The document discusses accounting principles, concepts, and conventions related to financial accounting and measuring business income. It provides definitions for key terms like Generally Accepted Accounting Principles (GAAP), which are the common set of standards that accountants follow when preparing financial statements. The matching principle and revenue recognition principle are also explained, which state that expenses must be matched to the period in which revenue is earned. Finally, the document outlines the objectives and procedures for measuring business income, including identifying the accounting period, revenues and expenses, and using the matching principle to determine net income.

25. 1.2 Financial Accounting Principles, Concept and Conventions :-
Generally Accepted Accounting Principles (GAAP)
If every accountant used his or her own rules for recording transactions, the
financial statements would be useless in making comparisons.
Therefore, accountants have agreed to apply a common set of measurement
principles (a common language) to record information for financial statements.
The rules that govern accounting are called GAAP
(Generally Accepted Accounting Principles).
• Generally Accepted Accounting Principle refer to a common set of accounting
principles, standards, and procedures that business reporting entity must
follow when it prepares and presents its financial statement statement
It is a combination of
• Authoritative standard (set by policyboards) and
• The commonly accepted ways of recording and reporting accounting
information
• At international level such authoritative standards are known as International
financial reporting standards (IFRS) and
• In India we have authoritative standards named as AS and IND AS
Accounting Principles –
“Accounting principles are the rules of action or the methods and procedures of
accounting commonly adopted while recording business transactions.”
‘Accounting Principles are man-made’. These principles are developed by
accountants and academicians as general accepted rules and regulations to be
adapted in charging business needs over a period of time. Thus, these are
suitable for each and every need of the business concern.
In order to make financial statement easily understandable and meaningful, it is
necessary that accounting should be based on certain uniform scientifically laid
down norms, which are called accounting principles. Accounting principles can
be classified as
1-Accounting concepts
2-Accounting conventions

87. Unit 2. Business Income
2.1 Business income :-
Concept of Revenue and Business Income
The main purpose of business is to earn profit (or income). In accounting, the
term income refers to business income. According to American Accounting
Association (AAA), business income means “increase in net assets due to
excess of revenue over expenses.” Revenues mean inflow of assets (e.g.
increase in debtors, bank, cash, etc.) or decrease in liabilities when arise from
the normal business operations. Normal business activities refer to selling of
goods or providing of service or both.
Expenses means outflow of assets (e.g. decrease in debtors, bank, cash, etc.) or
increase in liabilities. If revenue exceeds expenses, it would represent income
or profit. If expenses exceed revenue, it would represent loss. Thus Net Income
(Profit/Loss) Total revenue Total expens
Income increase the net worth of the business whereas loss decrease the net
worth of the business.
Objectives of Measuring Business Income
The measurement of business income is required to meet the following
objectives:
I .Indicator of efficiency:
Business income helps in measuring the efficiency with which the business is
being carried out. It also facilitates the comparison of two similar or dissimilar
businesses or the same business over a period of time. Thus, it provides a
suitable criterion for the efficiency of management in a competitive economy.
II .Used as a guide to dividend policy :
An important objective of business income measurement is to decide how much
can be distributed as dividend and how much of the current income should be
retained. Dividends should be paid out of current income and not out of capital
so that the rights of the creditors are adequately protected.
III .Basis for taxation :
Periodic measurement of income is required in order to determine the tax
liability of the business. Accounting helps in measuring the income of a business
enterprise for tax purposes.

88. IV .Helpful for future investment decision :
Current income serves as a guide for investment decision in the future.
Decisions regarding expansion and further investment in the business are based
on the current income to maximize their returns on investment.
V .Measurement of overall efficiency and creditworthiness :
Income is a useful measure of overall efficiency and creditworthiness for
creditors, banks and other credit institutions. They depend upon current income
level that acts as an indicator about a firm’s ability to repay loan out of future
income.
IV .Payment of bonus to workers :
Profit sharing bonus given to workers is based on the income measured by the
business enterprise. Apart from bonus, the reported income also serves as a
basis for concluding agreements regarding wages and other matters between
management and workers.
IV .Internal use by management :
Management is also interested to judge the performance of different divisions or
departments. Income measurement is very useful for this purpose.
2.2 Revenue recognition :-
Expenses are recognized when they are incurred, meaning when goods or
services are consumed or utilized in the operations of the business. This
principle, known as the matching principle, ensures that expenses are recorded
in the period in which they contribute to generating revenue. Even if the payment
for the expenses occurs at a later date, they are still recognized when the
obligation arises.
Similarly, income is recognized when it is earned, typically when goods are
delivered or services are rendered to customers. This principle, known as the
revenue recognition principle, ensures that income is recorded in the period in
which it is earned, regardless of when the payment is received. It ensures that
financial statements accurately reflect the inflow of economic benefits
resulting from the organization’s activities.

89. Accounting Concepts and Measurement of Business Income
There are number of accounting concepts which are used for preparing financial
statements. The measurement of net income is influenced by these concepts. The effect
of these concepts on the measurement of income can be explained as under:
(1) The Accounting Period Concept
The relevance of accounting period lies in the fact that the business is assumed to be
going concern one. Such indeterminable life span of an entity makes the period so long
and uncertain that the business can not wait that long to find out the results of its
performance. Therefore, the financial statements must be prepared on periodic basis to
ascertain the interim progress of the business. The widely used and established
accounting period is either the calendar year or a natural business year of 12months.
(2) The Going Concern Concept
Going concern concept perceives that business will continue its operations for a
foreseeable future. Thus, there is no intention to close the business. This concept
provides a basis for the measurement of income on periodic basis and leads to values in
the income statement or position statement that represent a continuing organisation
rather than a liquidating organisation. Thus, book values of assets and liabilities are
considered not the values that would realized if the business closes today. Further,
measurement of business income is also done on accrual basis i.e. if we find that and
item of revenue or expense does not belong to current accounting period it is treated as
deferred income or expenditure. That is why the continuity concept is relevant in
determination of business income.
(3) The Matching of Cost and Revenue Concept
The expenses incurred in a given accounting period are matched and compared with the
revenue earned during the same accounting period to calculate the net income. For
matching, expenses are considered on incurred basis while incomes are considered on
earned basis. This approach of matching of expense with revenue is referred to as
accrual process. The recognition of revenues and expenses as to their amount and
timing has a great influence on the reported figure of income. Some of the general rules
in accrual basis of timing and measurement of business income are discussed below:
(i) Revenue that has been earned in the accounting period (e.g. on the basis of sale)
be recorded in the income statement of the same accounting period although it has not
yet been collected.
(ii) An expense which is paid in advance should not be matched with the corresponding
revenue unless it is recognized in the accounting period of the income statement.
(iii) An expense that has been recognised should be charged to revenues even though it
has not been yet paid in cash.
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90. Procedure for Measuring Business Income
The procedure for computing business income may be explained as follows:
i. Defining particular accounting period:
Business income refers to the financial performance of the entity for a definite period
not for its whole life. The commonly accepted accounting period is of 12 months. It
may be calendar year (from January 1 to December 31) or a natural business year
(from April 1 to March 31).
The above figure explains that business is a going concern. Measurement of income
cannot be deferred to the time business is closed down. In accrual accounting, one
needs to identify a part of ongoing business as accounting period. It is usually the
Business Year
ii. Identifying revenues of the accounting period selected:
As discussed above that business income has two important components, viz. revenues
and expenses. Thus, it requires the measurement and recognition of revenues. In
general, realisation principle is used for recognition of revenues. Revenue is the
aggregate of values received in exchange for the goods and services of an enterprise.
Sale of goods is the commonest form of revenue. The realisation principle does not
consider unrealized gains accruing to the business enterprise by holding stock of goods
in hand. However, there are some instances where realization principle is ignored and
unrealized income is recognized e.g. valuation of property.
ii. Identifying expense corresponding to revenue earned:
Business income is based on historical cost concept. Income for an accounting period
considers only those costs which have become expenses i.e. those costs which have
been used against revenue. Depreciation is a typical example of expired cost of an asset.
Those costs which have not yet expired or not been utilised in connection with the
realization of revenue are not used to compute business income. Such costs appear in
the balance sheet as asset e.g. prepaid expenses, stock in hand, book value of fixed
assets etc.
iv. Matching Principle
Matching principle requires that revenues which are recognized through the application
of the realisation principle are to be matched with relevant and appropriate historical
costs expenses directly related with particular type of revenue, i.e., expired costs are
matched with the relevant revenues of the period in which they are recognized.
Expenses not directly or clearly associated with revenues i.e. unexpired costs which
have future service potential are carried forward in the balance sheet and are matched
with or allocated to the period of benefit.
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170. 15
Dissolution of Partnership Firm
When partners decide to dissolve the firm (i.e. close it down). All its assets are realized (converted
into cash bank form) and with this amount firms liabilities are settled and then partner’s a/c’s are
settled. With this books of account of firm will get closed.
Sell of all assets
1. There are various claimants on the firms asset like creditors, lender and then partners.
2. The assets at the 1st
place cannot practically be divided among such large number of claimants
and secondly such persons may not be interested in taking this assets,
3. Hence assets are sold and cash realized and with that money liabilities are settled.
4. Sometimes some of the assets may be taken by partners and
5. Even sometimes creditors or loan creditor can also take some assets if mutually agreed.

171. Order of Payment (Distribution)
Payment to be made in following order (order of distribution)
1. Third party liabilities
2. Advances/loans of the partners (don't transfer this a/c's to Realizations a/c)
3. Capitals of the partners
4. Surplus (if any) will be distributed among partners in their profit sharing ratio.
Entries for Accounting of Dissolution
Journal entry on dissolution - Accounting will be done with an objective to close the books of
account as all assets will be realised and all liabilities including capital account will be settled hence
nothing will be left in the firm's books of account.
Particulars Debit Credit
1. At the book value, all Assets except
cash and Bank balance is transferred
to realization a/c
Note: Fictitious assets/accumulated
losses, shown as assets should be
transferred to the partners capital
A/c. in their profit sharing ratio.
Realization a/ c A/c Dr.
To Asset a/ c
2. At Book value, all liabilities except
capital, loan of partner etc. is
transferred to realization a/c.)
Reserves/P&L a/c etc, will be
transferred to partners capital a/c in
their profit sharing ratio
Liabilities a/ c A/c Dr.
To Realization a/c
3. Assets sold/realised: Irrespective of
whether such asset was in books or not
Cash/Bank a/c Dr.
At market value i.e. actual sale
proceeds
To Realization a/c
4. If partner takeover any asset, it
should be adjusted in the partners
capital a/c.
Partners Capital a/c Dr.
(At agreed purchase value)
To Realization a/c.
5. Payment of liabilities (Irrespective of
whether that liability was recorded in
the books or not)
Realization a/c Dr.
(Actual amount paid) To Cash/Bank a/c.
6. If some of the liabilities is taken over
by the partner.
Realization a/c Dr.
(Actual amount agreed)
To Partner's a/c
7. Realization Expenses paid: Realization a/c Dr
(Amount of Expenses paid)
To Cash/Bank a/c
8. Now the realization a/c. will be
balanced and the profit/loss on
Realization a/ c Dr.
(Profit on realization transferred)
To Partners capital a/c

172. realization will be transferred to the
partners in their profit sharing ratio.
Note: If there is a loss, the entry
will be just reverse of this.
9. Then capital a/c's will be balanced:
If there is debit balance in any
partners a/c then the concerned
partner will bring in cash:
Cash/Bank a/c Dr To Partners capital a/c
10. Now the balance in cash/bank a/c will
be equal to the credit balance in the
other partners capital a/c. and the
amount will be distributed to them.
With this all accounts will get
closed.
Partners Capital a/c Dr. To Cash/Bank a/c
If question is silent about
1. Realization of a tangible asset like furniture, vehicle, debtors, etc. - then assume that it realizes
equal to its book value.
2. Realization of intangible assets like patent, goodwill, etc. - then assume that it does not have any
realizable value hence is nil.
3. Settlement of any liability - then assume that amount equal to book value is paid.
Accounting for Realization Expenses
1. Basically it is firm’s expense and should be paid by firm.
2. But sometimes a partner may pay it.
3. Sometimes in lieu of some commission etc, a partner may even bear this expense.
4. Summary of alternative situation is given below –
Sr.
No.
Paid by
whom
Borne by whom
(who will bear it)
Entry in the books of the firm
1 Firm Firm
Realization a/c. Dr. xxx
To Cash / Bank a/c. xxx
2 Partner Firm
Realization a/c. Dr. xxx
To Partners a/c. xxx
3 Firm Partner
Partner a/c. Dr. xxx
To Cash / Bank a/c. xxx
4 Partner Partner No entry
If nothing otherwise is clarified by the question then treat it as per 1 above.

173. Step 7. Close capital account insolvent partner. Balancing figure will be called deficiency. Such deficiency will be borne by
other solvent partners as per decisions given in Garner Vs Murray case. Decision was as follow:
(a)
(b)
If capital account is fixed: deficiency will be borne by all solvent partners in the ratio of their Capital account.
If capital account is fluctuating: deficiency will be borne by all solvent partners( having credit balance only)
in the ratio of their capital standing just before date of dissolution.
Revision question 1. (Fixed Capital) A, B and C were partners sharing profit and losses in the ration of 2:1:1. Firm was
dissolved on 31 December, 2022 due to insolvency of C. On that date their Balance Sheet was as Follow.
Balance Sheet as on 31 Dec. 2022
Let’s revise INSOLVENCY OF ONE OR MORE PARTNERS:
Steps to be followed in case of insolvency of one or more partners:
Step 1. Prepare realisation account, partner’s capital account, partner’s loan account and cash account.
Step 2. Transfer all items appearing in the balance sheet to the realisation account ( in the same way as in case of solvency
of partners)
Step 3. Realise assets and pay off liabilities through realisation account as per instruction given in questions.
Step 4. Close realisation account. Balancing figure will be called profit/loss on realisation. Such profit or loss will be
transferred to partners capital account in their profit sharing ratio.
Step 5. In case of loss on realisation, all solvent partners will bring cash into the business upto their share in loss on
realisation.
Step6. Collect cash from insolvent partner, as much as he can pay.( realised value of private assets- private liabilities paid).
Liabilities Rs. Assets Rs.
Capital Account Fixed assets 18,00,000
A 2,00,000 Bank 2,00,000
B 3,00,000 Other current assets 6,00,000
C 1,00,000 6,00,000 Profit & Loss A/c (Dr.) 4,00,000
Current A/c C’s current A/c 1,00,000
A 3,00,000
B 2,00,000 5,00,000
General Reserve 4,00,000
Liabilities 16,00,000
31,00,000 31,00,000
I. Fixed assets realized at Rs. 11,00,000.
II. Other current assets were sold at Rs. 2,00,000.
III. C could pay only Rs. 60,000 to the firm.
Close the books of firm.
Solution: Realisation account
Particulars Amount Particulars Amount
To fixed capital 18,00,000 By liabilities 16,00,000
To other current assets 6,00,000 By cash account
To cash ( liabilities) 16,00,000 Fixed assets 11,00,000
Other current assets 2,00,000 13,00,000
By loss on realisation:
A’Capital account 5,50,000
B’s Capital account 2,75,000
C’s Capital account 2,75,000 11,00,000
40,00,000 40,00,000

174. 2:1:1:1. Firm was dissolved due to insolvency of D. On that date Balance Sheet was as follow.
Balance Sheet
Assets realized Rs. 16,00,000.
Liabilities were paid in full.
D’s private estate realized at Rs. 6,00,000 and his private liabilities were Rs. 4,20,000.
Close the books of firm.
Solution: Realisation account
Partner’s capital account
Particulars A B C Particulars A B C
To profit & loss 2,00,000 1,00,000 1,00,000 By balance b/d 2,00,000 3,00,000 1,00,000
To current a/c --- --- 1,00,000 By current account 3,00,000 2,00,000 ----
To ralisation a/c 5,50,000 2,75,000 2,75,000 By general reserve 2,00,000 1,00,000 1,00,000
To C’s capital a/c 86,000 1,29,000 By cash account 5,50,000 2,75,000 ----
To cash account 4,14,000 371,000 By cash account --- --- 60,000
By A’s capital a/c 86,000
By B’s capital a/c 1,29,000
12,50,000 8,75,000 4,75,000 12,50,000 8,75,000 4,75,000
Cash account
Particulars Amount Particulars Amount
To balance b/d 2,00,000 By realisation a/c 16,00,000
To realisation a/c 13,00,000 By A’s capital 4,14,000
To A’s capital a/c 5,50,000 By B’s capital 3,71,000
To B’s Capital a/c 2,75,000
To C’s capital a/c 60,000
23,85,000 23,95,000
Revision question 2.( fluctuating capital method)A, B, C and D were partners sharing profit and loss in the ratio
Liabilities Rs. Assets Rs.
A’s Capital Account 15,00,000 Bank 3,00,000
B’s Capital Account 10,00,000 Other assets 27,00,000
General reserve 2,00,000 Profit and loss A/c 5,00,000
Liabilities 13,00,000 C’s Capital A/c 3,00,000
D’s Capital A/c 2,00,000
40,00,000 40,00,000
Particulars Amount Particulars Amount
To other assets 27,00,000 By liabilities 13,00,000
To cash (liabilities) 13,00,000 By cash account 16,00,000
By loss on realisation:
A’Capital account 4,40,000
B’s Capital account 2,20,000
C’s Capital account 2,20,000
D’s capital account 2,20,000 11,00,000
40,00,000 40,00,000
Partner’s capital account
Particulars A B C D Particulars A B C D
To bal b/d --- --- 3,00,000 2,00,000 By bal b/d 15,00,000 10,00,000 ---- -----
To P & L 2,00,000 1,00,000 1,00,000 1,00,000 By G. reserve 80,000 40,000 40,000 40,000
To 4,40,000 2,20,000 2,20,000 2,20,000 By cash a/c 4,40,000 2,20,000 2,20,000 ----
realisation 1,78,448 1,21,552 By cash a/c --- --- ---- 1,80,000
To D’s 12,01,552 8,18,448 (6,00,000-
capital 4,20,000
To cash a/c By A’s capital 1,78,448
(bal fig) By B’s capital 1,21,552
By Cash a/c 3,60,000
( bal. fig)
20,20,000 12,60,000 6,20,000 5,20,000 20,20,000 12,60,000 6,20,000 5,20,000

175. Ratio : 138: 94
Cash account
Particulars Amount Particulars Amount
To balance b/d 3,00,000 By realisation a/c 13,00,000
To realisation a/c 16,00,000 By A’s capital 12,01,552
To A’s capital a/c 4,40,000 By B’s capital 8,18,448
To B’s Capital a/c 2,20,000
To C’s capital a/c 2,20,000
To D’s capital a/c 1,80,000
To C’s capital a/c 3,60,000
33,20,000 33,20,000
Working notes 1. Computation of ratio of capital standing just before date of dissolution:
A B C D
Capital 15,00,000 10,00,000 (3,00,000) (2,00,000)
+ reserve 80,000 40,000 40,000 40,000
- losses (2,00,000) (1,00,000) (1,00,000) (1,00,000)
13,80,000 9,40,000 (3,60,000) (2,60,000)
Will bear Will bear C will not bear
because his capital
shows negative
balance
D is insolvent

176. Let’s revise dissolution in case of Insolvency of all partners:
1. sequence of payment to be followed in case of insolvency of all partners:
(i) expenses on dissolution
(ii) secured liabilities with fixed charge
(iii) secured liabilities with floating charge
(iv) unsecured liabilities
(v) partner’s loan
(vi) partner’s capital
2. steps to be followed in case of insolvency of all partners:
Step i. prepare realisation account, partner’s capital account, partner’s loan account and account of each liabilities
separately.
Step ii. (a) transfer all assets( except cash and bank balance) and provisions/funds on such assets to realisation account.
(b) transfer balances of cash and bank to the debit of cash & bank account.
(c) transfer balances of partner’s loan to the credit of partner’s loan account.
(d) transfer balances of partner’s capital, current account, all reserves and losses appearing in the balance sheet to
partner’s capital account.
(e) transfer balances of each liabilities to their respective account.
Step (iii) realise assets through realisation account. Close realisation account. Balancing figure will be called loss on
realisation. Such loss will be transferred to partner’s capital account in their profit-sharing ratio.
Step (iv) collect cash from all partners as much as they can pay.
Step (v) pay off claim of liabilities (in the sequence given above) as much as cash is available.
Step (vi) all account of remaining unpaid liabilities will be closed by transferring their balancing figure to deficiency
account.
Step (vii) prepare deficiency account. It should get tally.
Note : 1. All unrecorded liabilities should be paid through realisation account.

177. II. Private assets and liabilities of each partners were as follow:
Close the Books of Firm.
Solution:
Revision question 3. A, B, and C were partners sharing profit in the ratio of 3:1:1. Partnership firm was dissolved due to
insolvency of all partners. On that date their Balance Sheet was as follow:
Balance Sheet
Liabilities Rs. Assets Rs.
Capital A/c
A 2,00,000
B 1,00,000
C 50,000
Bank loan (secured by building)
Mortgage loan (floating charge)
Creditors
Bills payable
C’s Loan
3,50,000
5,00,000
6,50,000
4,00,000
2,00,000
4,00,000
Machinery
Building Goodwill Equipment
Stock Debtors
Profit and loss A/c
4,00,000
6,00,000
2,00,000
3,00,000
2,00,000
5,00,000
3,00,000
25,00,000 25,00,000
I. Assets were realized as follows:
Machinery 2, 00,000
Building 5, 50,000
Equipment 1, 00,000
Stock 1, 50,000
Debtors 3, 00,000
Particulars Private estate Private liabilities
A
B
C
2,00,000
3,00,000
1,00,000
2,40,000
2,60,000
1,50,000
Particulars Amount Particulars Amount
To machinery 4,00,000 By cash account:
To building 6,00,000 Machine 2,00,000
To goodwill 2,00,000 Building 5,50,000
To equipment 3,00,000 Equipment 1,00,000
To stock 2,00,000 Stock 1,50,000
To debtors 5,00,000 Debtors 3,00,000 13,00,000
By loss on realisation:
A’Capital account 5,40,000
B’s Capital account 1,80,000
C’s Capital account 1,80,000 9,00,000
22,00,000 22,00,000
Partner’s capital account
Particulars A B C Particulars A B C
To profit & loss 1,80,000 60,000 60,000 By balance b/d 2,00,000 1,00,000 50,000
a/c 5,40,000 1,80,000 1,80,000 By cash account 40,000 ----
To realisation a/c By deficiency a/c 5,20,000 1,00,000 1,90,000
(bal fig)
7,20,000 2,40,000 2,40,000 7,20,000 2,40,000 2,40,000
Bank loan account
Particulars Amount Particulars amount
To cash account 5,00,000 By balance b/d 5,00,000

178. Cash account
Deficiency account
Mortgage loan account
Particulars Amount Particulars amount
To cash account 6,50,000 By balance b/d 6,50,000
Creditors account
Particulars Amount Particulars amount
To cash account
To deficiency a/c
1,26,667
2,73,333
By balance b/d 4,00,000
Bills payable account
Particulars Amount Particulars amount
To cash account
To deficiency a/c
63,333
1,36,667
By balance b/d 2,00,000
C’s loan account
Particulars Amount Particulars amount
To deficiency account 4,00,000 By balance b/d 4,00,000
Particulars Amount Particulars amount
To balance b/d Nil By bank loan 5,00,000
To realisation a/c 13,00,000 By mortgage loan 6,50,000
To B’s capital a/c 40,000 By creditors 126,667
By B/P 63,333
13,40,000 13,40,000
Particulars Amount Particulars amount
To A’s capital
To B’s capital
To C’s capital
5,20,000
1,00,000
1,90,000
By C’ loan
By creditors
By B/P
4,00,000
2,73,333
136,667
8,10,000 8,10,000

179. Chiefly with the objective of limiting the personal liabilities of the partners, an
existing partnership firm may sell its entire business to an existing limited
company, or may convert itself in to a limited company. The former is the case of
absorption of a partnership firm by the joint stock company whereas, the latter
is the case of flotation of a new joint stock company so as to take over the
business of the partnership firm.
In both of these cases, the existing partnership firm is dissolved and all the
books of accounts are closed. Thus when a partnership firm is sold or converted
into a company, the same accounting procedure is followed as for simple
dissolution of a firm.
The purchase consideration (price) in between the vendor (dissolving) firm and
the purchasing company is fixed as mutually agreed upon. It may or may not be
specified in a lump sum figure. When it is not specified in a lump sum figure, the
difference of agreed values of acquired assets over agreed amount of liabilities
are undertaken.
The purchase price is discharged by the purchasing company either in the form
of cash or shares (equity or preference) or debentures or a combination of two
or more of these. The shares or debentures may be issued by the purchasing
company, at par, at a premium or at a discount.
In the absence of any agreement, the shares received from the purchasing
company is distributed among partners in the ratio of their final claim i.e. in the
ratio of their capital standing after all the adjustments.

180. When a partnership firm is sold or converted into a company, the practical steps
to close the books of the firm are given below:
Entries in the books of converting firm/vendor firm :-
Step 1: Transfer all recorded assets and liabilities (whether or not taken over by
the purchasing company) to the Realization account, except cash and bank
balance if not taken over by the purchasing company.
For transferring recorded assets:
Realization A/C………..Dr.
To sundry assets
For transferring recorded liabilities:
Sundry liabilities……………. Dr.
To Realization A/C
Step 2: Make purchase consideration(price) due.
For purchase price due:
Purchasing company………..Dr.
To Realization A/C

181. Step 3: If, there remain any assets (whether or not recorded) not taken over by
the purchasing company, it may be sold, or may be taken by one of the partners
or may be shared among the partners.
On sale of assets not taken over by the purchasing company:
Bank A/C…………………… Dr.
To realization A/C
Such assets taken over by any one of the partners:
Partner’s capital A/C…………. Dr.
To Realization A/C
On sharing such assets among the partners:
Partners’ capital A/C (capital ratio)…………Dr.
To realization A/C
Note: If such unsold assets are considered worthless, they should be shared
among the partners in profit sharing ratio.
Step 4: The liabilities (whether or not recorded) by the purchasing company may
be discharged or may be assumed by any one of the partners, or must be shared
by the partners in their capital ratio.
On discharge of any liability not taken over by the purchasing company:
Realization A/C………… Dr.
To Bank A/C

182. If such liability assumed by one of the partners:
Realization A/C…………………….. Dr.
To Partner’s capital A/C
If such liability has to be assumed by all partners:
Realization A/C……………………..Dr.
To Partners’ capital A/C(capital ratio)
Step 5: When the realization expenses is paid, Realization account is debited.
For payment of realization expenses:
Realization A/C…………..Dr.
To Bank A/C
Step 6: Close the realization account by transferring the balance(profit or loss) to
the capital of the partners in profit sharing ratio.
For profit on realization account:
Realization A/C……………Dr.
To Partners’ capital A/C(profit sharing ratio)
For loss on realization account:
Partners’ capital A/C………….Dr.
To realization A/C

183. Step 7: On the receipt of purchase consideration (price), cash/bank account,
equity shares in purchasing company or preference shares in purchasing
company at their issue prices are debited and purchasing purchasing company’s
account is credited.
For the receipt of purchase price:
Cash/bank A/C…………………………... Dr.
Equity share in purchasing Co……….Dr.
Preference share in purchasing Co….Dr.
Debentures share in purchasing Co…Dr.
To purchasing Co.
Step 8: Transfer all accumulated reserves/profits/losses to the capital accounts
of partners in profit sharing ratio.
For accumulated reserves, profits:
Reserve A/C……………..Dr.
Profit and loss A/C…….Dr.
To partners’ capital A/C
For accumulated losses:
Partners’ capital A/C…………..Dr.
To profit and loss A/C

184. Step 9: Transfer the current account, if any, in the books, to the capital accounts
of the partners.
For transferring current account to the capital account:
Partners’ current Account……. Dr.
To partners’ capital Account
Step 10: Pay off the partner’s loan if any.
For the payment of partner’s loan account:
Partner’s loan A/C……………Dr.
To bank A/C
Step 11: Make final settlement by paying off balances in capital accounts. In the
absence of an agreement as to the division of shares (from purchasing company)
among partners, such shares are distributed in the ratio of their final claims(i.e.
in the ratio of capitals after all the adjustments).
For final settlement:
Partners’ capital A/C…………Dr.
To equity shares in purchasing Co.
To preference shares in purchasing Co.
To bank A/C

185. Entries in the books of purchasing company :-
Assets Account…………. Dr.
Goodwill Account……….Dr.
To liabilities
To share capital
To share premium
(Being assets and liabilities taken over)
Note: In case debit higher than credit, capital reserve is credited.

186. Conversion/ Sale of Partnership Firm into a Limited Company
[ 1 ]
On 1-7-14 the business of M/S Lad and Wad who were sharing profits in the ratio of 3:2
was acquired by ABC co. LTD.
Their balance sheet as on 30-6-14 was as follows:
Balance Sheet
Liabilities ₹ Assets ₹
Trade creditors 16,580 Land and Building 40,000
Overdraft 8,950 Plant and Machinery 24,000
Capitals :- Stock 15,960
Lad 40,974 Debtors 23,860
Wad 37,316 78,290
1,03,820 1,03,820
The company took over all the assets and liabilities and the consideration was fixed at
RS 1,10,000. The purchase price was settled by the issue of RS 3,300 equity shares at
RS 10 each, to the firm 2,500 preference shares of RS 10 each, and the balance paid in
cash.
Prepare:
a. Realisation A/C
b. Partner’s capital A/C
c. ABC Co. LTD A/C
d. Cash A/C

187. [ 2 ]
A, B and C carry on businessin partnership sharing profits and losses in the
proportions of 1/2, 3/8 and 1/8 respectively. On 31st March 2012, they agreed to sell
their business to a limited company.
Their position on that date was as follows:
Balance Sheet
Liabilities ₹ Assets ₹
A’s Capital 40,000 Machinery 48,000
B’s Capital 30,000 Furniture 42,000
C’s Capital 26,000 Stock 23,000
Loan on Mortgage 16,000 Book Debts 15,000
Sundry Creditors 18,000 Cash 2,000
1,30,000 1,30,000
The company took the following assets at the valuation shown below :-
₹
Machinery 61,000
Furniture 31,800
Stock 22,000
Book Debts 14,000
Goodwill 10,000
The company also agreed to pay the creditors which was agreed at Rs 17,700. The
company paid Rs 67,000 in fully paid share of Rs 10 each and the balance in cash. The
expenses amounted to Rs 1500.

188. [ 3 ]
A, B and C were in partnership sharing under 1/2, 1/3and 1/6. The balance sheet of the
partners as on 31st
December was as under:-
Balance Sheet
Liabilities ₹ Assets ₹
Capitals :- Fixed Assets 70,000
A 50,000
B 30,000 Stock 34,000
C 20,000 1,00,000
Debtors 45,000
Current A/c’s :-
A 24,000 Cash 61,000
B 18,000
C 13,000 55,000
Loan from B 20,000
Creditors 35,000
2,10,000 2,10,000
The fixed assets include two motor car having book value of RS 7,000 and RS 5,000.
The partners accepted the offer of Unique India Limited to acquire the stock and fixed
assets, other than motor car at an inclusive price of RS 1,50,000 the purchase
consideration was to be satisfied by a cash payment of RS 26,000 and allotment by the
company to the partners of 5,500 6% preference shares of RS 10 each @ RS 8 per share
paid up and 8,000 equity shares of RS 10 each fully paid up. The debtors realized RS
42,000 and creditors were settled for RS 33,000.

189. The partners agreed that the following should be the basis of distribution on
dissolution of the partnership :-
1. A to take over one car at a valuation at RS 8,000 and B to take over the other car at a
valuation of RS 4,600
2. B to be allotted preference shares to the value of his loan, balance being allotted
equally between the partners
3. Equity shares to be allotted in proportion to fixed capital
4. The balance to be settled in cash.
You are required to prepare:
a. Realisation account
b. Cash account
c. Partner's capital Account in columnar from showing the final settlement between
them and
d. Statement showing distribution of shares

190. [ 4 ]
Ab Ltd. acquired the business of A and B who share profits in the ratio of 3:2
respectively.
The balance sheet of A and B on 31st
December 2014 was under:
Liabilities ₹ Assets ₹
Capital A/c’s :- Land and Building 40,000
A 64,000
B 40,000 1,04,000 Machinery 20,000
A’s Loan 3,200 Stock 24,000
Bill’s Payable 7,200 Debtors 23,200
Sundry Creditors 21,600 Bill’s Receivable 6,400
Investments 4,800
Cash at Bank 9,600
Goodwill 8,000
1,36,000 1,36,000
It was agreed by the company to take over the assets at book value with the exception
of land and building stock and goodwill which are taken over at Rs 45,000, Rs 20,000
and Rs 28,800 respectively. The investment were retained by the firm and sold for Rs
4,000. The firm discharged the loan of Mr. A. the company took over the remaing
liabilities. The purchase consideration was discharged by issuing 10,000 equity shares
Rs 10 each in AB Ltd. And the balance was paid in cash. Prepare the ledger accounts of
the firm assuming the shares are distributed amongst partners in their profit sharing
ratio.

191. [ 5 ]
A and B were in partnership sharing profit & losses in the ratio of 2:1 respectively
Their balance sheet as on 31-3-2015 was as follows:
Liabilities ₹ Assets ₹
Creditors 40,000 Plant and Machinery 20,000
Bill’s Payable 10,000
Mr. A’s Loan 20,000 Bill’s Receivable 5,000
Capital A/C :- Stock 43,700
A 30,000
B 20,000 50,000 Sundry Debtors 60,000
(-) Provision for Doubtful Debt(3,000) 57,000
Reserve fund 6,000
Cash in hand 300
1,26,000 1,26,000
On that date they agreed to sell their business to ‘C’Ltd. the company was to take over
assets valuation shown below:
Particular ₹
Plant & machinery 16,000
Stock 39,000
Sundry debtors 46,700
Bills receivable 5,000
Goodwill 6,000
The company also agreed to pay the creditors which was agreed at 39,000 the
expenses of realisation amounted to RS 300. Bills payable and Mr. A‘s loan were paid
by the firm in full. The company paid for 3,600 equity shares of RS 10 each and RS
37,700 in cash as purchase consideration. The shares were to be distributed in profit
sharing ratio to the partners.
Prepare necessary ledger accounts in the books of M/S A and B.

192. [ 1 ]
Realisation A/c
To Land and Building 40,000 By Creditors 16,580
To Plant and Machinery 24,000 By Overdraft 8,950
To Stock 15,960 By ABC Ltd. 1,10,000
To Debtors 23,860 (Purchase Consideration)
To Partners’ Capital A/c
(Profit transfer)
Lad 19,026
Wad 12,684 31,710
1,35,530 1,35,530
ABC Co. Ltd. A/c
To Realisation 1,10,000 By Equity Shares
By Preference Shares
By Cash A/c
33,000
25,000
52,000
1,10,000 1,10,000
Partners Capital A/c
Lad Wad Lad Wad
To Equity Shares 18,000 15,000 By Balance b/d 40,974 37,316
To Preference Shares 13,637 11,363 By Realization 19,026 12,684
To Cash A/c 28,363 23,637
(Balance)
60,000 50,000 60,000 50,000
Cash A/c
To ABC Co. Ltd 52,000 By Lad’s Capital
By Wad’s Capital
28,363
23,637
52,000 52,000

193. Working Notes :-
Calculation of Payment of Purchase Consideration
₹
Calculation of amount divided among the partners received
through purchase consideration by ABC Co. Ltd.
Lad Wad
Capital 40,974 37,316
Realisation A/c (Profit) 19,026 12,684
60,000 50,000
Now, Lad and Wad will divide the Equity and Preference
shares in the ratio = 60,000 : 50,000
= 6 : 5
Lad : Wad = 6 : 5
Lad Wad
Equity shares 18,000 15,000
Preference shares 13,637 11,363
31,637 26,363
Equity shares 33,000
(3,300@₹10)
Preference shares 25,000
(2,500@₹10)
Cash (Balance) 52,000
1,10,000

194. [ 2 ]
Realisation A/c
To Machinery 48,000 By Creditors 16,580
To Furniture 42,000 By Loan on 16,000
To Stock 23,000 mortgage
To Debtors 15,000 By Purchasing Co. A/c 1,21,100
To Cash A/c (Purchase Consideration)
Expense 1,500
Loan on Mortgage 16,000 17,500
To Partners’ Capital A/c
(Profit transfer)
A 4,800
B 3,600
C 1,200 9,600
1,55,100 1,55,100
Purchasing Co. A/c
To Realisation 1,21,000 By Shares
By Cash A/c
67,000
54,100
1,21,000 1,21,000
Partners Capital A/c
A B C A B C
To Shares 28,424 21,319 17,257 By Balance b/d 40,974 30,000 26,000
By Realization 4,800 3,600 1,200
To Cash A/c 16,376 12,281 9,943
(Balance)
44,800 33,600 27,200 44,800 33,600 27,200
Cash A/c
To Balance b/d
To Purchasing Co. A/c
2,000
54,100
By Realisation
By Partner’s Capital A/c
(16,376+ 12,281 +9,943)
17,500
38,600
56,100 56,100

195. Working Notes :-
Calculation of Purchase Consideration
₹
Calculation of Payment of Purchase Consideration
₹
Calculation of amount divided among the partners received
through purchase consideration by the Purchasing Company
A B C
Capital 40,000 30,000 26,000
Realisation A/c (Profit) 4,800 3,600 1,200
44,800 33,600 27,200
Now, A, B and C will divide the shares in the ratio
= 44,800 : 33,600 : 27,200
= 28 : 21 : 27
A : B : C = 28 : 21 : 27
A B C
Shares 28,424 21,319 17,257
28,424 21,319 17,257
Machinery 61,000
Furniture 31,800
Stock 22,000
Debtors 14,000
Goodwill 10,000
Less : Creditors (17,700)
1,21,100
Shares 67,000
Cash (Balance) 54,100
1,21,100

196. [ 3 ]
Realisation A/c
To Sundry Assets :- By Sundry Liabilities :-
Fixed Asset 70,000 Creditors 35,000
Stock 34,000 Loan from B 20,000 55,000
Debtors 45,000 1,49,000 By Cash A/c (Debtors) 42,000
To Cash A/c
Creditors 33,000 By Partner’s Capital A/c
Loan from B 20,000 53,000 A 8,000
To Partners’ Capital A/c B 4,600 12,600
(Profit transfer) By Unique India Ltd. 1,50,000
A 28,800
B 19,200
C 9,600 57,600
2,59,600 2,59,600
Unique India Ltd. A/c
To Realisation 1,50,000 By 6% Preference shares
By Equity shares
By Cash A/c
44,000
80,000
26,000
1,50,000 1,50,000
Partners Capital A/c
A B C A B C
To Preference shares 12,000 20,000 12,000 By Balance b/d 50,000 30,000 20,000
To Equity shares 40,000 24,000 16,000 By Realization 28,800 19,200 9,600
To Realisation A/c 8,000 4,600 By Current A/c 24,000 18,000 13,000
To Cash A/c 42,800 18,600 14,600
(Balance)
1,02,800 67,200 42,600 1,02,000 67,200 42,600
Cash A/c
To Balance b/d
To Realisation
To Unique India Ltd
61,000
42,000
26,000
By Realisation
By Partner’s Capital A/c
(42,800+18,600 +14,600)
53,000
76,000
1,29,000 1,29,000

197. Preference shares Capital A/c
Equity shares Capital A/c
To Unique India Ltd. 44,000 By Partner’sCapital A/c:-
A 12,000
B 20,000
C 12,000 44,000
44,000 44,000
To Unique India Ltd. 80,000 By Partner’sCapital A/c:-
A 40,000
B 24,000
C 16,000 80,000
80,000 80,000
To Unique India Ltd. 44,000 By Partner’sCapital A/c:-
A 12,000
B 20,000
C 12,000 44,000
44,000 44,000
To Unique India Ltd. 44,000 By Partner’sCapital A/c:-
A 12,000
B 20,000
C 12,000 44,000
44,000 44,000

198. [ 4 ]
Realisation A/c
To Sundry Assets :- By Sundry Liabilities :-
Land & Building 40,000 Creditors 3,200
Machinery 20,000 A’s Loan 21,600
Stock 24,000 Bill’s Payable 7,200 32,000
Debtors 23,200 By Cash A/c (Investment) 4,000
Bill’s Receivable 6,400
Investment 4,800 By AB Ltd. 1,24,200
Goodwill 8,000 1,26,400
To Cash A/c (Mr. A’s Loan) 3,200
To Partner’s Capital A/c :-
(Profit Transfer)
A 18,360
B 12,240 20,200
1,60,200 1,60,200
AB Ltd. A/c
To Realisation 1,24,200 By Equity shares
By Cash A/c
1,00,000
24,200
1,24,200 1,24,200
Partners Capital A/c
A B A B
To Equity shares 60,000 40,000 By Balance b/d 64,000 40,000
To Cash A/c (Balance) 22,360 12,240 By Realization 18,300 12,240
62,360 52,240 1,02,000 67,200
Cash A/c
To Balance b/d
To Realisation
To AB Ltd
9,600
4,000
24,200
By Realisation
By Partner’s Capital A/c
(22,360 + 12,240)
3,200
34,600
37,800 37,800

199. Shares in AB Ltd. A/c
Working Notes :-
Calculation of Purchase Consideration
₹
Calculation of Payment of Purchase Consideration
₹
To AB Ltd. 1,00,000 By Partner’s Capital A/c :-
A 60,000
B 40,000
1,00,000
37,800 37,800
Land & Building 45,000
Stock 20,000
Goodwill 28,800
Machinery 20,000
Debtors 23,200
Bill’s Receivable 6,400
Cash & Bank 9,600
Less : Creditors (21,600)
Less : Bill’s Payable (7,200)
1,24,200
Equity shares (10,000 10) 1,00,000
Cash (Balance) 24,200
1,24,200

200. [ 5 ]
Realisation A/c
To Sundry Assets :- By Sundry Liabilities :-
Plant&Machinery 20,000 Creditors 40,000
Bill’s Receivable 5,000 A’s Loan 20,000
Stock 43,700 Bill’s Payable 10,000 70,000
Debtors 57,000 1,25,700
To Cash A/c :-
Expense 300 By C Ltd. 73,700
Bill’s Payable 10,000
A’s Loan 20,000 30,300
To Partner’s Capital A/c:-
(Loss Transfer)
A 8,200
B 4,100 12,300
1,56,000 1,56,000
C Ltd. A/c
To Realisation 73,700 By Equity shares
By Cash A/c
36,000
37,700
73,700 73,700
Partners Capital A/c
A B A B
To Equity shares
To Realisation A/c (Loss)
24,000
8,200
12,000
4,100
By Balance b/d
By Reserve
30,000
4,000
20,000
2,000
To Cash A/c (Balance) 1,800 5,900
34,000 22,000 34,000 22,000
Cash A/c
To Balance b/d
To C Ltd
300
37,700
By Realisation
By Partner’s Capital A/c
(1,800+ 5,900)
30,300
7,700
38,000 38,000

201. Shares in C Ltd. A/c
Working Notes :-
Calculation of Purchase Consideration
₹
Calculation of Payment of Purchase Consideration
₹
To C Ltd. 36,000 By Partner’s Capital A/c :-
A 24,000
B 12,000
36,000
36,000 36,000
Plant & Machinery 16,000
Stock 39,000
Goodwill 6,000
Debtors 46,700
Bill’s Receivable 5,000
Less : Creditors (39,000)
73,700
Equity shares (3,600 10) 36,000
Cash 37,700
73,700