This Book is designed as per the Revised Syllabus of F.Y.B.Com. prescribed by University of Pune with effect from June, 2013

A Book Of

FFIINNAANNCCIIAALL

AACCCCOOUUNNTTIINNGG

F.Y.B.Com. Compulsory Paper

As Per New Revised Syllabus of Savitribai Phule Pune University

Dr. Mahesh Kulkarni Dr. Suhas Mahajan M.Com., M. Phil., L.L.B., D.T.L., Ph.D. (Management) B.A., M.Com., Ph.D. (Finance)

Research Guide, Univeristy of Pune and YCMOU, Research Guide, Univeristy of Pune and YCMOU, Nashik. Nashik.

Price `̀̀̀ 350.00

N1586

Financial Accounting (F.Y.B.Com.) ISBN 978-93-83073-31-3

Sixth Edition : May 2018

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PrefacePrefacePrefacePreface …

There are a number of books on the subject of Financial Accounting available in the

learners market but they do not meet the basic requirements of First Year Commerce

students of University of Pune. This book is written as per the revised syllabus prescribed for

F.Y.B.Com. students by the University of Pune from June, 2013. We do hope that this book

will definitely help to meet the growing requirements of the students of accountancy from

the Faculty of Commerce and Management. This book adopts a modern and novel approach

towards the study of Financial Accounting in view of the specific requirements of the readers

and practitioners of this subject.

All the topics included in the syllabus are explained in simple but apt language. Equal

stress is also given for necessary accounting theories and a wide variety of practical

problems. We have taken appropriate care to incorporate basic accounting concepts,

accounting standards and, tabular and graphical representation of classified financial

statements. Proper emphasis is also given on charts and graphs to simplify the complicated

accounting theories and practices. This book has been designed to serve as a self sufficient

text for F.Y.B.Com. students. It will definitely add to our satisfaction if this book would be

more useful as a guide and reference for practicing accountants, professional managers,

dynamic entrepreneurs and enthusiastic teachers of the subject.

We sincerely thank the senior faculty members from various Colleges, Management

Institutes and Accounting Associations for guiding and constantly encouraging us in our

enterprise and the ever challenging student community who inspired us to write this book

as per their requirement.

We are grateful to Shri. Dineshbhai Furia and Shri. Jigneshbhai Furia and the entire staff

of Nirali Prakashan, Pune for their earnest help in bringing out this book with vigour and

accuracy. We have taken maximum efforts to make the text error free. Nevertheless, we do

not rule out the possibility of certain shortcomings or misprints still remaining, we will be

grateful to the reader if such errors are being pointed out from time to time. We must

concede that this book would never have been written without the support, encouragement

and inspiration of our beloved family members. Many, many thanks to them !

Any criticism or valuable suggestions for further improvement of this book will be

gratefully acknowledged and highly appreciated.

26th June, 2013 Dr. Mahesh Kulkarni

Sankasti Chaturthi, Dr. Suhas Mahajan

Pune 411021

University of Pune

F.Y.B.Com.

Compulsory Paper

Financial Accounting

Course Code 102

SyllabusSyllabusSyllabusSyllabus …

TERM - I

1. Piecemeal Distribution of Cash : (12 L)

Meaning and Introduction, Surplus Capital Method and Maximum Loss Method

2. Amalgamation of Partnership Firms : (12 L)

Meaning and Introduction, Objectives, Methods of Accounting

3. Conversion of Partnership Firm into a Limited Company : (12 L)

Meaning and Introduction, Objectives, Effects, Methods of Calculation of

Purchase Consideration (Net Asset and Net Payment Method), Accounting

Procedure in the books of the Firm and Balance Sheet of New Company.

4. Computerised Accounting Environment : (12 L)

Meaning and Introduction, Application of Accounting Software Package,

Voucher Entry through Software Package.

(48 L)

TERM - II

5. Introduction and Relevance of Accounting Standards : (10 L)

Overview of Accounting Standards in India - Concept, Need, Scope and

Importance. Study of AS-1, AS-2, AS-4 and AS-9.

6. Royalty Accounts (Excluding Sub-lease] : (12 L)

Royalty, Minimum Rent, Shortworkings, Recoupment of Shortworkings, Lapse of Short

Working, Journal Entries and Ledger Accounts in the Books of Landlord and Lessee.

7. Hire Purchase and Instalment System [Excluding H.P. Trading] : (16 L)

Basic Concepts and Distinction, Calculation of Interest and Cash Price, Journal Entries

and Ledger Accounts in the Books of Purchaser and Seller.

8. Departmental Accounts : (10 L)

Meaning and Introduction, Methods and Techniques, Allocation of Expenses, Inter-

Departmental Transfers, Provision for Unrealised Profits.

(48 L)

���

Syllabus at a Glance Syllabus at a Glance Syllabus at a Glance Syllabus at a Glance …………

P I E C E M E A L D I S T R I B U T I O N O F C A S H

F

N

A

N

C

I

A

L

A

C

C

O

U

N

T

I

N

G

T SD E P A R T M E N T A L A C C O U

H I R E P U R C H A S E A N D I N S A L M E N T S Y S T E M

R O Y A L T Y A C C O N T S

A C O U N T I N G S T A N D A R D S

C O M P U T E R I S E D C C O U N T I N G

C O N V E R S I O N O F F I R M N T O A C O M P A N Y

A M A L G A M A T I O O F F I R M

ContentsContentsContentsContents …

TERM - I

1. Piecemeal Distribution of Cash 1.1 - 1.56

2. Amalgamation of Partnership Firms 2.1 - 2.42

3. Conversion of Partnership Firm into a Limited Company 3.1 - 3.44

4. Computerised Accounting Environment 4.1 - 4.46

TERM - II

5. Introduction and Relevance of Accounting Standards 5.1 - 5.32

6. Royalty Accounts (Excluding Sub-lease] 6.1 - 6.34

7. Hire Purchase and Instalment System

[Excluding H.P. Trading] 7.1 - 7.66

8. Departmental Accounts 8.1 - 8.44

• Appendices

− Glossary G.1 − G.6

− Objective Questions :

i) True or False Statements T.1 − T.8

ii) Fill in the Blanks F.1 − F.8

− Formulae R.1 − R.2

− Bibliography B.1 − B.1

• Question Papers P.1 − P.19

���

List of Figures, Graphs and ChartsList of Figures, Graphs and ChartsList of Figures, Graphs and ChartsList of Figures, Graphs and Charts …

1.1 : Classification of Liabilities 1.2

1.2 : Sub-classification of Liabilities 1.2

1.3 : Methods of Distribution of Cash among the Partners 1.6

2.1 : Methods of Accounting in Amalgamation of Partnership Firms 2.8

3.1 : Basic Objectives of Conversion 3.2

3.2 : Methods of Calculation of Purchase Consideration 3.3

4.1 : Coding of Accounts 4.14

4.2 : Integrated Accounting Modules 4.16

4.3 : Areas of Voucher Entry Screen 4.28

4.4 : Contra Voucher Entry 4.30

4.5 : Payment Voucher Entry 4.32

4.6 : Receipt Voucher Entry 4.33

4.7 : Purchase Voucher Entry 4.34

4.8 : Sales Voucher Entry 4.35

4.9 : Debit Note Voucher Entry 4.36

4.10 : Credit Note Voucher Entry 4.37

4.11 : Journal Voucher Entry 4.38

5.1 : Accounting Areas which have more than one method of Accounting

Treatment

5.13

5.2 : Fundamental Accounting Assumptions as per AS–1 5.14

5.3 : Selection of Accounting Policies 5.15

6.1 : Existence of Shortworkings 6.4

7.1 : Methods of Accounting for Hire Purchase Transactions 7.13

8.1 : Basis of Departmentation 8.2

8.2 : Methods of keeping Departmental Accounts 8.3

8.3 : Techniques of Departmental Accounts 8.4

8.4 : Classification of Expenses 8.6

8.5 : Classification of Incomes 8.8

���

(1.1)

TERM - I

ChapterChapterChapterChapter 1…

Piecemeal Distribution of Cash

Synopsis …

1.1 Introduction

1.2 Meaning

1.3 Surplus Capital Method

1.4 Maximum Loss Method

1.5 Illustrations

•••• Questions for Self Study

1.1 INTRODUCTION

The term “Dissolution” stands for discontinuation. Under the Partnership Act 1932, the dissolution may be either of a partnership or of a firm. The dissolution of partnership amongst all the partners of a firm is called “dissolution of the firm”. It should be noted that there is a distinction between dissolution of partnership and dissolution of firm, Dissolution of Firm means complete breakdown of the relation of partnership amongst all partners. It is the complete discontinuance of the relationship amongst all the partners of a firm. However, if this breakdown is relating to a few partners and not all the partners and the partnership business is continued, it is known as Dissolution of Partnership. Dissolution of partnership, is thus, a mere reconstitution of partnership. It involves a change in the relation between or amongst the partners. Admission, retirement or death of a partner or amalgamation also cause changes in relations of partners. When partnership business comes to an end, the partnership firm is required to be dissolved. The assets are realised and the liabilities are paid off. Since assets are realised in pieces, the liabilities as well as partners capital balances are also paid in pieces. This method of distribution is called as ‘Piecemeal Distribution of Cash’.

1.2 MEANING

On dissolution of firm, the assets are sold and the cash thus made available is used to pay off firm’s liabilities. In practice the realisation or sale of assets is not an easy job. It may take time, even months, to sell all of the assets of the firm. Thus, the realisation of assets is done part by part - it is gradual - it is piecemeal. The creditors of the firm will not sit quiet till all the assets are realised and they will demand their dues as and when the firm has sufficient funds. Thus creditors are paid part by part - the distribution of available funds is gradual - it is piecemeal.

Now the question arises as to in what order the liabilities of the firm should be paid off or in other words how should the assets of the firm be applied. In all the examples which we have seen in the simple dissolution, we have assumed that the realisation of assets and settlement of debts and partners’ accounts took place on the same day, i.e. the day the firm was dissolved. This assumption is, however, impractical.

Financial Accounting 1.2 Piecemeal Distribution of Cash

Classification of Liabilities

The liabilities including the amounts due to partners, may be classified in the three major categories viz. External Liabilities, i.e., dues to outsiders. Internal Liabilities, i.e., partners loans; and Capital Accounts of partners. The Figure 1.1 shows the Classification of Liabilities.

Fig. 1.1 : Classification of Liabilities

External liabilities may further be sub-classified as ‘Preferential Liabilities’ and “Other liabilities”. Preferential liabilities include i) dues to Government, such as income tax, municipal taxes etc. ii) dues to employees, such as outstanding wages, provident fund etc. and iii) realisation expenses. The Other Liabilities may be either i) secured liabilities or ii) unsecured liabilities. The Figure 1.2 shows the Sub-Classification of Liabilities.

Fig. 1.2 : Sub-Classification of Liabilities

Classification

of Liabilities

iii) Capital Accounts of

Partners

Intern

al Liab

ilities

ii)

Ex

tern

al L

iab

ilit

ies

i)

Liabilities

(Dues)

External Internal Capital Accounts

Loan from Partners

Preferential Others

Govt.

Dues

Employees

Dues

Realisation

Expenses

Secured Unsecured

Financial Accounting 1.3 Piecemeal Distribution of Cash

Order of Payment :

The assumption of realisation of all the assets and the payments of all the liabilities as on the

date of dissolution is far away from practice. In actual practice, the assets are realised gradually

and the cash available is applied in the following order:

From the external liabilities, first pay the Preferential Liabilities in the order

i.e. i) Realisation Expenses, ii) Government Dues and iii) Employees’ Dues.

Then pay Other Liabilities. In case of other liabilities, secured liabilities will get a priority

over unsecured ones for payment out of the amount realised from sale of assets charged for

securing such liabilities. If any other asset realises, then the secured liability will stand at par with

the unsecured liabilities. e.g. a Bank Loan secured against plant will be paid off from the amount

realised by the sale of plant. If the amount realised is from any other asset, the loan will stand at

par with other liabilities. Another point to be noted here is that in case there are more than one

liabilities of the same category, then the payment should be made on pro-rata basis

i.e., proportionately e.g. bills payable and creditors are to be paid simultaneous in the ratio of the

amounts due.

After paying off all the external liabilities, payment should be made for discharging Internal

Liabilities, i.e., Loans from Partners. Here also if there is more than one such loan, the payment

should be made pro-rata.

When all the external as well as internal liabilities are settled, payment can be made to

partners on their Capital Accounts.

Process of payment out of Assets :

While making the payment i.e. distribution of available cash among various claimants the

following steps should be followed :

Step 1 : First, realisation expenses are paid or provided for.

Step 2 : Then, outside creditors are paid. The point to be noted here is that whenever an

asset charged (i.e., an asset provided by way of security to a creditor) is realised,

the payment is made first to the concerned creditor (i.e., to whom that asset has

been provided as security). Whenever ‘an asset not charged’ is realised, payment

is made to all the creditors (whether secured or unsecured) in proportion to their

respective claims.

Step 3 : After the payment of all outside liabilities, the partners’ loans are discharged in

proportion to their respective amounts.

Step 4 : After the payment of all partners’ loan but before the partners’ capitals are paid

off, as a prudent measure, an adequate provision should be made for a

contingent liability (if any) (e.g. discounted bills receivable the maturity of which

has not yet reached).

Step 5 : Finally, the partners’ capitals are paid off.

Provisions of Indian Partnership Act‚ 1932 :

Section 48 of the Indian Partnership Act, 1932 provides that in settling of accounts between

the partners after dissolution of partnership, the following rules shall, subject to any agreement,

be observed :

Financial Accounting 1.4 Piecemeal Distribution of Cash

i) Losses, including deficiencies of capital shall be adjusted first out of undistributed

profits, next out of capital, and lastly, if necessary, by the partners individully in the

proportion in which they were entitled to share profits.

ii) The assets of the firm, including the sums, contributed by the partners to make up losses

or deficiencies of capital shall be applied in the following manner and order:

• in paying outside creditors;

• in repaying advances made by partners (distinct from investment of capital);

• in repaying capital to partners; and

• the ultimate residue, if any, shall be divided among the partners in the proportions

in which profits are divisible.

So the Partnership Act provides for the adjustment of debit balances of capital or current

accounts first from the undistributed profits etc. before the disposal of business. Then on

realisation of assets, to pay off outside creditors first, then partners’ loans, thereafter the partners’

capital balances. There is no mention of the realisation expenses in the act. But the provision for

the same should be done first because without which the assets can not be disposed off. Suppose

an advertisement is required to be given in the newspapers for the disposal of assets, then

without incurring advertisement expenses, nobody would come to know about such disposal.

Distribution of Cash among the Partners :

As stated above, after settlement of external and internal liabilities, the cash available from

realisation of assets should be distributed among the partners to settle their capital balances. Here

again, we have to decide in what order and what proportion payment should be made to partners

on their capital accounts. Should the cash be distributed in the ratio of the capitals of partners.

The distribution should be made in such a manner that the unpaid amount after distribution of all

realisations is in profit sharing ratio. The balance left unpaid in capital accounts is loss on

realisation and this must be in profit sharing ratio.

The partners are sharing profits and losses in a particular ratio i.e. profit sharing ratio. The

amount of exact profit or loss on realisation will not be known till all the assets are disposed off.

The partners may not be having their capitals in the profit sharing ratio.

The problem arises when the capital balances of partners are not in the ratio in which they

share profits and losses. In such a case the available cash can not be distributed among the

partners in profit sharing ratio because if it is so done, the amount left unpaid i.e. loss, will not be

in profit sharing ratio. Refer to the example given below. The proceeds can not be distributed in

capital ratio also because if it is so done, then the balance left unpaid, i.e., loss, will also be in

capital ratio, whereas it should be in profit sharing ratio.

EXAMPLE 1

A, B and C are partners who share profits in the ratio of 3 : 2 : 1.

Capital Balances Realisation of Assets

(After payment of liabilities)

Capital Balances `̀̀̀ Realisation Amount `̀̀̀

A : 20,000

B : 30,000

C : 50,000

I : 24,000

II : 36,000

Financial Accounting 1.5 Piecemeal Distribution of Cash

Show distribution of cash if i) Cash is distributed in profit sharing ratio and ii) cash is

distributed in capital ratio.

SOLUTION

Statement showing Distribution of Cash if

cash is distributed in profit sharing ratio i.e. 3 : 2 : 1.

Particulars Instalment Cash `̀̀̀

Total `̀̀̀

A 3 `̀̀̀

B 2 `̀̀̀

C 1 `̀̀̀

Balances Due

Realisation

Less amount paid to

A, B, and C (3 : 2 : 1)

∴ Balances Due

Realisation

Less amount paid

to A, B and C (3 : 2 : 1)

∴ Amount left unpaid

I

(−)

II

(−)

24,000

24,000

–

36,000

36,000

–

1,00,000

24,000

76,000

36,000

40,000

20,000

12,000

8,000

18,000

10,000

(Excess

Payment)

30,000

8,000

22,000

12,000

10,000

(Balance

Unpaid)

50,000

4,000

46,000

6,000

40,000

(Balance

Unpaid)

In the above statement, the amount left unpaid, i.e., loss on realisation of ` 40,000 has not

been shared by the three partners in profit sharing ratio. In fact, ‘A’ has been paid an excess

amount of ` 10,000 on his capital account.

Statement showing Distribution of Cash if cash is distributed in capital ratio i.e. 2 : 3 : 5. Particulars Instalment Cash

`̀̀̀ Total `̀̀̀

A 2 `̀̀̀

B 3 `̀̀̀

C 5 `̀̀̀

Balances Due

Realisation

Less amount paid

to A, B and C (2 : 3 : 5)

∴ Balances Due

Realisation

Less amount paid

to A, B and C (2 : 3 : 5)

∴ Amount left unpaid

I

(−)

II

(−)

24,000

24,000

–

36,000

36,000

–

1,00,000

24,000

76,000

36,000

40,000

20,000

4,800

15,200

7,200

8,000

30,000

7,200

22,800

10,800

12,000

50,000

12,000

38,000

18,000

20,000

In the above statement, the amount left unpaid, i.e., loss on realisation is not in profit sharing

ratio but it is in capital ratio. So whichever ratio is applied, it does not guarantee that the ultimate

profit or loss will be shared or borne by the partners in their profit sharing ratio. To solve this

problem of distribution of cash among the partners appropriately, the following methods are

followed as shown below in Figure 1.3.

Financial Accounting 1.6 Piecemeal Distribution of Cash

Fig. 1.3 : Methods of Distribution of Cash among the Partners

1.3 SURPLUS CAPITAL METHOD

This is a simple method of distribution of cash among the partners. As the name indicates, under this method, the surplus capital of the partners is found out first. Such surplus capital once paid off, will leave the remaining capital in the profit sharing ratio. Then it can be easily repaid. The balance, if any, indicating the realisation loss, will be shared by the partners in the profit sharing ratio automatically. If there is any realisation profit, the partners would get that much amount more than their capital balances. Surplus Capital means capital that is more than the required capital, according to the share of profit an individual partner is sharing.

This method is also known as “Excess Capital Method” or, “Highest Relative Capital Method” or “Quotient Method”. Under this method, the excess capital contribution by the partners, with reference to their profit sharing ratio is determined. It is already noted that the proceeds of assets realised cannot be distributed in profit sharing ratio if the capital balances are not in the profit sharing ratio. Thus, in order to bring the capitals in profit sharing ratio, the excess capital contributed by a partner over and above his proportionate capital with reference to his share of profit, is paid off first. To take an example, if A and B are two partners sharing profits and losses in the ratio of 3 : 1 and having capitals of ` 45,000 and `25,000, respectively, B’s excess capital is ` 10,000 for his share and this should be paid off first. Thus, the available cash should be paid only to B till the time his capital becomes ` 15,000 thereby making it proportionate to his share of profit. Capital to be considered for this purpose will be after adjustment of General Reserve, Profit and Loss Account (Credit) balance or Profit and Loss Account (Debit) balance.

Here, the capital of a partner, who is having the least capital per share is taken as a base. This is taken as a base because, the partnership is under dissolution and no partner would be ready to contribute anything further to the firm. They would be interested in taking the money back from the firm, instead of investing further. The partners capital is then revised according to the base capital. The difference between the actual capital and the required capital is called surplus

Methods of

Distribution of Cash

among the Partners

Proportionate Capital Method

Surplus Capital Method

Excess Capital Method

High Relative Capital Method

Quotient Method

OR

OR

OR

OR

OR

Notional Loss Method

Maximum Loss Method

Financial Accounting

Publisher : Nirali Prakashan ISBN : 9789383073313Author : Dr. MaheshKulkarni, Dr. SuhasMahajan

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