Capitalied %alue o# upe" p"o#it H Rs.!).000
Accounting 0reatment of Dood*ill on Admission
5nce t!e %alue o# good&ill i eti$ated it !ould (e p"ope"l'
accounted p"io" to t!e ad$iion o# a ne& pa"tne". T!e"e a"e (aicall'
t!"ee $et!od o# t"eat$ent o# good&ill on ad$iion) &!ic! a"e:
Premium method
;argin Ad3ustment
Re@aluation method
;emorandum re@aluation method
Premium ;ethod
Unde" p"e$iu$ $et!od t!e ne& pa"tne" pa' ca! #o" !i !a"e
good&ill along &it! !i capital. Ca! account i de(ited #o" (ot! t!ee
pa'$ent. T!e total a$ount ("oug!t in (' t!e ne& pa"tne" 6Capital D
Food&ill7 i c"edited to !i capital account. T!e good&ill pa"t o# t!i
pa'$ent (elong to t!e old pa"tne". T!i a$ount i t"an#e""ed to
t!ei" capital account .N THE SACRIFICI:D RA0IO. Since good&ill
account i not opened in t!e (oo/ o# t!e #i"$ it &ill not appea" in t!e
(alance !eet.
.# t!e"e i an' good&ill pa"tl' appea"ing in t!e (alance !eet o# t!e
#i"$ and t!e ne& pa"tne" i &illing to cont"i(ute #o" !i !a"e) t!e"e a"e
t&o option a%aila(le #o" it t"eat$ent.

Fi"t) t!e exiting good&ill $a' (e le#t intact) and collect t!e ne&
pa"tne"+ !a"e o# t!e "e$aining %alue o# good&ill onl'.
Alte"nati%el') &"ite o## t!e exiting good&ill againt t!e capital
account o# old pa"tne" in t!ei" old p"o#it !a"ing "atio and collect t!e
!a"e #o" #ull %alue o# good&ill #"o$ t!e ne& pa"tne".
;argin Ad3ustment ;ethod
T!i $et!od i p"acticall' a %a"iation o# p"e$iu$ $et!od. He"e t!e
ne& pa"tne" doe not ("ing in $one' peci#icall' #o" !i !a"e o#
good&ill. T!e (et option in t!i ituation i to "aie good&ill. Hor
-nreasonable reasons, raising goowill is not allowe5 T!e lat "eo"t i
$a"gin ad*ut$ent. He"e t!e good&ill i ad*uted onl' t!"oug! t!e
capital account. T!i $et!od &ill &o"/ #ine #o" all cae o#
"econtitution. ,!en p"o#it !a"ing "atio i c!anged at "econt"uction
o$et!ing i added o" deducted #"o$ t!ei" old p"o#it !a"e. .n ot!e"
&o"d t!e pa"tne" "etain a $a*o" pa"t o# t!ei" old p"o#it !a"e #o" &!ic!
no ad*ut$ent i "e1ui"ed. Food&ill unde" t!i $et!od i ad*uted on
t!e (ai o# $a"ginal inc"eae o" dec"eae o# p"o#it !a"e. T!e (aic
"ule i t!at t!e gaining pa"tne" !all co$penate t!e ac"i#icing
pa"tne".
Follo&ing a"e t!e tep in%ol%ed in good&ill ad*ut$ent.
i7 Find out t!e pa"tne"+ ac"i#ice I gain
ii7 De(it gaining pa"tne" and c"edit t!e ac"i#icing pa"tne" &it! t!e
p"opo"tionate %alue o# good&ill.
.# 'ou #ind t!e "atio (it di##icult) 'ou can a""i%e at t!e $a"gin %alue (' #ollo&ing
$e$o"andu$ "e%aluation in a di##e"ent #o"$at in t!e &o"/ing. T!i i (aicall' c"editing #ull
%alue o# good&ill to pa"tne"+ capital account in t!e old "atio and de(iting it in t!e ne& "atio.
T!e net "eult i p"e$iu$ (eing ad*uted in t!e account. Eou a"e not allo&ed to !o& t!ee
ent"ie in t!e capital account. 9ut t!e exa$ine" !a no p"o(le$ i# 'ou do it in t!e &o"/ing.
Re@aluation ;ethod
,!en t!e ne& pa"tne" doe not pa' ca! #o" !i !a"e o# good&ill t!e
old pa"tne" &ill RA.SE #ull %alue o# good&ill in t!e (oo/) (' de(iting
good&ill account and c"editing t!e capital account o# old pa"tne" in
t!e O#D PROFI0 SFARI:D "atio. T!i $et!od i te"$ed a
"e%aluation $et!od. A a ne& good&ill account i opened in t!e (oo/
it &ill appea" in t!e (alance !eet o# t!e #i"$.
.# a pa"t o# t!e good&ill i al"ead' appea"ing in t!e (oo/ o# t!e #i"$
t!e old pa"tne" a"e allo&ed to "aie t!e onl' t!e "e$aining (alance o#
good&ill to ("ing it to t!e #ull %alue. .n ot!e" &o"d) t!e %alue o#
good&ill t!e (oo/ !ould not exceed it eti$ated #ull %alue. 6T!i
$et!od i explained in t!e p"e%iou c!apte" alo7
Difference et*een
Premium ;ethod and Re@aluation ;ethod
Premium ;ethod
1. T!e ne& pa"tne" pa' #o" !i !a"e o# good&ill
0. 5nl' t!e !a"e o# good&ill not t!e #ull %alue ta/en #o" dit"i(ution
2. Ca! account) not t!e good &ill account i de(ited upon "ecei%ing
t!e good&ill pa'$ent
3. Sac"i#icing "atio i applied #o" dit"i(ution o# good&ill $one'.
<. Food&ill &ill not appea" in t!e (alance !eet a#te" ad$iion.
Re@aluation ;ethod
1. T!e ne& pa"tne" doe not pa' #o" !i !a"e o# good&ill
0. Full %alue o# good&ill i ta/en #o" dit"i(ution to old pa"tne"
2. Food&ill account i de(ited #o" "aiing t!e good&ill. Ca! i not
a##ected (' good&ill.
3. 5ld p"o#it !a"ing "atio i applied o# dit"i(ution o# #ull %alue o#
good&ill
<. Full %alue good&ill &ill appea" in t!e (alance !eet a#te"
ad$iion.

Me$o"andu$ Re%aluation Met!od
Me$o"andu$ "e%aluation $et!od i (aicall' a$e a "e%aluation
$et!od &it! a $inute %a"iation. Unde" t!i $et!od t!e good&ill i
"aied in t!e (oo/ o# t!e #i"$ (' de(iting good&ill account and
c"editing t!e old pa"tne"+ capital account in t!e old p"o#it !a"ing
"atio a$e a t!e "e%aluation $et!od. T!e"ea#te" t!e good&ill i
&"itten o## againt capital account o# all pa"tne" 6including t!e ne&
pa"tne"7) in t!e ne& p"o#it !a"ing "atio. .n t!i cae good&ill &ill not
appea" in t!e (alance !eet a#te" ad$iion.
Illustration !.!'
!a"e #utu"e p"o#it e1uall' #"o$ 1
t
>anua"' 0==2. T!ei" 9alance S!eet
on t!at date tood a #ollo&:

%alance
Sheet
#
i
a
il
it
i
e
s
A
m
o
u
n
t
A
s
s
e
t
s
A
m
o
u
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t
C
a
p
it
a
l
(
1
)
,
0
0
0
E
a
c
3
i
n
e
r
y
2
0
,
0
0
0
C
a
p
it
a
l
B
1
0
,
0
0
0
H
-
r
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it
-
r
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1
1
,
0
0
0
C
a
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C
1
0
,
0
0
0
C
a
s
3
2
,
0
0
0
I
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2
,
0
0
0

C
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it
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,
0
0
0

)
0
,
0
0
0
)
0
,
0
0
0

T!e aet and lia(ilitie !a%e (een "e%alued a #ollo&:
Mac!ine"' 1=@ leA Fu"nitu"e %alued at R.12)===A C"edito" include
R.3== not to (e paid. Pa necea"' ad*ut$ent ent"ie) $a/e
"e%aluation account and p"epa"e ne& (alance !eet o# t!e #i"$.
<ournal 5ntries:
Ieneral =eser%e a/c Dr5 2000
(:s Capital (cco-nt 1,000
B:s Capital (cco-nt 500
C:s Capital (cco-nt 500
/Ieneral reser%e acco-nt trans&erre to partner:s capital acco-nt in
t3e ol ratio1
...............................................................................................
....
=e%al-ation (cco-nt Dr5 2,000
To Eac3inery (cco-nt 2,000
/Jal-e o& #ac3inery re-ce1
...............................................................................................
....
H-rnit-re (cco-nt Dr52,000
To =e%al-ation 2,000
/Jal-e o& &-rnit-re raise1
...............................................................................................
....
Creitors Dr5 )00
To =e%al-ation )00
/Jal-e o& Creitors re-ce1

Re@aluati
on
Account
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Capi
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1
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111 111

%alance
Sheet
#
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A
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Illustration !.!)
T!e #ollo&ing i t!e (alance !eet o# A : 9. T!e' !a%e decided to
"e%alue t!e $ac!ine"' 1=@ $o"e and #u"nitu"e R.1)=== le #o" t!e
pu"poe o# ad$itting C a a ne& pa"tne". Re%ie t!e (alance !eet
p"io" to ad$iion.
%alance
Sheet
#
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Bere we 3a%e to o t3ree t3ings5
15 *repare a re%al-ation acco-nt to s-##arise t3e e&&ect o&
re%al-ation5
ii5 *repare capital acco-nts
iii5 *repare new balance s3eet5

Re@aluati
on
Account
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B
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A9s
Capital
Account
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%9s
Capital
Account
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%alance
Sheet
#
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s
A
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A
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$otice t3at t3e %al-es o& t3e two assets 3a%e c3ange an t3e e&&ect is
trans&erre to t3e capital acco-nt in t3e &or# o& re%al-ation pro&itK

Illustration !.!+
!a"e #utu"e p"o#it e1uall' 1
t
>anua"' 0==2. T!ei" 9alance S!eet on
t!at date tood a #ollo&:

%alance
Sheet
#
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a
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it
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s
A
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A
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Mac!ine"' 1=@ le
Fu"nitu"e %alued at R.12)===
C"edito" !ould include an additional (ill #o" R.<==.

Pa necea"' ad*ut$ent ent"ie and p"epa"e ne& (alance !eet o#
t!e #i"$.

Journal Entries:

Ieneral =eser%e a/c Dr5 5,000
(:s Capital (cco-nt 2,000
B:s Capital (cco-nt 2,000
C:s Capital (cco-nt 1,000
/Ieneral reser%e acco-nt trans&erre to partner:s capital
acco-nt in t3e ol ratio1
.........................................................................................
....
=e%al-ation (cco-nt Dr5 2,000
To Eac3inery (cco-nt 2,000
/Jal-e o& #ac3inery re-ce an t3e loss ebite to
re%al-ation1
.........................................................................................
....
=e%al-ation (cco-nt Dr52,000
To H-rnit-re (cco-nt 2,000
/Jal-e o& &-rnit-re re-ce an t3e loss ebite to t3e
re%al-ation acco-nt1
.........................................................................................
....
=e%al-ation (cco-nt Dr5 500
To Creitors 500
/Creitors raise an loss trans&erre1
.........................................................................................
...
B:s Capital (cco-nt Dr51,800
To =e%al-ation (cco-nt ),500
/=e%al-ation loss trans&erre to capital acco-nts1

Re@aluati
on
Account
P
a
rt
ic
u
l
a
r
s
A
m
o
u
n
t
P
a
rt
ic
u
l
a
r
s
A
m
o
u
n
t
T
o
#
a
c
3
i
n
e
r
y
2
,
0
0
0
B
y
,
o
s
s
tr
a
n
s&
e
rr
e

T
o
H
-
r
n
it
-
r
e
2
,
0
0
0
(
1
,
8
0
0

T
o
C
r
e
it
o
r
s
5
0
0
B
1
,
8
0
0
C

2
0
0

)
,
5
0
0
)
,
5
0
0
)
,
5
0
0

Capi
tal
Acco
unts
PA%CPA%C
T
o
1
,
1
,
2
0
B
y
1
5
1
0
1
0 B
y
2
,
2
,
1
, B
a
1
5
1
0
1
0

111 111

%alance
Sheet
#
i
a
il
it
i
e
s
A
m
o
u
n
t
A
s
s
e
t
s
A
m
o
u
n
t
C
a
p
it
a
l
(
1
5
,
2
0
0
E
a
c
3
i
n
e
r
y
1
8
,
0
0
0

B
1
0
,
2
0
0
H
-
r
n
it
-
r
e
1
3
,
0
0
0

C
1
0
,
1
0
0
C
a
s
3
2
,
0
0
0
C
r
e
it
o
r
s
)
,
5
0
0

)
0
,
0
0
0
)
0
,
0
0
0

Illustration !.!/ /Ee#oran-# =e%al-ation1
!a"e #utu"e p"o#it e1uall' 1
t
>anua"' 0==2. T!ei" 9alance S!eet on
t!at date tood a #ollo&:

%alance
Sheet
#
i
a
il
it
i
e
s
A
m
o
u
n
t
A
s
s
e
t
s
A
m
o
u
n
t
C
a
p
it
a
l
(
2
5
,
0
0
0
B
-
il
i
n
g
s
)
0
,
0
0
0
C
a
p
it
a
l
B
2
0
,
0
0
0
E
a
c
3
i
n
e
r
y
2
5
,
0
0
0
C
a
p
it
a
l
C
2
0
,
0
0
0
D
e
b
t
o
r
s
1
)
,
0
0
0
I
e
n
e
r
a
l
r
e
s
e
r
%
e
1
5
,
0
0
0
"
t
o
c
9
4
,
0
0
0
C
r
e
it
o
r
s
1
)
,
0
0
0
C
a
s
3
8
,
0
0
0
2
)
,
0
0
0
2
)
,
0
0
0

9uilding app"eciated to R.<=)===
Mac!ine"' app"eciated (' R.3)===
C"eate p"o%iion #o" (ad de(t B1=@ on de(to".
Stoc/ to (e %alued at R.J)3==.
T!e pa"tne" &ant t!e %alue o# aet and lia(ilitie to "e$ain t!e
a$e.
P"epa"e Me$o"andu$ Re%aluation AccountA Capital Account o#
Pa"tne" and t!e 9alance S!eet o# t!e #i"$ a#te" t!e necea"'
ad*ut$ent a"e ca""ied out.

;emorandum Re@aluation Account
( 6,000
B 6,000
C 3,000

1,)00

16,000
By B-ilings
By Eac3inery
By "toc9

By pro%ision'
re%erse
By ,oss
Trans&erre
( 5,000
B 5,000
C 5,000
16,)00

10,000
),000
2,)00

16,)00

Capital Accounts
C Particulars

5,000
24,000

5,000
21,000
By Balance b/
By Ieneral =eser%e
ByEe#5 =e%al-ation
32,000 26,000

%alance Sheet
Amount Assets Amount
32,000
24,000
21,000

1),000
B-ilings
Eac3inery
Debtors
"toc9
Cas3
2),000

). Ad3ustment of Capital Accounts
,!en t!e pa"tne" c!ange t!ei" p"o#it !a"ing "atio) t!e' $a' alo
c!ange t!ei" capital. Cont"i(ution o# capital i not eentiall' t!e (ai
o# p"o#it !a"ing. 9ut in $ot cae capital cont"i(ution i conide"ed
t!e $ot i$po"tant #acto" in dete"$ining p"o#it !a"ing "atio. Capital
(alance a"e uuall' ad*uted (' ("inging in o" ta/ing out ca!.
Ho&e%e" a a te$po"a"' $eau"e capital (alance can (e ad*uted ('
t"an#e""ing t!e di##e"ence t!"oug! cu""ent account.
Reconstitution 6 admission

T!e illut"ation gi%en (elo& a"e ca"e#ull' planned to explain eac! concept &e dicued
(e#o"e. ,o"/ out eac! one o# t!e$. T!e' &ill !elp 'ou #ocu on eac! apect o# t!i c!apte".
T!e' &ill alo !elp 'ou !a%e a #"e! loo/ at t!e t!eo"' ection.

Illustration !.!1
T!e #ollo&ing 9alance S!eet !o& t!e #inancial poition o# A : 9
!a"ing p"o#it and loe e1uall' (e#o"e ad$iion o# C.

%alance
Sheet
# A
m
o
u
n
t
As
se
ts
Am
ou
nt
C1
=
)
=
=
=
Ma
c!i
ne
"'
1<)
===
C 1
=
)
=
=
=
Fu
"ni
tu"
e
C)=
==
C0
)
<
=
=
Ca
!
1)<
==
!
!
.
)
0
0
>S
I;
,A%
OJ
5-
!!.
)0
0

C paid R.10)=== a !i capital and R.2)<== a !i !a"e o# good&ill
#o" e1ual pa"tne"!ip in #utu"e.
Pa necea"' *ou"nal ent"ieA P"epa"e "e%aluation account) capital
account o# pa"tne" and t!e ne& (alance !eet o# t!e #i"$ a#te" C+
ad$iion.

<ournal 5ntries
155 Cas3 (cco-nt Dr5 =s512,000
To C:s Capital (cco-nt =s512,000
/ C:s s3are o& capital creite to 3is acco-nt1
............................................................................
25 Cas3 (cco-nt Dr5 =s53,500
To (:s Capital (cco-nt =s51,450
B:s Capital (cco-nt =s51,450
/C:s goowill contrib-tion creite to ol partners in t3e
sacri&icing ratio1

A9s Capital
Account
P
a
r
t
i
c
u
l
a
r
s
A
m
o
u
n
t
Pa
rti
cu
la
rs
Am
ou
nt
By
Ba
la
nc
e
b/
10,
00
0
T 1
1
,
4
5
0
By
Ca
s3
'
I/
w
pr
e
#
1,4
50
!
!
,
.
5
0
!!,
.5
0

%9s Capital
Account
PA
m
o
u
n
t
Pa
rti
cu
la
rs
Am
ou
nt
By
Ba
la
nc
e
b/
10,
00
0
T 1
1
,
4
5
0
By
Ca
s3
'
I/
s
pr
e
#
1,4
50
!
!
,
.
5
0
!!,
.5
0

C9s Capital
Account
PA
m
o
u
n
t
Pa
rti
cu
la
rs
Am
ou
nt
T 1
2
,
0
0
0
By
Ca
s3
(c
co
-n
t
12,
00
0

!
-
,
0
0
0
!-,
00
0

%alance
Sheet
# A
m
o
u
n
t
As
se
ts
Am
ou
nt
C1
1
,
4
5
0
E
ac
3i
ne
ry
15,
00
0
C1
1
,
4
5
0
H-
rni
t-
re
6,0
00
C1
2
,
0
0
0
Ca
s3
14,
00
0
C0
)
<
=
=

3
/
,
0
0
0
3/,
00
0

$ot3ing is #entione abo-t t3e &-t-re pro&it s3aring arrange#ent
between ( + B5 T3ere&ore it s3o-l be -nerstoo t3at t3ey will
contin-e to re#ain e@-al partners &or t3e &-t-re as well5

Bere C pays &or 3is s3are o& goowill w3ic3 3as to be gi%en to ( + B
in t3eir sacri&icing ratio5 83en t3e ratio between ol partners
re#ains t3e sa#e &or &-t-reL t3e ol ratio itsel& will be t3e
sacri&icing ratio5 /(:s "ac 1/2 '1/3L B:s sacri&ice is also t3e sa#e5
w3ic3 #eans t3eir sacri&ice is e@-alK

Ioowill acco-nt will not appear in t3e boo9s a&ter a#ission5

Illustration !.!2
T!e #ollo&ing 9alance S!eet !o& t!e #inancial poition o# A and 9
!a"ing p"o#it and loe in t!e "atio 0:1.

%alance
Sheet
#A
m
o
u
n
t
A
s
s
e
t
s
A
m
ou
nt
C1
=
)
=
=
=
M
a
c
!i
n
e"
'
1C
)=
==
C1
=
)
=
=
=
F
u"
ni
tu
"e
<)
==
=
C0
)
<
=
=
C
a
!
1)
<=
=
!
!
.
)
0
0
!!
.)
00

T!e' !a%e decided to ad$it C and to !a"e #utu"e p"o#it and loe
e1uall'. C ag"eed to cont"i(ute R. 1=)=== a !i capital and R.0)<==
a !i !a"e o# good&ill. Pa necea"' *ou"nal ent"ie and p"epa"e t!e
ne& (alance !eet a#te" ad$iion.

He"e ne& pa"tne"+ !a"e o# good&ill i gi%en to t!e old pa"tne" in t!e
ac"i#icing "atio. T!i apect i "epeated (ecaue o# it i$po"tance.
He"e 'ou !a%e a ne& "atio. ,!ene%e" t!e"e i a ne& "atio gi%en in t!e
1uetion 'ou $ut c!ec/ i# t!e "atio (et&een old pa"tne" i till t!e
a$e. Fo" exa$ple uppoe t!e old "atio &a e1ual 61:17 and t!e ne&
"atio i 0:0:1 !e"e t!e "atio (et&een old pa"tne" "e$ain t!e a$e)
e%en t!oug! 0I< i $alle" t!an t!ei" old 1I0. .# t!e old pa"tne"
continue to "e$ain in t!e a$e "atio a (e#o"e 'ou need not calculate
t!e ac"i#icing "atio) See t!e p"e%iou illut"ation) T!e"e 'ou #ind t!e
old pa"tne" &e"e e1ual) getting O eac! (e#o"e ad$iion and a#te"
ad$iion t!e' a"e getting 1I2
"d
eac!. T!e"e#o"e &e a' t!ei" ac"i#ice
alo i a$e.

Bere in t3is ill-stration yo- will really see t3e e&&ect o& sacri&icing ratio5
T3e ol ratio was 2?15 T3is #eans (:s s3are was 2/3 an B:s s3are 1/35
T3e &-t-re pro&it s3aring arrange#ent is agree to be e@-alL w3ic3
#eans all will get 1/3
r
s3are5 $ow notice t3at ( is t3e only loser in t3is
arrange#ent5 B contin-es to get 3is ol 1/3
r
5 T3ere&ore, goowill is
gi%en only to (5

Journal Entries

15 Cas3 acco-nt Dr512,500
/Cas3 contrib-tion &or Capital an Ioowill by C1
..............
25 C:s Capital acco-nt Dr5 2,500
To (:s Capital 2,500
/Ioowill contrib-tion trans&erre to t3e sacri&icing partner1

R Eou can c"edit t!e #ull cont"i(ution o# t!e ne& pa"tne" to !i
capital and t"an#e" it to t!e ac"i#icing pa"tne" a#te"&a"d.
A9s
Capital
Accoun
t
PA
m
o
u
n
t
P
a
rt
ic
ul
a
r
s
A
m
ou
nt
B
y
B
al
a
n
c
e
b
/
10
,0
00
T 1
2
,
5
0
0
B
y
C
:s
C
a
pi
t
al
'
g
o
o
w
ill
2,
50
0
!
-
,
5
0
0
!
-,
5
0
0

%9s
Capital
Accoun
t
PA
m
o
u
n
t
P
a
rt
ic
ul
a
r
s
A
m
ou
nt
B
y
B
al
a
n
c
e
b
/
10
,0
00
T1
0
,
0
0
0

!
0
,
0
0
0
!
0,
0
0
0

C9s Capital Account
2,500 By Cas3
10,000
!-,500

%alance
Sheet
#
i
a
i
l
i
t
i
e
s
A
m
o
u
n
t
As
se
ts
Am
ou
nt
C
a
p
i
t
a
l

(
1
2
,
5
0
0
E
ac
3i
ne
ry
16,
00
0
C
1
0
,
0
0
0
H-
rni
t-
re
5,0
00
C
a
p
i
t
a
l

C
1
0
,
0
0
0
Ca
s3
1),
00
0
C
"
e
d
i
t
o
"
0
)
<
=
=

3
5
,
0
0
0
35,
00
0

Illustration !.&0
Follo&ing (alance !eet !o& t!e #inancial poition o# A : 9 !a"ing
p"o#it and loe in t!e "atio 2:0.

%alance
Sheet
#
i
a
i
l
i
t
i
e
s
A
m
o
u
n
t
As
se
ts
Am
ou
nt
C
a
p
i
t
a
l

A
1
=
)
=
=
=
Ma
c!i
ne
"'
1<)
===
C
a
p
i
t
a
l

9
1
=
)
=
=
=
Fu
"ni
tu"
e
C)=
==
C
"
e
d
i
t
o
"
0
)
<
=
=
Ca
!
1)<
==
!
!
.
)
0
0
!!.
)0
0

T!e' !a%e decided to ad$it C #o" 1IC
t!
!a"e in t!e #utu"e p"o#it #o"
&!ic! C ("ing in R.1=)=== a !i capital and R.0)<== a !i !a"e o#
good&ill.

Pa necea"' *ou"nal ent"ie and p"eent t!e (alance !eet o# t!e
#i"$ a#te" C+ ad$iion.
Ao- 9now t3is is also pre#i-# #et3o o& goowill5 T3e ol partner:s
s3are a&ter a#ission is not speci&ically #entione5 Ao- #-st
-nerstan t3e portion o& pro&it le&t a&ter paying C:s s3are will be
i%ie in t3e ol ratio5 Bere C:s s3are is 1/6
t3
5 T3e balance a%ailable
&or ( + B is 5/6
t3
5 T3is portion will be s3are in t3e ratio 3?2 w3ic3
#a9es t3e new ratio 3?2?15 (s t3e ratio between ol partners contin-es
to be 3?2, t3e sacri&icing ratio also will be t3e sa#e5 "t-y t3e s#all
ill-strations on ratios care&-lly5
Journal Entries

1. Cas3 (cco-nt Dr512,500
/Capital an goowill contrib-tion by C is creite to 3is
acco-nt1
.......................................................................................
..
25 C:s Capital acco-nt Dr5 2,500
/Ioowill contrib-tion is trans&erre to ol partners in
sacri&icing ratio1

A9s
Capital
Account
P
a
r
t
i
c
u
l
a
r
s
A
m
o
u
n
t
P
ar
ti
cu
la
rs
A
mo
un
t
B
y
B
al
an
ce
b/
10,
00
0
T
1
1
,
5
0
0
B
y
C:
s
C
ap
it
al.
I
oo
wi
ll
1,5
00
!
!
,
5
0
0
!!
,5
00

%9s
Capital
Account
P
a
r
t
i
c
u
l
a
r
s
A
m
o
u
n
t
P
ar
ti
cu
la
rs
A
mo
un
t
B
y
B
al
an
ce
b/
10,
00
0
T
o

b
a
l
a
n
c
e

c
/
1
1
,
0
0
0
B
y
C:
s
C
ap
it
al
'
go
o
wi
ll
1,0
00
!
!
,
0
0
0
!!
,0
00

C9s
Capital
Account
P
a
r
t
i
c
u
l
a
r
s
A
m
o
u
n
t
P
ar
ti
cu
la
rs
A
mo
un
t
T
o

(
:
s

C
a
p
i
t
a
l
1
,
5
0
0
B
y
C
as
3
12,
50
0
T
o

B
:
s

C
a
p
i
t
a
l
1
,
0
0
0

T
o

b
a
l
a
n
c
e

c
/
1
0
,
0
0
0

!
-
,
5
0
0
!-
,5
00

%alance
Sheet
P
a
r
t
i
c
u
l
a
r
s
A
m
o
u
n
t
P
ar
ti
cu
la
rs
A
mo
un
t
(
1
1
,
5
0
0
E
ac
3i
ne
ry
15,
00
0
B
:
s

C
a
p
i
t
a
l
1
1
,
0
0
0
H-
rn
it
-r
e
6,0
00
C
:
s

C
a
p
i
t
a
l
1
0
,
0
0
0
C
as
3
1),
00
0
C
r
e
i
t
o
r
s
2
,
5
0
0

3
5
,
0
0
0
35
,0
00
Illustration !.&1
T!e #ollo&ing (alance !eet !o& t!e #inancial poition o# A : 9
!a"ing p"o#it and loe in t!e "atio 2:0.

%alan
ce
Sheet
#A
m
o
u
n
t
A
s
s
e
t
s
A
m
o
u
n
t
C1
=
)
=
=
=
M
a
c
!
i
n
e
"
'
1
<)
=
=
=
C1
=
)
=
=
=
F
u
"
n
it
u
"
e
C)
=
=
=
C0
)
<
=
=
C
a
!
1)
<
=
=
!
!
.
)
0
0
!
!
.
)
0
0

T!e' !a%e decided to ad$it C into pa"tne"!ip) &!o ag"eed to pa'
R.1<)=== a !i !a"e o# capital #o" 1I3 !a"e in #utu"e p"o#it. He alo
paid p"e$iu$ #o" !i !a"e o# good&ill R.0)<==.

Pa necea"' *ou"nal ent"ie) open ledge" account and p"epa"e
(alance !eet a#te" ad$iion.

Journal Entries
15 Cas3 (cco-nt Dr515,000
/Capital contrib-tion by t3e new partner1
.............................................................................
To B:s Capital 1,000
/H-ll %al-e o& goowill raise in t3e boo9s on
a#ission1

A9s
Capital
Account
PA
m
o
u
n
t
P
ar
ti
c
ul
ar
s
A
m
ou
nt
B
y
B
al
a
n
c
e
b/
10
,0
00
1
1
,
5
0
0
By
1,
50
0
!
!
,
5
0
0
!!
,5
00

%9s
Capital
Account
PA
m
o
u
n
t
P
ar
ti
c
ul
ar
s
A
m
ou
nt
B
y
B
al
a
n
c
e
b/
10
,0
00
T 1
1
,
0
0
0
B
y
C
a
s
3
'
g
o
o
w
ill
1,
00
0
!
!
,
0
0
0
!!
,0
00

C9s
Capital
Account
PA
m
o
u
n
t
P
ar
ti
c
ul
ar
s
A
m
ou
nt
B
y
C
a
s
3
a/
c
15
,0
00
T 1
5
,
0
0
0

!
5
,
0
0
0
!5
,0
00

%alance
Sheet
# A
m
o
u
n
t
A
s
s
et
s
A
m
ou
nt
C1
1
,
5
0
0
E
a
c
3i
n
er
y
15
,0
00
1
1
,
0
0
0
H-
6,
00
0
C1
5
,
0
0
0
C
a
s
3
12
,0
00
C0
)
<
=
=

0
0
,
0
0
0
00
,0
00

Illustration !.&!
T!e #ollo&ing (alance !eet !o& t!e #inancial poition o# A : 9.

%alance
Sheet
A
m
o
u
n
t
A
ss
et
s
A
m
ou
nt
1
=
)
=
=
=
M
ac
!i
n
e"
'
1<
)=
==
1
=
)
=
=
=
Fu
"n
it
u"
e
C)
==
=
0
)
<
=
=
C
a
!
1)
<=
=
!
!
.
)
0
0
!!
.)
00

T!e' !a%e decided to ad$it C #o" 1I3
t!
!a"e in #utu"e p"o#it. C pa'
R.1<)=== a !i capital. T!e good&ill o# t!e #i"$ i eti$ated to (e
&o"t! R.10)===) C cont"i(ute #o" !i !a"e o# good&ill.
Pa *ou"nal ent"ieA p"epa"e ledge" and p"eent (alance !eet a#te"
ad$iion.

Journal Entries

15 Cas3 acco-nt Dr5 15,000
/Being capital contrib-tion o& new partner creite to
3is acco-nt1

25 Cas3 (cco-nt Dr5 3,000
To *re#i-# (cco-nt 3,000
/C:s s3are o& goowill contrib-tion1

35 *re#i-# acco-nt Dr5 3000

A9s
Capital
Account
P
a
r
ti
c
u
l
a
r
s
A
m
o
u
n
t
P
a
r
ti
c
u
l
a
r
s
A
m
o
u
n
t
B
y
B
a
l
a
n
c
e
b
/
1
0
,
0
0
0
T
o
B
a
l
a
n
c
e
c
/
1
1
,
5
0
0
B
1
,
5
0
0
!
!
,
5
0
0
!
!
,
5
0
0

%9s
Capital
Account
P
a
r
ti
c
u
l
a
r
s
A
m
o
u
n
t
P
a
r
ti
c
u
l
a
r
s
A
m
o
u
n
t
B
y
B
a
l
a
n
c
e
b
/
1
0
,
0
0
0
T
o
b
a
l
a
n
c
e
c
/
1
1
,
5
0
0
B
y
*
r
e
#

I
/
w

a
/
c
1
,
5
0
0
!
!
,
5
0
0
!
!
,
5
0
0

%alance
Sheet
#
i
a
il
it
i
e
s
A
m
o
u
n
t
A
s
s
e
t
s
A
m
o
u
n
t
C
a
p
it
a
l
(
1
1
,
5
0
0
E
a
c
3
i
n
e
r
y
1
5
,
0
0
0
C
a
p
it
a
l
B
1
1
,
5
0
0
H
-
r
n
it
-
r
e
6
,
0
0
0
C
a
p
it
a
l
C
1
5
,
0
0
0
C
a
s
3
1
2
,
5
0
0
C
r
e
it
o
r
s
2
,
5
0
0

0
0
,
5
0
0
0
0
,
5
0
0

Illustration !.&&
!a"ing p"o#it and loe in t!e "atio 2:0. T!e' !a%e decided to ad$it
C into pa"tne"!ip #o" 1I3
t!
!a"e in #utu"e p"o#it.

A9s
Capital
Account
P
a
r
ti
c
u
l
a
r
s
A
m
o
u
n
t
P
a
r
ti
c
u
l
a
r
s
A
m
o
u
n
t

C
a
pi
t
al
A
1
1
)
<
=
=
M
a
c
!i
n
e
"
'
1
<)
=
=
=
C
a
pi
t
al
9
1
1)
<
=
=
F
u
"
ni
t
u
"
e
C)
=
=
=
C
"
e
di
t
o
"
0)
<
=
=
E
1
ui
p
$
e
n
t
2)
=
=
=
C
a
!
1)
<
=
=
0
<)
<
=
=
0
<)
<
=
=

C !a ag"eed to pa' R.1<)=== a !i !a"e o# capital. He alo ag"eed
to pa' #o" !i !a"e o# good&ill R.0===. A and 9 ag"eed t!at t!e' &ill
di%ide t!ei" po"tion o# p"o#it e1uall'.

S!o& t!e ledge" account and t!e (alance !eet a#te" ad$iion.

$ote? Bere t3e ol partners are not contin-ing in t3e ol ratio5 T3e ol
partners are s3aring t3eir portion e@-ally, w3ic3 #eans t3ey will gi%e
M to C an t3e re#aining N will be s3are e@-ally5 T3eir new pro&it
s3aring ration will be 3/8?3/8?1/) ie53?3?25 T3e sacri&icing ratio 3ere is
2?1

A9s
Capital
Account
P
a
r
ti
c
u
l
a
r
s
A
m
o
u
n
t
P
a
r
ti
c
u
l
a
r
s
A
m
o
u
n
t
B
y
B
a
l
a
n
c
e
b
/
1
1
,
5
0
0
T
o
B
a
l
a
n
c
e
c
/
1
3
,
3
0
0
B
y
c
a
s
3
g
/
w
1
,
8
0
0
!
3
,
3
0
0
!
3
,
3
0
0

%9s
Capital
Account
P
a
r
t
i
c
u
l
a
r
s
A
m
o
u
n
t
P
a
r
ti
c
u
l
a
r
s
A
m
o
u
n
t
B
y
B
a
l
a
n
c
e
b
/
1
1
,
5
0
0
T
o
B
a
l
a
n
c
e
c
/
1
1
,
4
0
0
B
y
C
a
s
3
.
I
o
o
w
il
l
2
0
0
!
!
,
.
0
0
!
!
,
.
0
0

%alance
Sheet
#
i
a
il
it
i
e
s
A
m
o
u
n
t
A
s
s
e
t
s
A
m
o
u
n
t
C
a
p
it
a
l
(
1
3
,
3
0
0
E
a
c
3
i
n
e
r
y
1
5
,
0
0
0
C
a
p
it
a
l
B
1
1
,
4
0
0
H
-
r
n
it
-
r
e
6
,
0
0
0
C
a
p
it
a
l
C
1
5
,
0
0
0
<
@
-
i
p
#
e
n
t
3
,
0
0
0
C
r
e
it
o
r
s
2
,
5
0
0
C
a
s
3
1
8
,
5
0
0
0
-
,
5
0
0
0
-
,
5
0
0

.llut"ation 0.23
!a"ing p"o#it and loe e1uall'.

%alance
Sheet
#
i
a
il
i
t
i
e
s
A
m
o
u
n
t
A
s
s
e
t
s
A
m
o
u
n
t
C
1
1
,
5
0
0
E
a
c
3
i
n
e
r
y
1
5
,
0
0
0
C
a
p
i
t
a
l
B
1
1
,
5
0
0
H
-
r
n
i
t
-
r
e
6
,
0
0
0
C
r
e
i
t
o
r
s
2
,
5
0
0
<
@
-
i
p
#
e
n
t
3
,
0
0
0
C
a
s
3
1
,
5
0
0
!
)
.
)
0
0
!
)
.
)
0
0

T!e' !a%e decided to ad$it C a a pa"tne" and to !a"e #utu"e p"o#it
and loe in t!e "atio 0:1:1. C ag"eed to pa' R.1<=== a !i !a"e o#
capital. T!e #ull %alue o# good&ill i eti$ated to (e &o"t! R.?)===. C
paid #o" !i !a"e o# good&ill.

Pa *ou"nal ent"ie and p"epa"e capital account and t!e (alance
!eet o# t!e #i"$ a#te" C+ ad$iion.

Journal Entries
Cas3 (cco-nt Dr5 15,000
To C:s Capital 15,000
/C:s capital contrib-tion1
......................................................................................
/C:s goowill contrib-tion creite to B1

$ote? B is t3e only sacri&icing partner

A9s Capital
Account
P
a
r
ti
c
u
l
a
r
s
A
m
o
u
n
t
P
a
r
ti
c
u
l
a
r
s
A
m
o
u
n
t
B
y
B
a
l
a
n
c
e
b
/
1
1
,
5
0
0
T
o
b
a
l
a
n
c
e
c
/
1
1
,
5
0
0

!
!
,
5
0
0
1
!
!
,
5
0
0

%9s
Capital
Account
P
a
r
ti
c
u
l
a
r
s
A
m
o
u
n
t
P
a
r
ti
c
u
l
a
r
s
A
m
o
u
n
t

B
y
B
a
l
a
n
c
e
b
/
1
1
,
5
0
0
T
o
B
a
l
a
n
c
e
c
/
1
3
,
5
0
0
B
y
C
a
s
3
'
g
o
o
w
il
l
2
,
0
0
0
!
3
,
5
0
0
!
3
,
5
0
0

C9s
Capital
Account
P
a
r
ti
c
u
l
a
r
s
A
m
o
u
n
t
P
a
r
ti
c
u
l
a
r
s
A
m
o
u
n
t

B
y
C
a
s
3
(
c
c
o
-
n
t
1
5
,
0
0
0
T
o
B
a
l
a
n
c
e
c
/
1
5
,
0
0
0

!
5
,
0
0
0
!
5
,
0
0
0

%alance
Sheet
#
i
a
il
it
i
e
s
A
m
o
u
n
t
A
s
s
e
t
s
A
m
o
u
n
t
C
a
p
it
a
l
(
1
1
,
5
0
0
E
a
c
3
i
n
e
r
y
1
5
,
0
0
0
C
a
p
it
a
l
B
13,5
00
H
-
r
n
i
t
-
r
e
6
,
0
0
0
C
a
p
it
a
l
C
1
5
,
0
0
0
<
@
-
i
p
#
e
n
t
3
,
0
0
0
C
r
e
it
o
r
s
2
,
5
0
0
C
a
s
3
1
8
,
5
0
0
0
-
,
5
0
0
0
-
,
5
0
0

Illustration !.&)
T!e (alance !eet o# A : 9 !a"ing p"o#it and loe e1uall' i gi%en
(elo&.

%alance
Sheet
#
i
a
il
i
t
i
e
s
A
m
o
u
n
t
A
s
s
e
t
s
A
m
o
u
n
t
C
a
p
it
a
l
(
1
1
,
5
0
0
E
a
c
3
i
n
e
r
y
1
5
,
0
0
0
C
a
p
it
a
l
B
1
1
,
5
0
0
H
-
r
n
i
t
-
r
e
6
,
0
0
0
C
r
e
it
o
r
s
2
,
5
0
0
I
o
o
w
i
l
l
3
,
0
0
0
C
a
s
3
1
,
5
0
0
!
)
.
)
0
0
!
)
.
)
0
0

T!e' !a%e decided to ad$it C #o" 1I3
t!
!a"e in t!e #utu"e p"o#it. C !a
ag"eed to pa' R.1<)=== a !i capital. T!e good&ill i %alued at
R.?=== and C pa' R.0)=== #o" !i !a"e o# good&ill. T!e old pa"tne"
&ant t!e %alue o# good&ill !o&n in t!e (oo/ !all "e$ain unc!anged.
Pa necea"' *ou"nal ent"ie) open ledge" account and t!e ne&
(alance !eet a#te" ad$iion.

T3is is a co#plicate arrange#ent5 C:s 1/)
t3
s3are o& goowill is
esti#ate at =s52,0005 T3e new partner pays &or goowill on conition
t3at t3e ol partners o not raise t3eir goowill in t3e boo9s5 In &act
t3e new partner is b-ying 3is s3are o& t3at 3ien asset o& goowill5
Bere t3e goowill is appearing at =s53000 w3ic3 #eans t3e ol
partners 3a%e alreay ae t3at portion into t3eir capital acco-nts5
T3e new partner is re@-ire to pay only &or t3e portion t3at is still
3ien5 I& t3e new partner pays &or 3is &-ll s3are o& goowill, t3e ol
partners #-st re#o%e t3e goowill &ro# acco-nts5 I& t3ey insist on
9eeping it, t3e ne0t option is to gi%e t3e# w3at is -e &or t3e 3ien
portion only5 In t3is ill-stration, C:s contrib-tion o& =s2000 is creite
to 3is capital acco-nt an &ro# t3ere =s51,250 representing =s55000 o&
t3e goowill not raise is trans&erre to ol partners in t3eir sacri&icing
ratio5

Is t3is e0planation eno-g37 *lease rea t3is slowly, care&-lly5 8rite
own all t3e n-#bers abo%e, an st-y t3e relation between t3e#5

Journal Entries
15 Cas3 acco-nt Dr5 14,000
To C:s Capital acco-nt 14,000
/C:s s3are o& capital an goowill contrib-tion creite
to 3is capital acco-nt1
.............................................................................
.
35 C:s Capital acco-nt Dr51,250
(:s Capital (cco-nt 645
B:s Capital (cco-nt 645
/*roportionate a#o-nt &or t3e 3ien part o& goowill
trans&erre in t3e sacri&icing ratio1

A9s
Capital
Account
P
a
r
ti
c
u
l
a
r
s
A
m
o
u
n
t
P
a
r
t
i
c
u
l
a
r
s
A
m
o
u
n
t
B
y
B
a
l
a
n
c
e
b
/
1
1
,
5
0
0
T
o
b
a
l
a
n
c
e
c
/
1
2
,
1
4
5
B
y
C
:
s
C
a
p
i
t
a
l
a
/
c
6
4
5
!
-
,
!
.
5
!
-
,
!
.
5

%9s
Capital
Account
P
a
r
t
i
c
u
l
a
r
s
A
m
o
u
n
t
P
a
r
t
i
c
u
l
a
r
s
A
m
o
u
n
t
B
y
B
a
l
a
n
c
e
b
/
1
1
,
5
0
0
T
o
b
a
l
a
n
c
e
c
/
1
2
,
1
4
5
B
y
C
:
s
C
a
p
i
t
a
l
a
/
c
6
4
5
!
-
,
!
.
5
!
-
,
!
.
5

C9s
Capital
Account
P
a
r
t
i
c
u
l
a
r
s
A
m
o
u
n
t
P
a
r
t
i
c
u
l
a
r
s
A
m
o
u
n
t
T
o
(
:
s
C
a
p
i
t
a
l
6
4
5
B
y
C
a
s
3
a
/
c
1
5
,
0
0
0
T
o
B
:
s
C
a
p
i
t
a
l
6
4
5
B
y
C
a
s
3
a
/
c
2
,
0
0
0
T
o
B
a
l
a
n
c
e
c
/
1
5
,
6
5
0

!
.
,
0
0
0
!
.
,
0
0
0

%alance
Sheet
#
i
a
il
i
t
i
e
s
A
m
o
u
n
t
A
s
s
e
t
s
A
m
o
u
n
t
C
a
p
i
t
a
l
(
1
2
,
1
4
5
E
a
c
3
i
n
e
r
y
1
5
,
0
0
0
C
a
p
i
t
a
l
B
1
2
,
1
4
5
H
-
r
n
i
t
-
r
e
6
,
0
0
0
C
a
p
i
t
a
l
C
1
5
,
6
5
0
I
o
o
w
il
l
3
,
0
0
0
C
r
e
i
t
o
r
s
2
,
5
0
0
C
a
s
3
1
8
,
5
0
0
0
-
,
5
0
0
0
-
,
5
0
0
CHAPTER:2 "eti"e$ent o" deat! o# a pa"tne"
1. Change in profit sharing ratio
!. 0reatment of good*ill
&. Re@aluation of assets and liailities
'. Accumulated profitsK reser@esK losses etc.
). Ad3ustment of <oint #ife Polic6
+. Ad3ustment of capital
1. C!ange in p"o#it !a"ing "atio
Reti"e$ent o" deat! "educe t!e nu$(e" o# pa"tne" to !a"e #utu"e
p"o#it o" loe. Natu"all' t!e !a"e o# p"o#it #o" t!e continuing
pa"tne" &ill inc"eae (' t!e "eti"e$ent o" deat! o# a pa"tne".
Recalculation o# "atio i t!e #i"t tep in #o" #u"t!e" accounting
p"ocedu"e. Re%iion in "atio $a' (e indicated in an' o# t!e #ollo&ing
&a' in a 1uetion:

a. Old ratio is gi)en and nothing is 'entioned
about the ne+ arrange'ent after retire'ent.
T!i i p"acticall' t!e eaiet &a' o# p"eenting ne& p"o#it !a"ing
a""ange$ent. T!e ne& "atio unde" t!i $et!od i #ound out i$pl' ('
canceling t!e outgoing pa"tne"+ !a"e o# p"o#it au$ing t!at t!e
"atio (et&een t!e continuing pa"tne" doe not c!ange. ,!en t!i
$et!od i #ollo&ed t!e outgoing pa"tne"+ !a"e merges into the
continuing partners share in their profit sharing ratio.

Exa$ple: A) 9 and C !a%e (een !a"ing p"o#it and loe in t!e "atio
2:0:1. 9 !a "eti"ed #"o$ t!e (uine. Find out ne& "atio (et&een A
: C.

He"e 9 i "eti"ed and not!ing i $entioned a(out t!e a""ange$ent
(et&een A : C. T!e ne& "atio i #ound out (' i$pl' canceling t!e
9+ !a"e o# p"o#it.
$ew ratio D 3?1
He"e 9+ !a"e o# 0I2 o# p"o#it i $e"ged in t!e !a"e o# A and C in
t!e "atio 2:1.

. The outgoing partner#s share is ta2en o)er by
the continuing partners in a certain ratio.
( + B 3a%e been s3aring pro&its an losses in t3e ratio 3?2?15 B
retire &ro# t3e &ir#5 Bis s3are o& pro&it is i%ie e@-ally between (
+ C5 Hin o-t new ratio5

He"e 9+ !a"e o# 0IC i !a"ed (et&een A : C e1uall'. T!e ne& !a"e
o# A i !i old !a"e o# 2IC D 1IC #"o$ 9. T!u !i ne& !a"e i 3IC.
C+ ne& !a"e i !i old !a"e o# 1IC D 1IC #"o$ 9. T!u !i ne& !a"e
i 0IC. Ne& p"o#it !a"ing "atio i 3:0 t!at i 0:1.

c. The ne+ ratio is directly gi)en.
,!en t!e ne& "atio i di"ectl' gi%en) t!e need #o" calculating it i
ta/en a&a'. 9ut it i i$po"tant to "e$e$(e" t!at ne& "atio i onl' a
#i"t tep #o" #u"t!e" ad*ut$ent in account on "eti"e$ent o" deat!.

0. Accounting T"eat$ent o# good&ill
Accounting t"eat$ent o# good&ill on "eti"e$ent and deat! i %e"' cloe
to t!at in ad$iion Follo&ing a"e t!e di##e"ent $et!od #ollo&ed:

1. T!e outgoing pa"tne"+ !a"e ad*uted in t!e (oo/
,;argin Ad3ustment-
T!i $et!od i i$ila" to t!e p"e$iu$ $et!od adopted in ad$iion o#
pa"tne". Unde" t!i $et!od t!e outgoing pa"tne"+ !a"e o# good&ill i
c"edited to !i capital account and t!e continuing pa"tne"+ capital
account a"e de(ited #o" t!e a$e in t!e Sgaining ratio.T

Daining ratio
Faining "atio i t!e "atio o# gain. Eou !a%e een t!i in t!e ea"lie"
c!apte". Reti"e$ent o" deat! o# pa"tne" i one ituation &!e"e
gaining "atio i applied #o" ad*uting good&ill. ,!en a pa"tne" lea%e
t!e #i"$ t!e "atio i "e%ied and t!e continuing pa"tne" &ill !a"e t!e
outgoing pa"tne"+ po"tion o# p"o#it in addition to t!ei" old "atio. .t i
calculated (' deducting t!e old "atio #"o$ t!e ne&.

Calculation o# gaining "atio i i$po"tant &!en t!e pa"tne" decide to
ad*ut t!e outgoing pa"tne"+ !a"e o# good&ill &it!out "aiing t!e
good&ill account in t!e #i"$.

O$otice t3at we -se sacri&icing ratio w3en t3e new partner brings in cas3 &or t3e s3are o&
goowill on a#ission5 Co#pare t3e two sit-ations care&-lly learn t3oro-g3ly t3e i&&erence in
acco-nting treat#ent5K

0. Food&ill "aied in t!e (oo/
T!i i t!e "e%aluation $et!od o# t"eat$ent o# good&ill. Food&ill i
"aied in t!e (oo/ o# t!e #i"$ (' de(iting good&ill account and
c"editing Sall pa"tne"+ capital accountT in t!e old "atio.
,it! t!i *ou"nal ent"' good&ill account i actuall' opened in t!e (oo/
and &ill appea" in t!e #utu"e (alance !eet at it #ull %alue. T!e
outgoing pa"tne" get !i !a"e o# good&ill along &it! t!e continuing
pa"tne".
.# t!e continuing pa"tne" decide to "educe t!e %alue o# good&ill o" to
&"ite it o## co$pletel' t!e' can do o (' de(iting t!ei" capital account
in t!e ne& "atio and c"editing t!e good&ill account &it! t!e a$ount to
(e "educed. T!e outgoing pa"tne" !a"e o" !i poition i in no &a'
a##ected due to t!i tep.
2. Re%aluation o# aet and lia(ilitie
Re%aluation o# aet and lia(ilitie a"e done exactl' t!e a$e &a' it i
done on ad$iion o# a pa"tne". T!e "eaon (e!ind "e%aluation in
ad$iion o" "eti"e$ent i to $a/e t!e (alance !eet "e#lect a t"ue and
#ai" %ie& o# t!e aet and lia(ilitie o# t!e #i"$) p"io" to $a/ing an'
ot!e" $a*o" c!ange in t!e o&ne"!ip t"uctu"e o# t!e (uine. An'
lo o" gain in t!i "ea""ange$ent !ould go to t!oe pe"on) onl' to
t!oe pe"on) &!o a"e "eponi(le. .n ot!e" &o"d t!e inco$ing ne&
pa"tne" in ad$iion o" t!e outgoing pa"tne" in "eti"e$ent o" deat!
!all not loe o" gain due to &"ong %aluation o# aet and lia(ilitie.
Re%aluation i done in t!e (oo/ t!"oug! a "e%aluation account. P"o#it
o" lo on "e%aluation i t"an#e""ed to t!e capital account o# all
partners ,including the outgoing partner- in the old profit
sharing ratio.
=e#e#ber t3e r-le we &ollow in a#issionL Pol partners in ol ratioQ5
Bere also we apply t3e sa#e r-le5 8e on:t call t3e# ol partners ;-st
beca-se we on:t 3a%e any Pnew partner in retire#entQ5 (lso notice
t3at t3e e0pression Po-tgoing partnerQ is -se in t3is boo9 as a
con%enient ter# to re&er t3e Pretiring partnerQ as well as t3e
Pecease partnerQ5 (gain ecease partner #eans ea partner5 T3e
ter# ecease so-ns less ealy5
3. Ree"%e and Accu$ulated p"o#it loe etc.
Accu$ulated p"o#it) "ee"%e) loe etc. a"e t"eated on "eti"e$ent o"
deat! exactl' t!e &a' t!e' &e"e done in ad$iion. T!e p"o#it o"
"ee"%e a"e t"an#e""ed to t!e c"edit o# capital account o# all pa"tne"
in t!e old p"o#it !a"ing "atio. A a "eult t!ee ite$ &ill diappea"
#"o$ t!e (oo/ and #"o$ #utu"e (alance !eet a &ell. Accu$ulated
loe t!at a"e appea"ing on t!e aet ide o# t!e (alance !eet a"e
t"an#e""ed to t!e de(it ide o# all pa"tne" in t!e old p"o#it !a"ing
"atio.
<. Ad*ut$ent o# >oint Li#e Polic'
>oint li#e polic' i a p"ecautiona"' $eau"e to p"otect t!e #i"$ #"o$
#inancial c"ii) on account o# deat! o# a pa"tne". T!i i a li#e
inu"ance polic' (' &!ic! $o"e t!an one li#e i inu"ed. .n cae o# a
pa"tne"!ip #i"$ all pa"tne" a"e co%e"ed uuall' (' a ingle li#e
inu"ance polic'. T!e #i"$) not t!e pa"tne") pa' t!e p"e$iu$ on
t!i polic'. .n t!e e@ent of death of an6 one of the
partners. the insurance compan6 *ill pa6 the full
amount assured sum to the firm. T!i a$ount &ill (e
"ega"ded a a pecial inco$e to t!e #i"$ and c"edited to
capital account o# all pa"tne" in t!e p"o#it !a"ing "atio.

Does it so-n little -n&air on t3e part o& t3e contin-ing partners
to s3are t3e ins-rance a#o-nt in t3e pro&it s3aring ratio7 Bow
can so#eone s3are t3e li&e ins-rance #oney on t3e eat3 o&
anot3er #an7 T3is o-bt is @-ite nat-ral5
( person is allowe to ta9e any n-#ber o& policies on 3is own
li&e an pay &ro# 3is pri%ate inco#e5 $oboy e0cept t3e legal
3eirs will get t3e ins-rance a#o-nt5 B-t t3e ;oint li&e policy
isc-sse 3ere is i&&erent5 T3e #ain ai# o& t3is policy is not
s-pporting t3e &a#ily o& t3e partner, b-t to sa%e t3e &ir# &ro#
laning into &inancial crisis -e to eat3 o& a partner5 Bowe%er
t3is inirectly 3elps t3e &a#ily o& t3e ecease by @-ic9
settle#ent o& -es5 Bere all t3e partners /incl-ing t3e
ecease one1 ecie toget3er to ins-re t3eir li%es ;ointly an
pay t3e pre#i-# &ro# t3e &ir#:s &-ns5 T3ere is anot3er aspect
also to t3is proble#5 "-ppose t3e entire ins-rance clai# is
creite only to t3e ecease partner5 T3is will e&eat t3e %ery
p-rpose &or w3ic3 t3e policy is ta9en5 T3e capital acco-nt or t3e
a#o-nt payable to t3e e0ec-tors will irectly increase to t3e
e0tent o& t3e ins-rance clai#5 $ow &ir# 3as to &in o-t ot3er
so-rces o& &inance to settle original capital in%est#ent an
reser%es5 T3ere&ore it is per&ectly logical to consier t3e
ins-rance a#o-nt as a b-siness inco#e an s3are t3e a#o-nt
in t3e nor#al pro&it s3aring ratio5

So$eti$e t!e pa"tne" inu"e t!ei" li%e epa"atel' and pa' t!e
p"e$iu$ #"o$ t!e #i"$. T!i &ill !elp t!e continuing pa"tne" to /eep
t!ei" li#e inu"ance polic' %alid e%en a#te" t!e deat! o# a pa"tne". ,!en
t!e"e a"e epa"ate li#e inu"ance policie) t!e #ull a$ount due on t!e
polic' o# deceaed pa"tne" and t!e u""ende" %alue o# t!e policie o#
t!e continuing pa"tne" &ill (e c"edited to all pa"tne" in t!ei" p"o#it
!a"ing "atio. T!e u""ende" %alue &ill appea" in t!e u(e1uent
(alance !eet.
T!e #ollo&ing a"e t!e t!"ee $et!od o# accounting t"eat$ent o# *oint
li#e policie:
i. T!e inu"ance p"e$iu$ t"eated a no"$al (uine
expene
,!en inu"ance p"e$iu$ i t"eated a no"$al (uine expene)
t!e p"e$iu$ paid &ill (e initiall' de(ited to t!e p"e$iu$ account
and late" on t"an#e""ed to t!e p"o#it and lo account *ut li/e an'
ot!e" (uine expene.
<ournal entries
a- For pa6ment of premium:
>oint li#e inu"ance p"e$iu$ account D".
To Ca!

- For 0ransfer of expense to P " # account
P : L account D".
To >oint Li#e P"e$iu$ Account
c- At the time of maturit6 6clai$ due to deat!7
.nu"ance Clai$ Account D". 6#ull a$ount o# inu"ance polic'7
To All Pa"tne"+ Capital Account 6in t!e p"o#it !a"ing "atio7

d- For cash recei@ed
Ca! I 9an/ account D".
To .nu"ance Clai$

Illustration &.01
A) 9) and C !a"ing p"o#it and loe in t!e "atio 0:1:1 !a%e ta/en a
*oint li#e polic' #o" R.1==)=== &it! an annual p"e$iu$ o# R.1)=== on
1
t
>anua"' 0===. C died on 1=
t!
Fe("ua"' 0==0. T!e .nu"ance
Co$pan' ettled t!e clai$ on 1<
t!
Fe( 0==0..Pa necea"' *ou"nal
ent"ie in t!e (oo/ o# t!e #i"$ and !o& t!e >oint Li#e P"e$iu$ and
.nu"ance Clai$ account.
*irst 3ear
Jan 1, 2000
J,* *re#i-# acco-nt Dr51,000
To Cas3 (cco-nt 1,000
/J,* pre#i-# pai1
......................................................................................
..
Dec531, 2000
*ro&it an ,oss (cco-nt Dr51,000
To J,* pre#i-# (cco-nt 1,000
/J,* *re#i-# written o&& as e0pense1

(econd 3ea r
Jan1, 2001
J,* *re#i-# (cco-nt Dr51,000
To Cas3 1,000
/J,* *re#i-# pai1
......................................................................................
..
Dec531, 2001
*ro&it an ,os (cco-nt Dr51,000
To J,* *re#i-# 1,000
/J,* *re#i-# written o&&1

Third 3ear
Jan1st, 2002
J,* *re#i-# (cco-nt Dr51,000
To Cas3 1,000
/J,* *re#i-# pai1
......................................................................................
..
Heb10, 2002
Ins-rance Clai# (cco-nt Dr5100,00
To (:s Capital (cco-nt )0,000
To B:s Capital (cco-nt )0,000
/Ins-rance clai#/policy #at-rity -e to C:s eat31
......................................................................................
..
Heb 15, 2002
Ban9 (cco-nt Dr5100,000
To Ins-rance Clai# 100,000
/Ins-rance clai# settle1

<#P
Premi
um
Accou
nt
D
a
t
e
P
a
r
t
i
c
u
l
a
r
s
A
m
o
u
n
t
D
a
t
e
P
a
r
t
i
c
u
l
a
r
s

A
m
o
u
n
t

1
J
a
n
,
2
0
0
0

T
o

C
a
s
3
1
,
0
0
0
3
1

D
e
c
2
0
0
0

B
y

*
+
,

(
c
c
o
-
n
t
1
,
0
0
0
!
,
0
0
0
!
,
0
0
0

1

J
a
n

2
0
0
1
T
o

C
a
s
3
1
,
0
0
0
3
1

D
e
c
,

2
0
0
1
B
y

*
+
,

(
c
c
o
-
n
t
1
,
0
0
0
!
,
0
0
0
!
,
0
0
0

1

J
a
n

2
0
0
2
T
o

C
a
s
3
1
,
0
0
0
3
1

D
e
c

2
0
0
2
B
y

*

+
,

(
c
c
o
-
n
t
1
,
0
0
0

!
,
0
0
0
!
,
0
0
0

Insura
nce
Claim
Accou
nt
D
a
t
e
P
a
r
t
i
c
u
l
a
r
s

A
m
o
u
n
t

D
a
t
e
P
a
r
t
i
c
u
l
a
r
s

A
m
o
u
n
t

H
e
b

1
0
,
2
0
0
2
T
o

(
:
s

C
a
p

)
0
,
0
0
0
H
e
b

1
0
,

2
0
0
2
B
y

B
a
n
9
1
0
0
,
0
0
0
T
o

B
:
s

C
a
p

)
0
,
0
0
0

T
o

C
:
s

C
a
p

2
0
,
0
0
0
1
0
0
,
0
0
0

!
0
0
,
0
0
0
!
0
0
,
0
0
0
ii. T!e u""ende" %alue i "etained a aet.
Su""ende" %alue o# an inu"ance polic' i t!e a$ount &!ic! t!e
inu"ance co$pan' &ill pa' (ac/ to t!e inu"ed i# !e decide to cancel
t!e polic' (e#o"e $atu"it'. T!e inu"ance co$pan' uuall' &ould not
pa' an't!ing i# t!e polic' i cancelled in t!e #i"t 'ea". 9ut t!e"ea#te")
t!e' co$pan' &ill ag"ee to "e#und a $all po"tion o# t!e p"e$iu$ paid
i# t!e cuto$e" decide to dicontinue t!e polic'. ,it! eac! pa'$ent o#
p"e$iu$ o$e po"tion it i added to t!e u""ende" %alue o# t!e polic'.
T!e po"tion t!u added into t!e u""ende" %alue i not conide"ed a
capital expene. 5nl' t!e "e$aining pa"t i &"itten o## to P"o#it and
Lo account a expene.

<ournal entries7
a. For Pa6ment of Premium
Joint li&e policy acco-nt Dr5
To cas3
/$otice t3at t3e ;oint li&e policy /asset1 acco-nt, not t3e pre#i-#
/e0pense1 acco-nt is ebite1
.............................................................................................
...
b. *or the pre'iu' abo)e surrender )alue is transferred?
* + , acco-nt Dr5
To Joint ,i&e *olicy (cco-nt
.............................................................................................
...
c. "t the ti'e of 'aturity 4clai' due to death5
Ins-rance Clai# (cco-nt Dr5 /&-ll %al-e ins-re1
To Joint ,i&e *olicy
.............................................................................................
...
d. *or the $lai' (ettle'ent
Ban9/cas3 (cco-nt Dr5
To Ins-rance Clai#
.............................................................................................
...
e. *or $losing J6P account
J,* acco-nt Dr5 /balance a#o-nt1
To (ll *artner:s Capital (cco-nts /*ro&it s3aring ratio1

Illustration &.0!
A)9) and C !a"ing p"o#it and loe in t!e "atio 0:1:1 !a%e ta/en a
1
t
>anua"' 0===.T!e u""ende" %alue #o" t!e polic' &e"e:
21t Dec. 0===8nilA
21
t
Dec. 0==18R.2==A
21
t
Dec. 0==08 R.;<=
21
t
Dec. 0==28 R.1)0<=
C died on 1=
t!
Fe("ua"' 0==2. T!e .nu"ance Co$pan' ettled t!e
clai$ on 1<
t!
Fe() 0==2. Pa necea"' *ou"nal ent"ie in t!e (oo/ o#
t!e #i"$ and !o& t!e >oint Li#e Polic' and .nu"ance Clai$ account.

T3e &-ll a#o-nt o& pre#i-# pai in t3e &irst year =s5 1,000 wo-l be
regare an e0pense in t3at year5 T3e pre#i-# pai in t3e secon
year res-lte in s-rrener %al-e o& =s300, an t3ere&ore only =s5 400
will be consiere an e0pense in t3e secon year5 T3e t3ir pre#i-#
pay#ent res-lte in an addition o& =s5 )50 to t3e s-rrener %al-e an
t3ere&ore only =s5550 is consiere to be t3e e0pense5
<ournal 5ntries

*irst 3ear
Jan1, 2000
Joint li&e policy acco-nt Dr51,000
To Cas3 1,000
/*re#i-# pai on t3e ;oint li&e policy1
......................................................................................
31 Dec5,2000
*+, acco-nt Dr5 =s51000
To Joint li&e policy acco-nt =s51,000
/*re#i-# pai trans&erre to t3e *+,1
$ote? T3ere is no s-rrener %al-e in t3e &irst year in t3e abo%e
e0a#ple5

(econd 3ear
Jan1, 2001
Joint ,i&e *olicy acco-nt Dr51,000
To Cas3 1,000
/*re#i-# pai on t3e policy1
...........................................................................................
.
31 Dec5 2001
*+, acco-nt Dr5400
To Joint ,i&e policy 400
/T3e pre#i-# pay#ent abo%e t3e s-rrener %al-e trans&erre to
*+,1
/$ote? Bere t3e pre#i-# pay#ent is =s51,000 o-t o& w3ic3 only
=s5400 is consiere e0pense s-rrener -e to %al-e o& =s53005
T3e ;oint li&e policy will appear as asset in t3e balance s3eet51

Third 3ear
Jan 1 2002
To Cas3 1,000
.........................................................................................................................................
..
31 Dec52002
*+, acco-nt Dr5550
To Joint ,i&e policy 550
/T3e pre#i-# pay#ent abo%e t3e s-rrener %al-e trans&erre to
*+,1

*ourth 3ear
10 Heb 2003
To Joint ,i&e *olicy 100,000
/Ins-rance Clai# creite to policy acco-nt1
.........................................................................................................................................
...
Joint ,i&e *olicy (cco-nt Dr5 28,250
/Joint ,i&e policy balance trans&erre to capital acco-nts1
15 Heb 2003
............................................................................................................................................................................................................................
......
Ban9 (cco-nt Dr5 100,000

<oint
#ife
Polic6
Accou
nt
D
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P
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iii. >oint li#e polic' "ee"%e account i $aintained.
Unde" t!i $et!od u""ende" %alue o# >oint li#e polic' i !o&n a aet
6a$e a t!e econd $et!od7. A *oint li#e polic' "ee"%e e1ui%alent to
t!e u""ende" %alue i $aintained in t!e (oo/. T!e"e a"e t!"ee tep
in%ol%ed in t!e accounting.

<ournal 5ntries
Step 1: De(it >oin Li#e Polic' and C"edit Ca! #o" pa'$ent o#
P"e$iu$

Joint ,i&e *olicy (cco-nt Dr5
To Cas3
888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888
8
Step 0 De(it P:L App"op"iation account and C"edit >oint Li#e polic'
"ee"%e to c"eate "ee"%e e1ui%alent to t!at o# polic'.

*+ , (ppropriation (cco-nt Dr5
To Joint ,i&e *olicy =eser%e (cco-nt
888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888
8
Step 2 De(it >oint li#e polic' "ee"%e and C"edit >oint li#e polic'
account) to ad*ut t!e a$ount in (ot! t!e account to t!e
actual u""ende" %alue.

Joint ,i&e *olicy =eser%e (cco-nt Dr5

At t!e ti$e o# deat! o# a pa"tne" t!e inu"ance "elated account a"e
cloed in t!e #ollo&ing &a':

<ournal 5ntries
1. .nu"ance Clai$
Ins-rance Clai# acco-nt Dr5
To Joint ,i&e policy (cco-nt
88888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888
88
0. Cloing o# Ree"%e
6T!e"e i no t"ict "ule t!at 'ou $ut t"an#e" t!e "ee"%e into t!e
polic' account onl'. Eou can t"an#e" t!i account di"ectl' to t!e
capital account o# pa"tne"7
88888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888888
88
2. Cloing t!e Polic' Account
Joint ,i&e *olicy (cco-nt Dr5
To (ll *artner:s Capital (cco-nts
..............................................................................................
...
3. Recei%ing Clai$ A$ount
Ban9/Cas3 (cco-nt Dr5
Ins-rance Clai#

$ote? T3e abo%e section #ay so-n a co#plicate acco-nting
treat#ent5 Eore &or#al e0planation will #a9e #ore con&-sion5 J-st
notice t3at yo- are creating a ;oint li&e policy acco-nt on t3e asset sie
/&irst entry1, creating t3e sa#e a#o-nt on t3e liability sie as reser%e
/secon entry1, an tri# own bot3 t3e asset an liability by 'utual
transfer 7 eli'ination /t3ir entry15

Illustration &.0&
A)9) and C !a"ing p"o#it and loe in t!e "atio 0:1:1 !a%e ta/en a
1
t
>anua"' 0===.T!e u""ende" %alue eti$ated #o" t!e polic' &e"e:
21t Dec. 0===8nilA
21
t
Dec. 0==18R.2==A
21
t
Dec. 0==08 R.;<=
21
t
Dec. 0==28 R.1)0<=
C died on on 1=
t!
Fe("ua"' 0==2. T!e .nu"ance Co$pan' ettled t!e
clai$ on 1<
t!
Fe() 0==2. Pa necea"' *ou"nal ent"ie and "elated
ledge" account /eeping t"eating t!e u""ende" %alue o# t!e inu"ance
polic' a aet and $aintaining a "ee"%e againt t!e polic'.

*irst 3ear
Jan1, 2000
Joint li&e policy acco-nt Dr51,000
To Cas3 1,000
/*re#i-# pai on t3e ;oint li&e policy1
31 Dec5,2000
*+, (ppropriation (cco-nt Dr5 =s51000
To Joint ,i&e *olicy =eser%e (cco-nt =s51,000
/=eser%e create &or t3e pre#i-# pay#ent1
31
st
Dec, 200
Joint ,i&e *olicy =eser%e (cco-nt Dr51,000
To Joint ,i&e *olicy (cco-nt 1,000
/Balances in reser%e an policy acco-nts eli#inate by #-t-al
trans&er1

$ote? T3ere is no s-rrener %al-e in t3e &irst year in t3e abo%e
e0a#ple5

(econd 3ear
Jan1, 2001
To Cas3 1,000

31 Dec5 2001
*+, (ppropriation (cco-nt Dr 1,000
To Joint ,i&e *olicy =eser%e (cco-nt 1,000
/=eser%e create &or t3e pre#i-# pay#ent1

31
st
Dec52001
Joint ,i&e *olicy (cco-nt 400
/Bot3 J,* an =eser%e re-ce to t3e s-rrener %al-e by #-t-al
eli#ination1
/$ote? Bere t3e pre#i-# pay#ent is =s51,000, b-t Joint li&e
policy an J,* reser%e acco-nts will appear at =s5300 on t3e
eit3er sie o& t3e Balance "3eet51
Third 3ear
Jan 1 2002
To Cas3 1,000

31 Dec5 2002
*+, (ppropriation acco-nt Dr51,000
To Joint ,i&e policy =eser%e (cco-nt 1,000
/T3e reser%e create against pre#i-# pay#ent1

31
st
Dec52001
Joint ,i&e *olicy (cco-nt 550
/Bot3 J,* an =eser%e re-ce to t3e s-rrener %al-e by #-t-al
eli#ination1

*ourth 3ear
1
st
Jan-ary 2003
To Cas3 1,000
/*re#i-# pai on t3e policy

10 Heb 2003
To Joint ,i&e *olicy 100,000
/Ins-rance Clai# creite to policy acco-nt1

10 Heb 2003

Joint ,i&e *olicy =eser%e (cco-nt Dr5 450
To Joint ,i&e *olicy (cco-nt 450
/=eser%e acco-nt close by trans&er to policy acco-nt1
$ote? Ao- can trans&er t3e reser%e irectly to t3e capital
acco-nts o& partners5

10 Heb 2003
Joint ,i&e *olicy (cco-nt Dr5100,000
/Joint ,i&e policy close by trans&er to capital acco-nts1
15 Heb 2003
Ban9 (cco-nt Dr5 100,000

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C. Ad*ut$ent o# Capital Account
Capital account o# t!e continuing pa"tne" $a' (e "ead*uted on t!e
(ai o# ne& p"o#it !a"ing "atio. Fene"all' pa"tne" ("ing in o" ta/e out
ca! to ad*ut t!e capital (alance. T!e' can e%en do t!i ad*ut$ent
(' opening cu""ent account and paing t!e u"plu o" de#icienc'
t!e"e) &it!out ("inging in o" ta/ing out ca!.

C!apte":3 diolution o# t!e pa"tne"!ip
;eaning of Dissolution
Diolution o# a pa"tne"!ip #i"$ i t!e p"oce (' &!ic! t!e exitence o# a
pa"tne"!ip #i"$ co$e to an end. T!i in%ol%e t!e ale o" dipoal o# aet)
ettle$ent o# lia(ilitie and cloing o# (oo/ o# account. 5nce t!e outide lia(ilitie
o# t!e #i"$ a"e ettled) t!e pa"tne" ta/e a&a' t!ei" capital in%et$ent. .# t!e"e i an'
u"plu o" de#icit in t!i p"oce it &ill (e !a"ed (' t!e pa"tne" in t!ei" p"o#it !a"ing
"atio.

Diolution o# a pa"tne"!ip #i"$ can ta/e place on account o# an' o# t!e #ollo&ing
"eaon:

a. Dissolution 6 Agreement7 ,!en t!e pa"tne" t!e$el%e "eac! an ag"ee$ent
to dicontinue t!ei" (uine #o" &!ate%e" "eaon) it i /no&n a diolution ('
ag"ee$ent.

. Compulsor6 Dissolution7 Co$pulo"' diolution ta/e place &!en t!e (uine
o# t!e #i"$ i decla"ed illegal) o" t!e pa"tne" (eco$e inol%ent o" t!e citiUen o# an
ene$' count"' !appen to (e pa"tne" o# t!e #i"$.

c. Dissolution 6 notice7 A pa"tne" can de$and diolution o# a pa"tne"!ip at &ill)
(' e"%ing a notice to t!e #i"$.

d. Dissolution 6 Court7 Cou"t $a' initiate diolution o# a #i"$ unde" t!e #ollo&ing
ci"cu$tance:
i7 ,!en one o# t!e pa"tne" !a (eco$e o# unound $ind
ii7 ,!en a pa"tne" i guilt' o# $iconduct &!ic! $a' a##ect t!e (uine
iii7 ,!en a pa"tne" co$$it &il#ul ("eac! o# cont"act
i%7 An' ot!e" "eaon &!ic! t!e cou"t $a' #ind ade1uate

e. Dissolution 6 the expir6 of a pre determined period or completion of
e@ent7 T!i diolution ta/e place in cae o# pa"ticula" pa"tne"!ip &!ic! a"e
#o"$ed #o" a peci#ic pe"iod o" t!e co$pletion o# a peci#ic p"o*ect. Suc!
pa"tne"!ip &ill (e diol%ed at t!e co$pletion o# t!e peci#ic pe"iod o# o" t!e
p"o*ect a t!e cae $a' (e.

Dissolution of Partnership and Dissolution of Partnership Firm
T!e te"$ diolution) "e#e""ed in "elation to a pa"tne"!ip (uine gene"all' denote
t!e &inding up o# t!e (uine. Ho&e%e") t!e"e i a di##e"ence (et&een -diolution o#
pa"tne"!ip+ and -diolution o# t!e pa"tne"!ip #i"$+. T!e #o"$e" indicate ending o#
ag"ee$ent onl' to "eplace it &it! a ne& one) (ut t!e latte" indicate t!e ending o#
pa"tne"!ip (uine altoget!e". T!e #ollo&ing point $a' (e noted in co$pa"ion
(et&een t!e t&o:

Dissolution of Partnership

5nl' t!e ag"ee$ent i diol%ed)
no p!'ical dipoal ta/e place.

T!e pa"tne" &ill continue to "un
t!e (uine &it! a ne&
ag"ee$ent.

Li$ited e##ect on e$plo'ee o"
de(to" and c"edito" o# t!e
(uine

Man' diolution o# ag"ee$ent
can ta/e place du"ing t!e li#e o#
a pa"tne"!ip (uine.

Ad$iion) "eti"e$ent and o"
deat! o# a pa"tne" can "eult in
co$pulo"' diolution o#
exiting ag"ee$ent.
Dissolution of Partnership Firm

T!e Fi"$ i diol%ed) (' elling o## aet and ettling lia(ilitie.

T!e pa"tne" &ill dicontinue t!e (uine

Since t!e (uine i cloed do&n it a##ect t!e &o"/e") de(to"
and c"edito" o# t!e #i"$

Diolution o# #i"$ can ta/e place onl' once in t!e li#eti$e o# a
pa"tne"!ip (uine.

None o# t!ee e%ent can lead to a co$pulo"' diolution o# t!e
#i"$.

Settlement of Accounts on Dissolution
T!e #i"t tep in diolution i t!e "ealiation o# aet #ollo&ed (' t!e ettle$ent o#
outide lia(ilitie. All indi%idual account #o" aet and lia(ilitie) except ca!) a"e
cloed (' t"an#e""ing t!ei" (alance to a Realiation Account. Realiation account i
t!e te$po"a"' account #o" accu$ulating all aet and lia(ilitie #o" con%enient
accounting t"eat$ent. All ledge" account except pa"tne"+ capital account and ca!
account a"e cloed p"io" to "ealiation p"ocedu"e. Accu$ulated p"o#it o" loe a"e
di"ectl' t"an#e""ed into t!e capital account in t!e p"o#it !a"ing "atio. T!e #ollo&ing
i t!e o"de" o# p"io"it' in ettle$ent o# lia(ilitie and capital upon diolution:
i7 Expene incu""ed on "ealiation o# aet uc! a co$$iion) ca"tage)
("o/e"age etc.
ii7 All outide c"edito"
iii7 Pa"tne"+ Loan account
i%7 9alance in Capital Account o# pa"tne"

Special Items in Accounting for Dissolution

1. Realisation Account7 T!i i t!e $ot i$po"tant account p"epa"ed to #acilitate
diolution o# #i"$. T!i i e1ual in i$po"tance to Re%aluation Account in
Recontitution. T!e"e i no cope o# "e%aluation o# aet and lia(ilitie o# a #i"$
unde" li1uidation. Realiation account i ued to accu$ulate all aet and
lia(ilitie in one place #o" con%enient accounting tep #o" dipoal and ettle$ent
o# lia(ilitie.

0. 0reatment of Dood*ill7 Food&ill i t!e $ot p"o$inent ite$ in Recontitution o#
pa"tne"!ip. 9ut good&ill doe not !a%e an' pecial t"eat$ent in diolution. .# it
appea" in t!e (oo/ it !a to (e t"an#e""ed into Realiation Account. T!i &ill
auto$aticall' get t"an#e""ed into t!e Capital Account o# Pa"tne") (' &a' o#
"ealiation p"o#it o" lo. .# good&ill doe not appea" in t!e (oo/ it i *ut igno"ed.
T!e"e i no $eaning in "aiing it o" t"eating it in an' &a' &!en t!e #i"$ i (eing
diol%ed.

2. Realisation 5xpenses7 Expene o# "ealiation uc! a co$$iion paid to
("o/e" #o" t!e dipoal o# aet) expene on t"anpo"tation o# ite$) "egit"ation
docu$entation c!a"ge #o" t!e aet old etc. a"e de(ited to Realiation Account
and c"edited to Ca! Account. Ho&e%e" i# an' pa"tne" ag"ee to (ea" t!e expene
#o" a ce"tain #ee) t!e #ee c!a"ged (' t!e pa"tne" (eco$e t!e co$$on expene
&!ic! i de(ited in Realiation AccountA &!e"ea t!e actual "ealiation expene) i#
$entioned) !ould (e t"eated a pe"onal d"a&ing o# t!e pa"tne" conce"ned.

3. Aife9s #oan7 Loan #"o$ a pa"tne"+ &i#e i to (e t"eated a no"$al c"edito". T!e
(aic ai$ o# p"o%iding a loan in t!e na$e o# pa"tne"+ &i#e i to ('8pa t!e legal
"et"iction on t!e Loan #"o$ a Pa"tne" to t!e #i"$.

<. Pro@ident Fund7 P"o%ident #und !ould (e unde"tood a a lia(ilit' pa'a(le to t!e
e$plo'ee. .t !ould (e paid o## e%en &!en t!e 1uetion i ilent a(out it
t"eat$ent. Sa$e "ule applie to all ot!e" outide lia(ilitie) uc! a c"edito") (ill
pa'a(le etc.

C. Specific Funds7 Speci#ic #und uc! a .n%et$ent Fluctuation Fund a"e
p"e#e"a(l' c"edited to Realiation account along &it! t!e t"an#e" o# "elated aet)
&!ic! &ill get t"an#e""ed to capital account (' &a' o# p"o#it o# lo on Realiation.
P"o%iion #o" dou(t#ul de(t) accu$ulated dep"eciation etc. $ut (e c"edited to
Realiation Account along &it! t!e t"an#e" o# aet.

;. Profits Hept Aside7 Fene"al Ree"%eA c"edit (alance in P: L Account etc !ould
(e di"ectl' t"an#e""ed into t!e Capital Account o# Pa"tne") in t!e p"o#it !a"ing
"atio.

?. Inrecorded Assets7 Un"eco"ded aet o" aet &!ic! a"e co$pletel' &"itten
o## $a' #etc! o$e ca! at t!e ti$e o# diolution. T!e"e i no need o# ("inging
t!e$ into (oo/ and elling t!e$ a#te"&a"d. .t can (e di"ectl' t"eated (' c"editing
"ealiation account and de(iting ca! account.

J. Creditors Purchasing Some Assets in Part Settlement of Claim7 ,!en
c"edito" pu"c!ae o$e o# t!e aet in pa"t ettle$ent) t!i i not peci#icall'
"eco"ded (' &a' o# a *ou"nal ent"') ince t!e aet and lia(ilit' a"e appea"ing in
t!e a$e Realiation Account. T!e (alance a$ount due to t!e c"edito" i aid in #ull
ati#action o# t!e clai$. .# t!e %alue o# aet ta/en o%e" i $o"e t!an t!e a$ount
due) t!e c"edito" &ill pa' t!e exce a$ount to t!e #i"$.

Please note? T3e treat#ent o& creitors ta9ing o%er part o& t3e assets #entione
abo%e is a @-estionable acco-nting treat#ent5 83at I #entione abo%e is only on
Fe0a#ination point o& %iew:5 T3e correct acco-nt treat#ent is to ebit t3e Creitors
acco-nt in t3e ,eger by passing a ;o-rnal entry an trans&erring t3e balance o&
creitors into =ealisation (cco-nt

P"o#it o" lo on "ealiUation &ill (e t"an#e""ed to t!e Capital Account o# pa"tne" in
t!e p"o#it !a"ing "atio. At t!e #inal tage o# t!e "ealiUation p"oce) onl' Ca!
Account and Capital Account &ill (e le#t. T!e #inal (alance o# eac! ot!e" &ill $atc!
exactl') and t!e ca! &ill (e paid o## to capital account to cloe (ot! t!e account.
T!i i t!e lat t"anaction in t!e (oo/ o# t!e #i"$.

T!e enti"e accounting tep in "ealiUation can (e u$$a"iUed a #ollo&:

Step 17 Reduce the :umer of Accounts into 0FR557 A 'ou a"e a&a"e eac!
ite$ in a detailed 9alance S!eet "ep"eent an account in t!e Ledge". Eou
!a%e to "educe t!e$ into *ut three account) na$el'
i7 Realiation Account
ii7 Capital Account o# Pa"tne" 6conide"ed one account7
iii7 Ca! Account
Step !7 Reduce the :umer of Accounts into 0AO7 Ma*o" acti%itie o#
"ealiation p"oce ta/e place at t!i tage. Sell aet one (' one and add it
to 6de(it7 Ca! and "educe it #"o$ 6c"edit7 Realiation Account. Ta/e out ca!
and pa' to lia(ilitie placed in t!e Realiation Account. No& t!e Realiation
Account i "educed to a "eidue) &it!out an' acti%e account inide. T!i
(alance i t"an#e""ed into capital account a "ealiation p"o#it o" lo. No&
'ou !a%e onl' t&o account) t!e Ca! Account and t!e Capital Account.

Step &7 Reduce the :umer of Accounts to :I#7 T!i i t!e $ot inte"eting
tep. He"e t!e ca! (alance !a to (e exactl' e1ual to t!e c"edit (alance in
capital account. Ta/e out ca! 6c"7A Pa' o## Capital 6D".7) and t!e"e end t!e
Pa"tne"!ip 9uine.

Journal Entries in issolution

(cco-nting &or issol-tion begins wit3 t3e closing o& assets an liabilities acco-nts
by trans&erring t3e# to =ealisation (cco-nt5

i- For transfer of assets
Realiation Account D".
To Aet Account

ii- For 0ransfer of liailities
Lia(ilit' Account D".
To Realiation Account

(cc-#-late pro&its s-c3 as Ieneral =eser%es, *ro&it an ,oss (cco-nt Creit
Balance etc5 are trans&erre to capital (cco-nts in t3e pro&it s3aring ratio5

iii- For transfer of accumulated profits
Accu$ulated P"o#it Account 6Fene"al Ree"%eA P:L etc.7 D".

$ote? *ro%ision &or o-bt&-l ebtsL In%est#ent &l-ct-ation &-n etc5 are creite to realiRation acco-nt an
ignore t3erea&ter5 T3ese are internal pro%isions 3a%ing no clai# against t3e &ir# an t3ere&ore t3ese
a#o-nts will #erge into realiRation pro&it or loss an &inally get trans&erre to Capital (cco-nts o& partners5

i@- For assets realiLed
Ca!I9an/ account D"
$ote? 8e o not 3a%e separate asset acco-nt any#ore5 =ealisation acco-nt is t3e
co##on acco-nt representing all assets an liabilities trans&erre into it5 *lease
c3ec9 t3e ne0t entry also5

@- For #iailities paid off
To Ca! Account

@i- For asset taGen o@er 6 a partner
Pa"tne"+ Capital Account D".

@ii- For #iailit6 taGen up 6 the partner
To Pa"tne"+ Capital Account

@iii- For unrecorded asset taGen o@er 6 a partner
Pa"tne"+ Capital Account D".

ix- Inrecorded #iailit6 settled 6 the firm
To Ca! account

x- Realisation expense
To Ca!

xi- Asset taGen o@er 6 creditors
No ent"'A 5nl' ettle$ent o# (alance a$ount i !o&n in t!e (oo/.

Author9s Comment
T!i i t!e eaiet c!apte" in Pa"tne"!ip account. Eou !a%e 1= $a"/ #o" t!i
c!apte" unde" "e%ied 'lla(u. He"e 'ou need not "e$e$(e" di##e"ent $et!od o#
t"eat$ent o# good&ill) no "atio calculation etc. E%e"'t!ing i plain and i$ple. Pa'
e"iou attention to t!i c!apte" to ecu"e #ull 1= $a"/. Loo/ at o$e o# t!e
i$po"tant ad*ut$ent in t!e p"e%iou c!apte" (eco$ing %e"' i$ple !e"e.

1. Food&ill
Eou $ut !a%e pent $axi$u$ ti$e in unde"tanding %a"iou &a' o# t"eat$ent o#
good&ill in t!e ea"lie" c!apte". He"e it i %e"' i$pleA i# t!e"e i good&ill gi%en in t!e
9alance S!eet) *ut de(it it in t!e "ealiation account and #o"get it) 'e) #o"get it. .# it
doe not appea" in t!e 9alance S!eet) *ut igno"e itA &!o ca"e a(out t!e good&ill o#
a #i"$ unde" li1uidation an'&a'K Si$ple) i$ple indeedV

0. 5ld Ratio) Ne& Ratio) Sac"i#icing Ratio) Faining Ratio) an' ot!e" "atioK See t!e long
lit o# "atio 'ou need N5T appl' !e"e. Eou !a%e *ut one p"o#it !a"ing "atio) to
t"an#e" t!e p"o#it o" lo on "ealiation.

2. Re%aluation: Eou need not t"uggle &it! t!e "e%aluation o# aet and lia(ilitie.
T!e"e a"e no p"o%iion to (e /ept. He"e 'ou *ut !a%e a Realiation Account to $o%e
'ou" ledge" account ite$ #o" t!e ti$e (eing to !elp 'ou t"an#e" t!e$ to ca! a
and &!en "ealied.

3. 9alance S!eet .n diolution 'ou !a%e to p"epa"e N5 9alance S!eet at all. .ntead
'ou !a%e to det"o' one 9alance S!eet gi%en in t!e 1uetion. Too good to (e t"ue)
(ut it i %e"' t"ue. ,!at 'ou !a%e to do !e"e i to ("ea/ up old 9alance S!eet) ext"act
ca! out o# it) pa' to c"edito" and #inall' to o&ne". Re$e$(e" !o& #unn' it loo/ed
&!en 'ou pla'ed %ideo caette in "e%e"e $ode) ca" "unning (ac/&a"d at #ull
peed) #ood ta/en out o# $out! and put (ac/ into plate and all t!oe #unn' tu##.
Diolution i t!e action "epla' o# pa"tne"!ip #o"$ation in t!e -"e%e"e $ode+. T!e
p"oce o# #o"$ing ca! and ot!e" aet and lia(ilitie in a (uine #o"$ing a
9alance S!eet in t!e (eginning o# a (uine i no& "e%e"ed to !o& !o& a 9alance
S!eet $elt into ca!) #inall' goe #"o$ t!e ca! (ox to t!e o&ne"+ poc/et a "etu"n
o# capital.

IPCC Notes - Partnership Accounts

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PARTNERSHIP ACCOUNTS P a g e | -1

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