CS Foundation

Go through this Theoretical Framework – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

Introduction to Company Accounts – CS Foundation Fundamentals of Accounting Notes

Basic Concepts of Company Accounts:

1. The company form of business organization is an association of persons who contribute money for some common purpose.
2. The money so contributed is the capital of the company.
3. The persons who contribute capital are its members.
4. Therefore members of a joint stock company are known as shareholders and the capital of the company is known as share capital.
5. The total share capital is divided into a number of units known as ‘shares’.
6. The word company is derived from a Latin word “Com” meaning with or together and “Panis” meaning bread.
7. It originally referred to association of people taking food together and discussing matters.
8. It is a form of business organisation of people to carry on a business.
9. Company law recognizes a company as one which is formed and registered under the Companies Act, 2013 or under any previous company law.

Features of a Company:

1. Incorporated association
2. Separate legal entity
3. Perpetual existence
4. Limited liability
5. Transferability of shares

Artificial legal person:

• The persons who contribute money in the company are called the members of the company.
• The total amount of capital of the company is termed as stock and part of stock to which every member is entitled, is called the share and the persons are called shareholders.
• As per the Companies Act, a company is an artificial person created by law, having separate legal entity with a perpetual succession.

As per the Companies Amendment Act, 2015:
In Section 22 of the Principal Act –
(i) in sub section (2)
(a) for the words “under its common seal”, the words “under its common seal, if any, “shall be substituted;

(b) the following proviso shall be inserted, namely:
“Provided that in case a company does not have a common seal, the authorisation under this sub-section shall be made by two directors or by a director and the company secretary, wherever company has appointed a company secretary.”

(ii) in sub-section (3), the words “and have the effect if it were made under its common seal” shall be omitted.
In Section 46 of the Principal Act, in sub-section (1), for the words” issued under the common seal of the company” the words “issued under the common seal, if any, of the company or signed by two directors or by a director and the company secretary, wherever the company has appointed a company secretary” shall be substituted.

Types of Companies:

1. Statutory Company:
Companies that have been incorporated under a special act of Parliament E.g. Unit Trust of India, Life Insurance Corporation of India.

2. Government Company:
It means a company in which not less than 51% of the paid up share capital is held by –
(a) Central Government ;or
(b) any State government or governments; or
(c) partly by central government and partly by one or more state governments and includes a company which is a subsidiary company of such a government company.

3. Foreign Company:
Foreign company means any company or body corporate incorporated outside India which –
(a) has a place of business in India, whether by itself or through agent, physically or through electronic mode; and

(b) conducts any business activity in India in any other manner.
Thus, the companies doing business through electronic mode are also termed as foreign company and need to comply with the specified provision.

4. Holding Company and Subsidiary Company:
When a Company –
(a) controls the composition of the board of directors; or

(b) exercises or controls more than one half of the total share capital either at its own or together with one or more of its subsidiary companies, then it is known as the holding company and the other company is the subsidiary company.

Total share capital for this purpose means the aggregate of –
1. paid up equity share capital; and
2. convertible preference share capital.

5. Registered Companies:
All companies registered under the Companies Act, 2013 or under any previous company law are called the registered companies.

6. Public Company
Public company means a company which –
(a) Is not a private company;

(b) Has a minimum paid-up share capital of five lakh rupees or such higher paid-up capital, as may be prescribed. [Omitting requirement for minimum paid up share capital and consequential changes [Section 2 (71)] of the Companies Act, 2013.]

(c) Is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act;

(d) Should have minimum seven members and have no limit for maximum members.

7. Private Company:
A company which has the following features is a private company:

• Restricts the right to transfer its shares.
• Except in case of one person company, limits the number of its members to 200.
• Prohibits any invitation to the public to subscribe for any securities of the company.
• Has a minimum paid up capital of one lakh rupees or such higher paid – up capital as prescribed [Omitting requirement for minimum paid up capital and consequential changes (Section 2 (68)) of Companies Act. 2013.]

8. One Person Company (OPC):
it means a company which has only one person as a member. It is considered as a private company. Only a natural person who is an Indian citizen and resident in India is eligible to incorporate OPC.

9. Small Company:
it means a company other than a public company, whose –
(a) Paid-up capital does not exceeds ₹ 50 lakh or such higher amount as maybe prescribed which shall not be more than crore; or

(b) Turnover as per last profit and loss account does not exceeds ₹ 2 crore or such higher amount as may be prescribed, which shall not be more than ₹ 20 crore.

Amendment made by Companies (Amendment) Act, 2017:
“Small Company means a company, other than a public company, –
(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than ten crore rupees; and

(ii) turnover of which as per profit and loss account for the immediately preceding financial year does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than one hundred crore rupees.”

10. Producer Company:
Sec. 465(1) of the Companies Act, 2013 provides that the Companies Act, 1956 and the registration of the Companies (Sikkim) Act, 1961 (hereafter) in this section referred to as the repeated enactments shall stand repeated.

According to the provisions as prescribed under Section 581 A(1) of the Companies Act, 1956, a producer company is a body corporate having objects or activities specified in this Section 581B and which is registered as such under the provision of the Act. The membership of producer company is open to such people who themselves are the primary producers. Which is an activity by which some agricultural produce is produced by such primary producers.

Share:

• Shares are defined under Section 2(84) of the Companies Act, 2013
• A share is defined as the share in the share capital of a company and includes stock.
• A share is one unit into which total share capital is divided.
• Every person who contributes capital into the company gets a share in the company which represents his capital in the company.

Types of Shares:

• Preference Shares
• Equity Shares

(i) Preference Shares:
1. Preference Shares are those shares which have the following preference rights over other shares:

2. Rights conferred by Article of Association.

• Payment of dividend at a fixed rate or as a fixed amount
• Return of capital on winding up of a company

3. The holders of preference shares are called preference shareholders.

4. Preference shareholders do not have a voting right.
Note: When dividend is outstanding for more than 2 years for cumulative preference shares and 3 years for non cumulative preference share, the preference shareholders will get voting right.

5. Depending upon the articles of association of the company, in addition to the preferential rights, they may also get the following:

• to participate in surplus profits after payment of dividend at a fixed rate to equity.
• to receive arrears of dividend at the time of winding up.
• to receive premium on redemption of preference shares.
• to participate in surplus remaining after the equity shares are redeemed in winding up.

Types of preference shares:
1. Cumulative preference shares – The holders of cumulative preference shares have a fixed right to receive present as well as future dividend. This means that even if the company does not have sufficient profit to pay dividend, the dividend of such shareholders keeps on accumulating and will be paid in future in the years of profits.

2. Non cumulative preference shares – When the preference shares do not have a right to cumulate their dividend then, these are called non cumulative preference shares.

3. Participating preference shares – Holders of these shares have a right to participate in the surplus profits if any, after equity shareholders have been paid at a fixed rate.

4. Non participating preference shares – When shareholders have a fixed right of dividend and not over and above that, even in case of surplus profits then, these are called non participating preference shares.

5. Redeemable preference shares – When shares are issued with a condition that they will be repaid (redeemed) after a fixed period of time, these are called redeemable preference shares.

A company may issue preference shares for a period exceeding 20 years but not exceeding 30 years for infrastructure projects [Specified in Schedule VI). However, it is subject to redemption of minimum 10% of such preference shares per year from the twenty-first year onwards or early on proportionate basis, at the option of the preference shareholders.

6. irredeemable Preference Shares – No company Ltd. by share, can issue any preference shares which are irredeemable.

7. Convertible Preference Shares – The shares which carry an option to get converted into equity shares are called convertible preference shares.

8. Non Convertible Preference Shares – Preference shares which do not have an option of conversion are called non convertible preference shares.

(ii) Equity Shares:

• Shares other than preference shares are termed as equity shares.
• They do not carry a preferential right but have a right to vote.
• There is no compulsion to pay equity dividend they are paid dividends only when there are sufficient profits after payment of preference dividends.
• These are also called as risk bearing shares as they do not have a fixed rate of dividend. But after payment to preference shareholders ail surplus remaining will he distributed among equity shareholders.

Share Capital:

• The total capital of the company is divided into small shares, hence it is known as the share capital.
• Every share has a face or nominal value. Share capital is the sum of the total face value of all the shares.

Categories / Types of Share Capital:
1. Authorized (Nominal) Capital:
This is the maximum amount of capital mentioned in the Memorandum of Association of a company, which it can raise during its life time it is also known as the registered capital. In order to increase the limit of authorized capital, the memorandum of the company should be altered.

2. issued Capital:
It refers to that portion of authorised capital which has been offered to the public for subscription.

3. Subscribed Share Capital:
It refers to that part of the issued share capital which has been subscribed by the public. It also includes the issue of shares for consideration other than cash.

4. Called up Share Capital:
It is that portion of subscribed capital which the shareholders are called upon to pay. The amount remaining to be called up is called as the uncalled capital.

5. Paid up Capital:
It is that portion of called up capital that is paid by the shareholders. The amount that is not paid is known as the calls in arrear. This is the actual capital of the company that is included in the Balance Sheet.

Capital Reserve:
Reserves which are created out of capital profits and cannot be used for declaration of dividend are called capital reserve.

Issue of Shares:

(a) Issue of Shares for Cash
When a company issues share for cash either full amount is received at once or in installments. The share price is generally received in installments and these are known as :

• First installment – Application money
• Second installment – Allotment money
• Third installment – First call money
• Fourth installment – Second call money
• Last/fifth – Final call money

Note : Nowadays, practically the whole amount is received at once and hence, above installments are not required. We will use this method only for academic purpose.

Journal entries for issue of shares :
(a) When shares are issued at par:
(i) On receipt of application money :
Bank A/c                              Dr.
To Share Application A/c

(ii) On allotment of share :
Share Allotment A/c            Dr.                 (Amount due on allotment)
Share Application A/c          Dr.
(Application amount received on allotment) To Share Capital A/c

(iii) On receipt of allotment money :
Bank A/c                               Dr.
To Share Allotment A/c

(iv) On call being made :
Share Call A/c                       Dr.                  (With amount due on calls)
To Share Capital A/c
Bank A/c                               Dr.                  (With amount received on calls)
To Share Call A/c

Notes:

1. Unless the shares are allotted, it cannot become the share capital of the company hence, cannot be credited to Share Capital A/c.
2. When a company fails to raise minimum subscription then, no shares can be allotted and the amount received on application will be refunded back.

→ entry for refund of application money.
Share Application A/c
Dr.                                 (with application money received)
To Bank A/c

Concept of minimum subscription :
Minimum subscription refers to that amount that the company should raise as subscription before allotment of shares. A public Ltd. company cannot make allotment of shares unless the amount of minimum subscription is received. As per the SEBI guidelines a company must receive 90% subscription against the entire issue before making allotment of any shares or debentures.

(b) Issue of shares at premium:

• When a company issues a share at a price which is more than its face value, it is called issue at premium.
• Premium = Issue price – face value.
• Premium amount is generally called at the time of allotment.
• Amount of premium is credited to a separate account called “Securities Premium A/c.”
• Securities premium is not a part of share capital of the company, it is a type of capital receipt.
• Securities premium is shown in the liability side of Balance Sheet under the head “Reserves and Surplus.
• Generally, highly reputed companies or companies with a huge market value issue shares at a premium. A new company cannot issue shares at premium.

Accounting Treatment:
When allotment money becomes due :
Share Allotment A/c Dr.
(Amount due on allotment + premium)
To Securities Premium A/c  (Amt. of premium)
To Share Capital A/c
(Amount of share allotment)
Always remember Share Capital A/c will always be shown at face value.

Note :
Section 52 : Use of Securities Premium:
Securities premium amount can be used only for the following purposes –

• For issuing fully paid bonus shares.
• To write off preliminary expenses of the company.
• To write off the expenses of, or commission paid or discount allowed on any securities or debentures of the company.
• For purchase of its own shares or other securities u/s 68.
• To pay premium on redemption of preference shares or debentures of the company.

Securities premium can never be used for any other purpose.

Note:
If Securities Premium amount is utilised for any purpose, other than stated above, then it will attract provisions relating to reduction of share capital of company [Section 66].

(c) Issue of Shares at a discount:
Section 53 of the Companies Act, 2013 provides that the company shall not issue shares at a discount except in case of issue of sweat equity shares. Any share issued by a company at a discount shall be void.

Note:
Since, new shares can not be issued at a discount, any problem relating to’t is not relevant as per the provisions of Companies Act, 2013. If company contravenes this provision shall be punishable with:

• fine which shall not be less than ₹ 1 lakh but may exceed to ₹ 5 lakh and
• every officer in default shall be punishable within imprisonment for a term which may extend to 6 months or
• with fine which shall not be less than 1 lakh but may extend to 5 lakh rupees, or
• with both.

Amendment made by Companies (Amendment) Act, 2017 in sub-section (2), for the words “discounted price”, the word “discount” shall be substitued.

Subscription of Shares:
Subscription means the application received from the applicants for issue of shares to them.

1. Full Subscription:
In case of full subscription, accounting entries will be the same as done earlier.

2. Under Subscription:

• Under subscription means that the number of shares subscribed by public is less than the number of shares offered for subscription.
• Allotment can be made in this case only if minimum subscription is received.
• All accounting entries will be same by taking the number of shares actually applied and allotted.

3. Over Subscription:

• This means when the number of shares subscribed by the public is more than the shares offered for subscription by the company.
• As per the guidelines issued by SEBI the company cannot reject out rightly any application for shares unless it has incomplete information or absence of signature(s) or insufficient application money.

In such case the company adopts the following procedure:

• Total rejection of some applications.
• Acceptance of some applications in full.
• Allotment to the remaining applicants on pro-rata basis.

Note : Pro rata basis allotment :
1. Under pro rata basis, no applicant is refused, no applicant is allotted in full.

2. They are allotted shares proportionately.

3. Here the excess amount received is not refunded but will be adjusted in further calls.

4. In case of pro rata allotment, the excess amount is not refunded but it is first adjusted towards the amount due on allotment and if the amount is still remaining to be adjusted then it is adjusted from amount due on calls.

5. Thus, the excess amount which is adjusted from the calls is called as calls in advance in the case of pro rata adjustment.

6. However, the company can adjust this amount from calls only if the following conditions are satisfied

• Acceptance of calls in advance is agreed by the articles of the company.
• The consent of the applicant has been taken either by a separate letter or by inserting a clause in the company’s prospectus.

7. For adjusting the excess money, the following entry is passed – Share Application A/c Dr.
To Share Allotment A/c
(Being excess amount received on application adjusted in allotment)

Calls in Advance and Calls in Arrears:
1. Calls in Advance –
(i) When the call is not yet due but the amount is paid by the applicant it is known as Calls in Advance.

(ii) For recording calls in advance the following entry is passed :
1. For receiving calls in advance :
Bank A/c Dr.
To Calls in Advance A/c

2. When that call finally becomes due :
Calls in Advance A/c Dr.
To Particular call A/c

(iii) Since the amount is received in advance by the company, hence it is a liability for the company and shown under the heading namely “Calls in Advance” on the liability side of Balance Sheet. Till the call becomes due, the company is liable to pay interest to the applicant. If the articles do not specify the rate, then, such internet will be charge against profits of the company.

(iv) According to Table F, interest at such rate not exceeding 12% p.a. is to be paid on such advance call money.

(v) No dividend is paid on calls in advance.

2. Callls in arrear:
(i) When the shareholders fail to pay amount due on allotment or calls it is said to be calls in arrear/unpaid calls.

(ii) Calls in arrear are recorded as follows :
Calls in Arrear A/c Dr.
To Share Allotment A/c
To Share A/c

(iii) This amount represents the uncollected amount of capital from the shareholders hence, it is shown by way of deduction from “called up capital” to arrive at paid value of share capital which is shown in the Balance Sheet.

(iv) Since the amount of the call is due hence, the applicants are required to pay interest on the amount due but not paid to the company.

If the articles are silent:

• According to table F, interest @ 10% or such lower rate as the board may determine is charged from the date the call becomes due till the date of actual payment.
• However the directors have a right to waive the interest i.e. the company will not charge interest on calls in arrears.
• Interest on call in Arrears are transferred to P&L A/c at the end of the year.

Issue of Shares for consideration other than cash:
Share issued for consideration other than cash can be in two forms –

• Issue of shares to vendors
• Issue of shares to promoters

1. Issue of Shares to vendors:

• When assets are purchased from vendors then, payment is made to them.
• Sometimes instead of paying them cash the company issues its shares to the vendors in the settlement of the payment.
• These shares can be issued at par or premium

Journal entries recording issue of shares to vendors –
1. On acquisition of asset –
Sundry Asset A/c                  Dr.
To Vendor A/c

2. When fully paid shares are issued to vendors –
(a) At par : Vendor A/c           Dr.
To Share Capital A/c

(b) At premium : Vendor A/c  Dr.
To Share Capital A/c To Securities premium A/c

Note: Students should note that the Companies Act, 2013 totally prohibits the issue of shares at a discount.

2. Issue of Shares to promoters:

• Promoters are the persons who actively participate in the incorporation of the company.
• Sometimes for the services rendered by them, the company may issue shares to them.
• The amount paid to the promoters is treated as a capital expenditure of the company and debited to Goodwill A/c.
• Accounting entry
  Goodwill A/c          Dr
  To share Capital A/c

(Being shares issued to promoters as a consideration other than cash)

Forfeiture and Reissue of Shares:
Forfeiture of Shares –
1. The term forfeiture means taking away a property if a condition has not been fulfilled.

2. When shares are allotted to the applicants, a condition is imposed on them that they will have to pay calls on their due date.

3. When the shareholders fails to pay call money, their shares are forfeited by the company.

4. Once the shares are forfeited, the shareholders name is removed from the register of members and he is not entitled to any future claim on such shares.

5. The amount already paid on shares will not be refunded to the defaulting shareholder.

6. A person whose shares have been forfeited shall cease to be a member in respect of the forfeited shares, but shall remain liable to pay the company all the monies which, at the date of forfeiture, were presently payable by him to the company in respect of the shares. He is not entitled to future dividends and rights of membership.
The liability ceases when the company shall have received payment in full of all such monies in respect of such shares.

7. For carrying out forfeiture “Share Forfeiture A/c” is opened in the books. It is shown on the liability side of Balance Sheet as an addition to paid up share capital. Forfeiture of share is not a cancellation of shares, it is just the cancellation of present membership as the forfeited shares can be further reissued.

8. Forfeiture can be done of shares issued at par, at premium.

9. Shares can be forfeited only if it is permitted by the articles.

10. The directors must pass a resolution for forfeiting the shares at Board Meeting and send a notice to the members requiring them to pay the amount due along with interest within the time specified in the notice. However, the time specified cannot be less than 14 days.
(i) Forfeiture of Share issued at par:
(a) When all unpaid calls have been transferred to Calls in Arrear A/c :
Share Capital A/c Dr.
(No. of shares x called up value)
To Shares Forfeiture A/c
(Amount paid-up by shareholders)
To Calls in Arrear A/c
(Amount of unpaid calls)

(b) When unpaid calls have not been transferred to Calls in Arrear A/c:
Share Capital A/c Dr. (Amount called up)
To Share Forfeiture A/c (Amount paid)
To Share Allotment A/c (Unpaid on allotment)
To Share First Call A/c (Unpaid on calls)
To Share Final Call A/c (Unpaid on calls)

Example :
Y Ltd. forfeited 200 equity shares of ₹ 10 each, ₹ 8 called up for non payment of first call @ ₹ 2 each. Application money @ ₹ 2 per share and allotment money @ ₹ 4 per share have already been received by the company. Give journal entry for forfeiture of shares.
Solutions:
Equity Share Capital A/c (200 x 8)       Dr.     1,600
To Calls in arrear A/c (200 x 2)                        400
To Share forfeiture A/c (200 x 6)                   1,200
(Being forfeiture of shares, ₹ 8 called up for non payment of first call of ₹ 2)

2. Forfeiture of Shares issued at premium:
When shares were issued at premium there can be two situations:
(i) If the premium is not paid by the shareholder – securities premium will be debited to cancel it.

(ii) If premium has already been received by the company – it cannot be cancelled even if the shares are forfeited in future.
Share Capital A/c                  Dr.
Securities Premium A/c        Dr.
To Share Forfeiture A/c
To Calls in Arrear A/c
(Being forfeiture of shares for non-payment of calls and premium money)

Re-issue of forfeited Shares:

• The shares forfeited shall be re-issued on some specific terms.
• Forfeited shares can be reissued at par, premium or discount.

Note:
During the reissue of the forfeited shares, the following things should be kept in mind:

• The amount receivable on reissue together with the amount already received from defaulting member shall not be less than the face value of shares.
• Loss on reissue should not exceed the forfeited amount.
• If the loss on reissue is less than the amount forfeited, the surplus should be transferred to capital reserve in proportion to the number of shares reissued.
• When shares are forfeited at a loss, such loss is to be debited to Share Forfeiture A/c.
• Even though original shares can not be issued at a discount, but forfeited shares can be issued at a discount.
• If forfeited shares are re-issued at a discount, the amount of discount can in no case, exceed the amount credited to the share forfeiture account.

1. Reissue of shares at par:
(a) On reissue of shares :
Bank A/c                                 Dr.                                 (Amt. received on reissue)
To Share Capital A/c
(No. of share x amt. received)

(b) On transfer of Share Forfeited A/c to Capital Reserve :
Share Forfeiture A/c               Dr.
To Capital Reserve A/c

Note:
On reissue of shares, if there is any loss then it is made good from the balance in Share Forfeiture A/c. After reissue, the balance in Share Forfeiture A/c becomes a capital profit for the company and is transferred to the Capital Reserve A/c.

2. Reissue of forfeited shares at a premium:
(a) On reissue of shares :
Bank A/c Dr.                         (amt. received on reissue)
To Share Capital A/c            (paid up value of shares)
To Securities Premium A/c   (premium received)

(b) Transfer of Share Forfeited A/c to Capital Reserve A/c :
Share Forfeiture A/c Dr.
(with forfeited amt. on shares reissued)
To Capital Reserve A/c

3. Reissue of forfeited shares at a discount:

• Amount of discount cannot be more than balance in Share Forfeiture A/c
• Discount allowed will be debited to Share Forfeiture A/c.
• If discount allowed is less than balance in Share Forfeiture A/o, the surplus of Share Forfeiture A/c, will be transferred to Capital Reserve A/c in proportion to the number of shares reissued.

(a) On reissue of shares :
Bank A/c Dr. (amt. received on reissue)
Share Forfeiture A/c Dr. (discount allowed)
To Share Capital A/c

(b) On transfer of balance to Share Forfeiture A/c :
Share Forfeiture A/c Dr.
To Capital Reserve A/c

General Instructions for preparing the Balance Sheet of a company:
1. An asset shall be classified as current when it satisfies any of the following criteria:

• It is expected to be realized in, or is intended for sale or consumption in, the company’s normal operating cycle;
• it is held primarily for the purpose of being traded;
• it is expected to be realized within twelve months after the reporting date; or
• It is cash or cash equivalent unless it is restricted from being exchanged or used to settle a liability for at least twelve months after the reporting date.

All other assets shall be classified as non-current.

2. An operating cycle is the time between the acquisition of assets for processing and their realization in Cash or cash equivalents. Where the normal operating cycle cannot be identified. it is assumed to have a duration of 12 months.

3. A liability shall be classified as current when it satisfies any of the following criteria:

• it is expected to be settled in the company’s normal operating cycle;
• it is held primarily for the purpose of being traded:
• it is due to be settled within twelve months after the reporting date: or
• the company does not have an unconditional right to defer settlement of the liability for at least twelve months after the reporting date. Terms of a liability that could, at the option of the counter party, result in its settlement by the issue of equity instruments do not affect its classification.

All other liabilities shall be classified as non-current,”

4. A receivable shall be classified as a ‘trade receivable’ if it is in respect of the amount due on account of goods sold or services rendered in the normal course of business.

5. A payable shall be classified as a ‘trade payable’ if it is in respect of the amount due on account of goods purchased or services received in the normal course of business.

6. Depending upon the turnover of the company, the figures appearing in the financial statement may be rounded o ff as given below:

	Turnover	Rounding off
(a)	Less than one hundred crore rupees	To the nearest hundreds thousands, lakhs or millions or decimals thereof
(b)	One hundred crore rupees or more	To the nearest lakhs, millions or crores or decimals thereof.

A. Share Capital:
For each class of share capital(different classes of preference shares to be treated separately):

• The number and amount of shares authorized;
• The number of shares issued, subscribed and fully paid, and subscribed but not fully paid;
• Par value per share;
• A reconciliation of the number of shares outstanding at the beginning and at the end of the period;
• The rights, preferences and restrictions attaching to that class including restrictions on the distribution of dividends and the repayment of capital;
• Shares in the company held by its holding company or its ultimate holding company or by its subsidiaries or associates;
• Shares in the company held by any shareholder holding more than 5 percent shares;
• Shares reserved for issue under options and contracts/commitments for the sale of shares/disinvestment, including the terms and amounts;
• Separate particulars for a period of five years following the year in which the shares have been allotted/bought back, in respect of;
• Aggregate number and class of shares allotted as fully paid up pursuant to contract(s) without payment being received in cash.
• Aggregate number and class of shares allotted as fully paid up by way of bonus shares (Specify the source from which bonus shares are issued).
• Aggregate number and class of shares bought back.
• Terms of any security issued along with the earliest date of conversion in descending order starting from the farthest such date.

B. Reserves and Surplus:
(i) Reserves and Surplus shall be classified as:

• Capital Reserves;
• Capital Redemption Reserves;
• Securities Premium Reserve;
• Debenture Redemption Reserve;
• Revaluation Reserve;
• Share Options Outstanding Account;
• Other Reserves – (specify the nature of each reserve and the amount in respect thereof);
• Surplus i.e. balance in statement of Profit & Loss disclosing allocations and appropriations such as dividend paid, bonus shares and transfer to/from reserves.

(Additions and deductions since last balance sheet to be shown under each of the specified heads)

(ii) A reserve specifically represented by earmarked investments shall be termed as a fund.

(iii) Debit balance of Statement of Profit and Loss shall be shown as a negative figure under the head -Surplus’ Similarly, the balance of ‘Reserves and Surplus’, after adjusting negative balance of surplus, if any shall be shown under the head ‘Reserves and Surplus’ even if the resulting figure is in the negative.

C. Long – term Borrowings:
(i) Long-term borrowings shall be classified as:

• Bonds/debentures
• Term loans – From banks, From other parties
• Deferred payment liabilities.
• Deposits.
• Loans and advances from related parties.
• Long-term maturities of finance lease obligations
• Other loans and advances (specify nature).

(ii) Borrowings shall further be sub-classified as secured and unsecured. Nature of security shall be specified separately in each case.

(iii) Where loans have been guaranteed by directors or others, the aggregate amount of such loans under each head shall be disclosed.

(iv) Bonds/debentures (along with the rate of interest and particulars of redemption or conversion, as the case may be) shall be stated in descending order of maturity or conversion, starting from farthest redemption or conversion date, as the case may be. Where bonds/debentures are redeemable by installments, the date of maturity for this purpose must be reckoned as the date on which the first installment becomes due.

(v) Particulars of any redeemed bonds/ debentures which the company has power to reissue.

(vi) Terms of repayment of term loans and other loans shall be stated.

(vii) Period and amount of default in repayment of dues, providing break¬up of principal and interest shall be specified separately in each case.

D. Other Long-term Liabilities:
Other Long-term Liabilities shall be classified as:

• Trade payables
• Others

E. Long-term Provisions:
The amounts shall be classified as:

• Provision for employee benefits.
• Others (specify nature).

F. Short-term borrowings
(i) Short-term borrowings shall be classified as:

1. Loans repayable on demand – (a) from banks, (b) from other parties.
2. Loans and advances from subsidiaries/ holding company/ associates/ business ventures.
3. Deposits.
4. Other loans and advances (specify nature).

(ii) Borrowings shall further be sub-classified as secured and unsecured. Nature of security shall be specified separately in each case.

(iii) Where loans have been guaranteed by directors or others, a mention thereof shall be made and also the aggregate amount of loans under each head.

(iv) Period and amount of default in repayment of dues, providing break up of principal and interest shall be specified separately in each case.

G. Other current liabilities:
The amounts shall be classified as:

• Current maturities of long-term debt;
• Current maturities of finance lease obligations;
• Income received in Advance;
• Interest accrued but not due on borrowing;
• Interest accrued and due on borrowings;
• Unpaid Dividends;
• Unpaid matured deposits and interest accrued thereon;
• Unpaid matured debentures and interest accrued thereon;
• Other payables (specify nature);

Application money received for allotment of securities and due for refund and interest accrued thereon. Share application money includes advances towards allotment of share capital. The terms & conditions including the number of shares proposed to be issued, the amount of premium, if any, and the period before which shares shall be allotted shall be disclosed.

It shall also be disclosed whether the company has sufficient authorized capital to cover the share capital amount resulting from allotment of shares out of such share application money. Further, the period for which the share application money has been pending beyond the period for allotment as mentioned in the document inviting application for shares along with the reason for Such share application money being pending shall be disclosed.

Share application money not exceeding the issued capital and to the extent not refundable shall be shown under the head Equity and share application money to the extent refundable i.e., the amount in excess of subscription or in case the requirements of minimum subscription are not met, shall be separately shown under ‘Other current liabilities’;

H. Short-term provisions:
The amounts shall be classified as:

• Provision for employee benefits;
• Others (specify nature).

I. Tangible assets
(i) Classification shall be given as:

• Land
• Buildings
• Plant and Equipment
• Furniture and Fixtures
• Vehicles
• Office Equipment
• Others (specify nature)

(ii) Assets under lease shall be separately specified under each class of asset.

(iii) A reconciliation of the gross and net carrying amounts of each class of assets at the beginning and end of the reporting period showing additions, disposals, acquisitions and other movements and the related depreciation and impairment losses/reversals shall be disclosed separately.

(iv) Where sums have been written off on a reduction of capital or revaluation of assets or where sums have been added on revaluation of assets, every balance sheet subsequent to date of such write-off, or addition shall show the reduced or increased figures as applicable and shall by way of a note also show the amount of the reduction or increase as applicable together with the date therefore for the first five years subsequent to the date of such reduction or increase.

J. Intangible assets:
(i) Classification shall be given as:

• Goodwill
• Brands/trademarks.
• Computer software.
• Mastheads and publishing titles.
• Mining rights.
• Copyrights, and patents and other intellectual property rights, services and operating rights.
• Recipes, formulae, models, designs and prototypes.
• Licences and franchise.
• Others (specify nature).

(ii) A reconciliation of the gross and net carrying amounts of each class of assets at the beginning and end of the reporting period showing additions, disposals, acquisitions and other movements and the related amortization and impairment losses/reversals shall be disclosed separately.

(iii) Where sums have been written off on a reduction of capital or revaluation of assets or where sums have been added on revaluation of assets, every balance sheet subsequent to date of such write-off, or addition shall show the reduced or increase as applicable and shall by way of a note also show the amount of the reduction or increase as applicable together with the date therefore for the first five years subsequent to the date of such reduction or increase.

K. Non-Current Investments
(i) Non- current investments shall be classified as trade investments and other investments and further classified as:

• Investment property;
• Investments in Equity Instruments;
• Investments in Preference shares;
• Investments in Government or trust securities;
• Investments in units, debentures or bonds;
• Investments in Mutual Funds;
• Investments in partnership firm;
• Other non-current investments (specify nature)

Under each classification, details shall be given of names of the bodies corporate (indicating separately whether such bodies are –

• subsidiaries
• associates
• joint ventures
• controlled special purpose entities

in whom investments have been made and the nature and extent of the investment so made in each such body corporate (showing separately investments which are partly paid). In regard to investments in the capital of partnership firms, the names of the firms (with the names of all their partners, total capital and the shares of each partner) shall be given.

(ii) Investments carried at other than at cost should be separately stated specifying the basis for valuation thereof.

(iii) The following shall also be disclosed:

• Aggregate amount of quoted investments and market value thereof;
• Aggregate amount of unquoted investments;
• Aggregate provision for diminution in value of investments;
• Aggregate amount of partly paid-up investments;
• The names of bodies corporate (indicating separately the names of subsidiaries, associates and other business ventures) in whose securities, investments have been made and the nature and extent of the investments so made in each such body corporate.

L. Long-term loans and advances:
(i) Long-term loans and advances shall be classified as:

• Capital Advances;
• Security Deposits;
• Loans and Advances to related parties (giving details thereof);
• Other Loans and Advances (specify nature).

(ii) The above shall also be separately sub-classified as;

• To the extent secured, considered good;
• Others, considered good;
• Doubtful.

(iii) Allowance for bad and doubtful loans and advances shall be disclosed under the relevant heads separately.

(iv) Loans and Advances due by directors or other officers of the company or any of them either severally or jointly with any other persons or amounts due by firms or private companies respectively in which any director is a partner or a director or a member should be separately stated.

M. Other non-current assets:
Other non-current assets shall be classified as:
(i) Long-term Trade Receivables (including trade receivables on deferred credit terms);

(ii) Others (specify nature)

(iii) (a) Long-term Trade Receivables, shall be sub-classified as:

• secured, considered good;
• unsecured, considered good;
• Doubtful

(b) Allowance for bad and doubtful debts shall be disclosed under the relevant heads separately.

(c) Debts due by directors or other officers of the company or any of them either severally or jointly with any other person debts due by firms or private companies respectively in which any director is a partner or a director or a member should be separately stated.

N. Current Investments:
(i) Current investments shall be classified as:

• Investments in Equity Instruments;
• Investments in Preference shares;
• Investments in Government or trust securities;
• Investments in units, debentures or bonds;
• Investments Mutual Funds;
• Investments partnership firm;
• Other investments (specify nature)

Under each classification, details shall be given of names of the bodies corporate (indicating separately whether such bodies are (i) subsidiaries, (ii) associates, (iii) joint ventures, or (iv) controlled special purpose entitles) in whom investments have been made and the nature and extent of the investment so made in each such body corporate (showing separately investments which are partly paid).

In regard to investments in the capital of partnership firms, the names of the firms (with the names of all their partners, total capital and the shares of each partner) shall be given.

(ii) The following shall also be disclosed:

• The basis of valuation of individual investments:
• Aggregate amount of quoted investments and market value thereof;
• Aggregate amount of unquoted investments;
• Aggregate amount of partly paid-up investments.
• Aggregate provision for diminution in value of investments.

O. Inventories:
(i) Inventories shall be classified as :

• Raw material;
• Work-in-progress;
• Finished goods;
• Stock-in-trade;
• Stores and spares;
• Loose tools;
• Others (specify nature).

(ii) Goods-in-transit shall be disclosed under the relevant sub-head of inventories.

(iii) Mode of valuation should be stated.

P. Trade Receivables:
(i) Aggregate amount of Trade Receivables outstanding for a period exceeding six months from the date they are due for payment should be separately stated.

(ii) Trade receivables shall also be classified as:

• To the extent secured, considered good;
• Others, considered good;
• Doubtful

(iii) Allowance for bad and doubtful debts shall be disclosed under the relevant heads separately.

(iv) Debts due by directors or other officers of the company or any of them either severally or jointly with any other person debts due by firms or private companies respectively in which any director is a partner or a director or a member should be separately stated.

Q. Cash and cash equivalents:
(i) Classification shall be made as:

• Bank balances;
• Cheques, drafts on hand;
• Cash on hand;
• Cash equivalents – short-term, highly liquid investments that are readily convertible into known amount of cash and which are subject to an insignificant risk of changes in value;
• Others (specify nature)

(ii) Earmarked bank balances (example – unpaid dividend) shall be separately stated.

(iii) Balance with banks to the extent held as security against the borrowings, guarantees, other commitments shall be disclosed separately.

(iv) Repatriation restrictions, if any, in respect of cash and bank balances shall be separately stated.

(v) Bank deposits with more than 12 months maturity shall be disclosed separately.

R. Short-term loans and advances:
(i) Short-term loans and advances shall be classified as:

• Loans and Advances to related parties (giving details thereof);
• Others (specify nature).

(ii) The above shall also be sub-classified as:

• To the extent secured, considered good;
• Others, considered good;
• Doubtful;

(iii) Allowance for bad and doubtful loans and advances shall be disclosed under the relevant heads separately.

(iv) Loans and Advances due by directors or other officers of the company or any of them either severally or jointly with any other person debts due by firms or private companies respectively in which any director is a partner or a director or a member should be separately stated.

S. Other current assets (specify nature):
This is an all-inclusive heading, which incorporates current assets that do not fit into any other assets categories.

T. Contingencies and commitments:
(to the extent not provided for)
(i) Contingent liabilities shall be classified as:

• Claims against the company not acknowledged as debt;
• Guarantees;
• Other money for which the company is contingently liable

(ii) Commitments shall be classified as:

• Estimated amount of contracts remaining to be executed on capital account and not provided for;
• Uncalled liability on shares and other investments partly paid;
• Other commitments (specify nature).

U. The amount of dividends proposed to be distributed to equity holders for the period and the related amount per share shall be disclosed separately. Arrears of fixed cumulative dividends shall also be disclosed separately.

V. Where in respect of an issue of securities made for a specific purpose, the whole or part of the amount has not been used for the specific purpose at the Balance Sheet date, they shall be indicated by way of note how such unutilized amounts have been used or invested.

W. If, in the opinion of the board, any of the assets other than fixed assets and non-current investments do not have a value on realization in the ordinary course of business at least equal to the amount at which they are stated, the fact that the board is of the opinion, shall be stated.

PART – II
Form of statement of profit and loss
Name of Company __________
Profit and Loss Statement for the year ended __________

(₹ in ……….)

General Instructions for Preparation of Statement of Profit and Loss:
1. The Provision of this Part shall apply to the Income and Expenditure account referred to in sub-section (2) of Section 210 of the Act, in like manner as they apply to a statement of profit and loss.

2. (A) In respect of a company other than a finance company, revenue from operations shall be disclosed separately in the notes revenue from –

• Sale of products;
• Sale of services;
• Other operating revenues;
• Excise duty.

(B) In respect of a finance company, revenue from operations shall include revenue from –

• Interest; and
• Other financial services

Revenue under each of the above heads shall be disclosed separately by way of notes to accounts to the extent applicable.

3. Finance Costs:
Finance costs shall be disclosed as:

• Interest expense;
• Other borrowing costs;
• Applicable net gain/loss on foreign currency transaction and translation.

4. Other Income:
Otner income shall be classified as:

• Interest Income (in case of a company other than a finance company);
• Dividend Income;
• Net gain/loss on sale of investments
• Other non-operating income (net of expenses directly attributable to such income).

5. Additional Information:
A Company shall disclose by way of notes additional information regarding aggregate expenditure and income on the following items:

• Employee Benefits Expense [showing separately –
  (a) salaries and wages
  (b) contribution to provident and other funds
  (c) expense on Employee Stock Option Scheme (ESOP) and Employee Stock Purchase Plan (ESPP)
  (d) staff welfare expense
• Depreciation and amortization expense;
• Any item of income or expenditure which exceeds one percent of the revenue from operations or ? 1,00,000, whichever is higher;
• Interest Income;
• Interest Expense;
• Dividend Income;
• Net gain/loss on sale of investments;
• Adjustments to the carrying amount of investments;

6. Net gain or loss on foreign currency transaction and translation (other than considered as finance cost);

7. Payments to the auditors as –

• audit
• for taxation matters
• for company matters
• for management services
• for other services
• for reimbursement of expense;

8. Details of items of exceptional and extraordinary nature;
(i) Prior Period Items;

(ii) (a) In the case of manufacturing companies;

• Raw materials under broad heads.
• Goods purchased under broad heads.

(b) In the case of trading companies, purchases in respect of goods traded in by company under broad heads.

(c) In the case of companies rendering or supplying services, gross income derived from services rendered or supplied under broad heads.

(d) In the case of a company, which falls under more than one of the categories mentioned in (a), (b) and (c) above, it shall be sufficient compliance with the requirements herein if purchase, sales and consumption of raw material and the gross income from services rendered is shown under broad heads.

(e) In the case of other companies, gross income derived under broad heads.

(iii) In the case of all concerns having work-in-progress, work-in-progress under broad heads.

(iv) (a) The aggregate, if material, of any amounts set aside or propose to be set aside, to reserve, but not including provisions made to meet any specific liability, contingency or commitment known to exit at the date as to which the Balance Sheet is make up.

(b) The aggregate, if material, of any amounts withdrawn from such reserves.

(v) (a) The aggregate, if material, of the amounts set aside to provisions made for meeting specific liabilities, contingencies or commitment.

(b) The aggregate, if material, of the amounts withdrawn from such provisions, as no longer required.

(vi) Expenditure incurred on each of the following items, separately for each item:

• Consumption of stores and spare parts
• Power & fuel
• Rent
• Repairs to building
• Repairs to Machinery
• Insurance
• Rates and Taxes, excluding, taxes on income.
• Miscellaneous expense,

(vii)

• Dividends from subsidiary companies
• Provisions for losses of subsidiary companies

(viii) The profit and loss account shall also contain by way of a note the following information, namely:
(a) Value of imports calculated on C.I.F. basis by the company during the financial year in respect of –

• Raw materials;
• Companies and spare parts;
• Capital goods;

(b) Expenditure in foreign currency during the financial year on account of royalty, know-how, professional and consultation fees, interest, and other matters;

(c) Total value of all imported raw materials, spare parts and the components consumed during the financial year and the total value of all indigenous raw materials, spare parts and components similarly consumed and the percentage of each to the total consumption;

(d) The amount remitted during the year in foreign currencies on account of dividends with specific mention of the total number of nonresidents shareholders, the total number of shares held by them on which the dividends were due and the year to which the dividends relate;

(e) Earnings in foreign exchange classified under the following heads, namely:

• Exports of goods calculated on F.O.B basis;
• Royalty, know-how professional and consultation fees;
• Interest and dividends;
• Other Income, indicating the nature thereof.

Note:
Broad heads shall be decided taking into account the concept of materiality and presentation of true and fair view of Financial Statements.

Introduction to Company Accounts MCQ Questions

1. Member’s in private company are (Maximum):
(a) 100
(b) 200
(c) 500
(d) Unlimited.
Answer:
(b) 200

2. Amount of share application should not be less than _________ % of face value:
(a) 5%
(b) 10%
(c) 75%
(d) None.
Answer:
(a) 5%

3. Amount of share forfeited after re-issue of shares should be transferred to:
(a) Add to Share Capital
(b) Capital Reserve A/c
(c) The Head Revenue & Surplus
(d) Share Forfeited A/c.
Answer:
(b) Capital Reserve A/c

4. If shares are issued at premium then, the amount of premium can be utilized.
(a) for issue of bonus shares
(b) for payment of dividend
(c) for redemption of debenture
(d) None.
Answer:
(a) for issue of bonus shares

5. Value of share is ₹ 100 and only ₹ 80 called up only and a shareholder did not paid the final call of ₹ 30 and his share is forfeited. On forfeiture Share Capital A/c will be debited by:
(a) ₹ 100
(b) ₹ 80
(c) ₹ 50
(d) ₹ 70
Answer:
(b) ₹ 80

6. All those companies, which operate under the special act passed by the state Legislature or Parliament, are called:
(a) Unregistered Company
(b) Registered Company
(c) Statutory Company
(d) Government Company.
Answer:
(c) Statutory Company

7. Time period between 2 calls should be _________.
(a) Minimum 15 Days
(b) Minimum 21 Days
(c) Minimum 1 Month
(d) Minimum 3 Months.
Answer:
(c) Minimum 1 Month

8. “Securities Premium A/c” is shown in B/S on:
(a) Asset side (Loan & Advances)
(b) Liabilities side (Reserve & Surplus)
(c) Liabilities side (Loan & Advances)
(d) Asset side (Misc Assets).
Answer:
(b) Liabilities side (Reserve & Surplus)

9. Which capital is shown in B/S:
(a) Authorised Share Capital
(b) Issued Share Capital
(c) Subscribed Share Capital
(d) All of the above.
Answer:
(d) All of the above.

10. The maximum amount beyond which a company is not allowed to raise funds by issue of shares is known as:
(a) Nominal Capital
(b) Issued Capital
(c) Subscribed Capital
(d) None.
Answer:
(a) Nominal Capital

11. Maximum amount that can be collected as premium as a percentage of face value:
(a) 10%
(b) 20%
(c) 30%
(d) Unlimited.
Answer:
(d) Unlimited.

12. The minimum amount that should be called by a company with application for its shares is the following percent of face value of shares:
(a) 2%
(b) 5%
(c) 10%
(d) 15%.
Answer:
(b) 5%

13. A company cannot issue:
(a) Redeemable Equity Shares
(b) Redeemable Preference Shares
(c) Redeemable Debentures
(d) Fully Convertible Debentures.
Answer:
(a) Redeemable Equity Shares

14. Which of the following is not a capital profit?
(a) Profit prior to incorporation of the company
(b) Profit from the sale of fixed assets
(c) Premium on issue of shares
(d) Compensation received on the termination of a contract.
Answer:
(d) Compensation received on the termination of a contract.

15. Unless otherwise stated, a preference share is always deemed to be:
(a) cumulative, participating and non – convertible
(b) non – cumulative, non – participating and non – convertible
(c) cumulative, non – participating and non – convertible
(d) non – cumulative, participating and non – convertible.
Answer:
(c) cumulative, non – participating and non – convertible

16. Premium on issue of shares can be used for:
(a) issue of bonus shares
(b) payment of dividends
(c) payment of operating expenses
(d) redemption of debentures.
Answer:
(a) issue of bonus shares

17. The rate of interest paid on calls in advance as per Table F is:
(a) 5% p.a.
(b) 6% p.a.
(c) 10% p.a
(d) 12% p.a.
Answer:
(d) 12% p.a.

18. The document inviting offers from public to subscribe for the debentures or shares or deposits of a company is a:
(a) Share Certificate
(b) Articles of Association
(c) Fixed Deposit Receipt
(d) Prospectus.
Answer:
(d) Prospectus.

19. When shares are issued to promoters for their services, the account that will be debited is:
(a) Preliminary Expenses A/c
(b) Goodwill A/c
(c) Promoters A/c
(d) Share Capital A/c.
Answer:
(b) Goodwill A/c

20. The maximum amount beyond which a company is not allowed to raise funds, by issue of shares, is its:
(a) Issued Capital
(b) Reserve Capital
(c) Authorised Capital
(d) Subscribed Capital
Answer:
(c) Authorised Capital

21. Dividends are usually paid on:
(a) Authorised Capital
(b) Issued Capital
(c) Cailed – up Capital
(d) Paid – up Capital
Answer:
(d) Paid – up Capital

22. Which of the following should be deducted from the share capital to find out paid – up capital?
(a) Calls – in – advance
(b) Calls – in arrears
(c) Share forfeiture
(d) Discount on issue of shares.
Answer:
(b) Calls – in arrears

23. Which of the following does not appear under the head ‘share capital’ of a balance sheet?
(a) Preference Share Capital
(b) Share Forfeiture A/c
(c) Equity Share Capital
(d) Capital Reserve A/c.
Answer:
(d) Capital Reserve A/c.

24. Which of the following statements is true regarding calls – in – arrears?
(a) Calls – in – arrears is that part of called up capital which remains unpaid.
(b) It is not shown in the balance sheet until the defaulted shares are forfeited.
(c) The rate of interest on calls – in – arrear is chargeable at 5% p.a. if a company adopts Table F.
(d) Charging of interest on calls – in arrear need not be permitted by the articles of association.
Answer:
(a) Calls – in – arrears is that part of called up capital which remains unpaid.

25. Which one of the following is known as Registered Capital of the Company?
(a) Paid – up Capital
(b) Authorised Capital
(c) Uncalled Capital
(d) Reserve Capital.
Answer:
(b) Authorised Capital

26. The directors of B Ltd. made the final call of ₹ 30 per share on January 15,2004 indicating the last date of payment of call money to be January 31,2004. Mr. C holding 7,500 shares paid the call money on March 15, 2004.
If the company adopts Table F of the Companies Act the amount of interest on calls – in – arrear to be paid by Mr. C is?
(a) ₹ 1937.50
(b) ₹ 1,406.00
(c) ₹ 2812.50
(d) ₹ 1,687.50.
Answer:
(c) ₹ 2812.50

27. O Ltd. issued 10,000 equity shares of ₹ 10 each at a premium of 20% payable ₹ 4 on application (including premium), 15 on allotment and the balance on first and final call. The company received applications for 15,0 shares and allotment was made pro-rata. P, to whom 3,000 shares were allotted failed to pay the amount due on allotment. All his shares were forfeited before the call was made. The forfeited shares were reissued to Q at par. Assuming that no other bank transactions took place, the bank balance of the company after effecting the above transactions is?
(a) ₹ 1,14, 000
(b) ₹ 1,32,000
(c) ₹ 1,20,000
(d) ₹ 1,00,000.
Answer:
(b) ₹ 1,32,000

28. A company forfeited 2,000 shares of ₹ 10 each (which were issued at par) held by Mr. John for non – payment of allotment money of ₹ 4 per share. The called – up value per share was ₹ 9. On forfeiture, the amount debited to share capital A/c is?
(a) ₹ 10,000
(b) ₹ 8,000
(c) ₹ 2,000
(d) ₹ 18,000.
Answer:
(d) ₹ 18,000.

29. G. Ltd. acquired assets worth ₹ 7,50,000 from H. Ltd. by issue of shares of ₹100 at a premium of 25%. The number of shares to be issued by, G. Ltd. to settle the purchase consideration is?
(a) 6,000 Shares
(b) 7,500 Shares
(c) 9,375 Shares
(d) 5,625 Shares
Answer:
(a) 6,000 Shares

30. B. Ltd., a listed company, proposed to issue 1,00,000 equity shares of ₹ 10 each at par by way of private placement. The maximum amount of brokerage that can be paid by the company is?
(a) ₹ 5,000
(b) ₹ 10,000
(c) ₹ 50,000
(d) ₹ 25,000
Answer:
(a) ₹ 5,000

31. UK Ltd. issued 20,000 shares of ₹10 each at a premium of 20% on May 01,2004, payable as follows:
On application ₹ 4.50 (inclusive of premium)
On allotment ₹ 2.50
On first and final call ₹ 5.00
Mrs. M, to whom 1,000 shares were allotted, has paid ₹ 5,000 on June 01, 2004. At the time of remitting the allotment money, she indicated that the excess money should be adjusted towards the call money. The directors of the company made the first and final call on October 31,2004. The company has a policy of paying interest on calls- in-advance.
The amount of interest paid to Mrs. M on calls-in-advance is?
(a) ₹ 62.00
(b) ₹ 52.08
(c) ₹ 250
(d) ₹ 150.00
Answer:
(c) ₹ 250

32. Z Ltd. issued 10,000 shares of ₹ 10 each. The called up value per share was ₹ 8. The company forfeited 200 shares of Mr. A for non- payment of 1st call money of per share. He paid ₹ 6 for application and allotment money. On forfeiture, the share capital account will be _________.
(a) Debited by ₹ 2,000
(b) Debited by ₹ 1,600
(c) Credited by ₹ 1,600
(d) Debited by ₹ 1,200
Answer:
(b) Debited by ₹ 1,600

33. B Ltd. invited applications for 5,000 shares of ₹10 each at a premium of ₹ 2 per share payable as follows:
On application – ₹ 5 (including premium)
On allotment – ₹ 4
On final call – ₹ 3
Allotment was made on pro rate basis to the applicants of 6,000 shares. Mr. C to whom 60 shares were allotted, failed to pay allotment money and call money. Mr. D the holder of 100 shares, failed to pay call money. All these shares were forfeited after proper notice.
(i) On forfeiture, the amount credited to share allotment account is?
(a) ₹ 480
(b) ₹ 640
(c) ₹ 180
(d) ₹ 400
Answer:
(c) ₹ 180

(ii) On forfeiture, the amount credited to share forfeiture account is?
(a) ₹ 300
(b) ₹ 880
(c) ₹ 320
(d) ₹ 940
Answer:
(b) ₹ 880

34. When shares are forfeited, the Share Capital Account Is debited with _________ and the Share Forfeiture Account is credited with _________.
(a) Paid – up capital of shares forfeited; Called up capital of shares forfeited
(b) Called up capital of shares forfeited; Calls in arrear of shares forfeited.
(c) Called up capital of shares forfeited; Amount received on shares forfeited
(d) Calls in arrears of shares forfeited; Amount received on shares forfeited.
Answer:
(c) Called up capital of shares forfeited; Amount received on shares forfeited

35. The following statements apply to equity/preference shareholders. Which one of them applies only to preference shareholders?
(a) Shareholders risk the loss of investment
(b) Shareholders bear the risk of no dividends in the event of losses
(c) Shareholders usually have the right to vote
(d) Dividends are usually given at a set amount in every financial year.
Answer:
(d) Dividends are usually given at a set amount in every financial year.

36. What do you mean by foreign company?
(a) Company that is incorporated outside India but operates in India
(b) Company that is incorporated in India but operates in India
(c) Subsidiary company in India of a foreign holding
(d) None of these
Answer:
(a) Company that is incorporated outside India but operates in India

37. The amount of capital that is mentioned in ‘Capital clause’ Is known as:
(a) Authorised Capital
(b) Registered Capital
(c) Nominal Capital
(d) All of these
Answer:
(d) All of these

38. That portion of called up capital which is not received is known as:
(a) Uncalled capital
(b) Unpaid calls
(c) Reserved capital
(d) None of these
Answer:
(b) Unpaid calls

39. The minimum subscription as prescribed by SEBI against the entire issue is:
(a) 95%
(b) 90%
(c) 5%
(d) None of these
Answer:
(b) 90%

40. The amount called over and above the nominal value of share should be credited to:
(a) Share premium a/c
(b) Share capital a/c
(c) Share allotment a/c
(d) None of these
Answer:
(a) Share premium a/c

41. The excess of the nominal value over the issue price represents:
(a) Premium on share
(b) Discount on share
(c) Forfeiture of share
(d) None of these
Answer:
(b) Discount on share

42. Pro-Rata allotment is done in case of:
(a) Full subscription
(b) Over subscription
(c) Under subscription
(d) Shares issued at premium
Answer:
(b) Over subscription

43. Share application account is of the nature of a _________.
(a) Reala/c
(b) Personal a/c
(c) Nominal a/c
(d) None of the above
Answer:
(b) Personal a/c

44. Profit prior to incorporation is an example of _________.
(a) Revenue reserve
(b) Secret reserve
(c) Capital reserve
(d) General reserve
Answer:
(c) Capital reserve

45. The company charges interest on calls in arrear at rate of:
(a) 6%
(b) 10%
(c) 5%
(d) 14%
Answer:
(b) 10%

46. If the Premium of the forfeited share has already been received, then share Premium a/c should be:
(a) Credited
(b) Debited
(c) Cannot be cancelled
(d) None of these
Answer:
(c) Cannot be cancelled

47. What percentage of shares issued to the public must be subscribed so that the shares can be allotted?
(a) 75%
(b) 50%
(c) 90%
(d) None of these
Answer:
(c) 90%

48. Dividend proposed to be paid is calculated as a percentage of _________.
(a) Net Profits
(b) Authorised Capital
(c) Issued Capital
(d) Paid up Capital
Answer:
(d) Paid up Capital

49. Which account will be credited if the gain on forfeiture is more than the loss on reissue _________.
(a) Capital Reserve
(b) Profit & Loss
(c) General Reserve
(d) Share Forfeiture
Answer:
(a) Capital Reserve

50. The subscribed capital of a company is ₹ 80,00,000 and the nominal value of the share is ₹ 100 each. There were no calls in arrear till the final call was made. The final call made was paid on 77,500 shares only. The balance in the calls in arrear amounted to ₹ 62,500. Calculate the final call on share.
(a) ₹ 7
(b) ₹ 20
(c) ₹ 22
(d) ₹ 25
Answer:
(d) ₹ 25

51. On the forfeiture of shares, the share capital will be debited by _________.
(a) Paid up value
(b) Called up value
(c) Uncalled capital
(d) Nominal value
Answer:
(b) Called up value

52. If the shares are issued at a premium and the amount of premium has been received, then what will be the treatment of the premium amount at the time of forfeiture.
(a) Debit Security Premium A/c
(b) Debit Capital Reserve A/c
(c) Credit Security Premium A/c
(d) No treatment
Answer:
(d) No treatment

53. As per Section 52, the balance standing in the securities premium account cannot be utilized for _________.
(a) Payment of dividend
(b) Writing off discount on issue of shares
(c) Issue of fully paid Bonus Shares
(d) None of these
Answer:
(a) Payment of dividend

54. Voluntary return of shares for cancellation by the shareholders is called _________.
(a) Cancellation of shares
(b) Forfeiture
(c) Surrender of shares
(d) None of these
Answer:
(c) Surrender of shares

55. Balance in the share forfeiture account appears in the balance sheet under the head of _________.
(a) Share Capital
(b) Reserve & Surplus
(c) Current Liabilities
(d) None of these
Answer:
(a) Share Capital

56. The statement issued to the public for issue of shares is called as _________.
(a) Statement in lieu of prospectus
(b) Prospectus
(c) Articles of association
(d) None of the above
Answer:
(b) Prospectus

57. Right shares are issued to _________.
(a) The existing shareholders
(b) Promoters
(c) Employees
(d) Vendor
Answer:
(a) The existing shareholders

58. Share allotment account is _________.
(a) Personal A/c
(b) Nominal A/c
(c) Real A/c
(d) All of the above
Answer:
(a) Personal A/c

59. If the shares are issued to the promoters, then which account will be debited _________.
(a) Promoters A/c
(b) Share Capital A/c
(c) Goodwill A/c
(d) P & L A/c
Answer:
(c) Goodwill A/c

60. A company forfeited 5,000 shares of ₹ 10 each held by A for non payment of allotment money of ₹ 4 per share. The called up value per share is ₹ 8. Calculate the amount to be debited to the share capital A/c at the time of forfeiture of such shares _________.
(a) ₹ 28,000
(b) ₹ 40,000
(c) ₹ 18,000
(d) None of these
Answer:
(b) ₹ 40,000

61. A vender has been allotted shares of ₹ 5,50,000 in consideration of net assets purchased worth ₹ 5,00,000. Then the balance of ₹ 50,000 will be considered as _________.
(a) Goodwill
(b) Capital Reserve
(c) Loss
(d) Profit
Answer:
(a) Goodwill

62. ABC Ltd. acquired the assets worth ₹ 10,00,000 from XYZ Ltd. by issuing shares of ₹ 10 each at a premium of ₹ 10 each. Calculate the number of shares to be issued to settle the liability
(a) ₹ 50,000
(b) ₹ 1,00,000
(c) ₹ 5,000
(d) ₹ 10,000
Answer:
(a) ₹ 50,000

63. ABC Ltd. allotted 20,000 shares to the applicants of 28,000 shares on pro-rata basis. If the application money is ₹ 5 per share, calculate the number of shares allotted to Ram and also the amount to be adjusted from further calls if he has applied for 840 shares.
(a) 800 shares, ₹ 1,200
(b) 600 shares, ₹ 800
(c) 600 shares, ₹ 1,800
(d) 600 shares, ₹ 1,200
Answer:
(d) 600 shares, ₹ 1,200

64. If a share of ₹ 100 on. which ₹ 80 has been paid is forfeited, then calculate the minimum price at which it can be re-issued.
(a) ₹ 80
(b) ₹ 100
(c) ₹ 20
(d) ₹ 50
Answer:
(c) ₹ 20

65. A company has issued 50,000 shares of ₹ 10 each at 20% premium payable as follows Application ₹ 3, Allotment ₹ 5 (including premium) and first & final call of ₹ 4 each. A holder of 2,500 shares failed to pay the first & final call and his shares were forfeited thereafter. Calculate the amount to be credited to the share forfeiture A/c.
(a) ₹ 11,000
(b) ₹ 15,000
(c) ₹ 22,000
(d) None of these
Answer:
(b) ₹ 15,000

66. Which of the following statement is true?
(a) Authorised Capital = Issued Capital
(b) Authorised Capital > Issued Capital
(c) Paid up Capital ≥ Issued Capital
(d) None of the above.
Answer:
(b) Authorised Capital > Issued Capital
Authorised Share Capital means that amount of capital which is mentioned in ‘Capital Clause’ of the ‘Memorandum of Association’ registered with the Register of Company. Issued share capital means that portion of the Authorised Capital which is issued by the company. Paid – up share capital means that capital which is paid up by the shareholders. Thus, authorised capital is always greater than issued capital.

67. Which of the following will define, when appropriation of a certain number of shares is made to an applicant in response to his application?
(a) Share allotment
(b) Share forfeiture
(c) Share trading
(d) Share purchase
Answer:
(a) Share allotment
Allotment means the appropriation of a certain number of shares to an applicant in response to his application. If the number of shares applied for is less than the number of shares offered, the allotment can be only for the shares applied for, provided, minimum subscription is raised.

68. P Ltd. forfeited 150 shares of ₹ 10 each, issued at a premium of ₹ 2, for non – payment of the final call of ₹ 3. Out of these, 100 shares were re-issued @ ₹ 11 per share. How much amount would be transferred to capital reserve?
(a) ₹ 700
(b) ₹ 500
(c) ₹ 1,200
(d) ₹ 300
Answer:
(a) ₹ 700

₹ 700 would be transferred to Capital Reserve A/c.

69. If the number of shares offered to public for subscription is less than the number of applications received, it is termed as:
(a) Minimum subscription
(b) Over subscription
(c) Under subscription
(d) Maximum subscription
Answer:
(c) Under subscription
When the number of shares applied for less than the number of shares issued, the shares are said to be under – subscribed. In such situation, the directors allot shares on some reasonable basis because the company can allot only that number of shares which are actually offered for subscription.

70. XY Limited issued 2,50,000 equity shares of ₹ 10 each at a premium of ₹ 1 each payable as ₹ 2.5 on application, ₹ 4 on allotment and balance on the first and final call. Applications were received for 5,00,000 equity shares but the company allotted to them only 2,50,000 shares. Excess money was refunded after adjustment for further calls. Last call on 500 shares were not received and shares were forfeited after due notice. This is a case of:
(a) Over subscription
(b) Pro-rata allotment
(c) Forfeiture of shares
(d) All of the above
Answer:
(d) All of the above
Company invited applications for 2,50,000 shares but applications are received for 5,00,000 shares. This is a case of over-subscription. Company allotted 2,50,000 shares to the applicants of 5,00,000 shares. This is a case of Pro-rata allotment. Company could not receive last call on 500 shares and these were subsequently forfeited. This is a case of forfeiture of shares. Hence, all of the above.

71. Z Limited forfeited 200 fully called up shares of ₹ 10 each on which ₹ 1,300 had been received; later on these shares were reissued as fully paid up @ ₹ 9 per share. The amount to be transferred from share forfeited account to capital reserve account will be:
(a) ₹ 1,800
(b) ₹ 2,000
(c) ₹ 1,100
(d) Nil
Answer:
(c) ₹ 1,100

72. Omega Limited, a listed company acquires assets worth ₹ ₹,50,000 from Alpha Limited and issue shares of ₹ 10 each at a premium of 25%. The number of shares to be issued by Omega Ltd., to settle the purchase consideration will be:
(a) ₹ 60,000
(b) ₹ 75,000
(c) ₹ 1,00,000
(d) ₹ 1,25,000
Answer:
(a) ₹ 60,000
No. of Shares to be issued = \(\frac{7,50,000}{125}\)
= 60,000 shares.

73. E Ltd. had allotted 10,000 shares to the applicants of 14,000 shares on pro-rata basis. The amount payable on application was ₹ 2. F applied for 420 shares. The number of shares allotted and the amount carried forward for adjustment against allotment money due from F will be:
(a) 60 shares; ₹ 120
(b) 340 shares; ₹ 160
(c) 320 shares; ₹ 200
(d) 300 shares; ₹ 240
Answer:
(d) 300 shares; ₹ 240
No. of shares allotted to F = 420 x \(\frac { 10 }{ 14 }\) = 300 shares.
F sent 420 x 2 = ₹ 840 on application money adjusted against
application (300 x 2)     600
Excess money               240
to be adjusted against allotment.

74. A company forfeited 1,000 shares of ₹ 10 each (which were issued at par) held by Saurabh for non-payment of allotment money of ₹ 4 per share. The called-up value per share was ₹ 8. On forfeiture, the amount debited to share capital account will be _________.
(a) ₹ 10,000
(b) ₹ 8,000
(c) ₹ 2,000
(d) ₹ 18,000
Answer:
(b) ₹ 8,000
On forfeiture, following entry will be made :
Share Capital A/c    Dr.
(with the amount of called up value of share forfeited)
To Share Forfeiture A/c (With the amount paid up by share-holder)
To Share Allotment A/c (With the amount of unpaid calls)
So, Share Capital A/c will be debited by (1,000 x 8) = ₹ 8,000

75. The maximum amount beyond which a company is not allowed to raise funds by issue of its shares, is called _________.
(a) Subscribed capital
(b) Called-up capital
(c) Paid-up capital
(d) Authorised capital.
Answer:
(d) Authorised capital.
According to Companies Act, 2013, a joint stock company is not allowed to raise funds by issue of shares beyond the limit of Authorised Capital.

76. Pious Limited purchases a machine worth ₹ 1,15,000 from Indigo Traders. Payment was made as ₹ 10,000 by cheque and the remaining by issue of equity shares of the face value of ₹ 10 each fully paid-up at an issue price of ₹ 10.50 each. Amount of share premium would be _________.
(a) ₹ 6,000
(b) ₹ 5,000
(c) ₹ 7,000
(d) ₹ 4,000
Answer:
(b) ₹ 5,000
Machinery A/c Dr. 1,15,000

(Being payment made to Indigo Traders)
Thus, share premium A/c would be ₹ 5,000.

77. A company invited share application of 5,000 shares, it received application of 6,000 shares and were allotted shares on prorata basis, 200 shares were forfeited. To which of the following does this case belong :
(a) Prorata
(b) Oversubscription.
(c) Forfeiture
(d) All of the above
Answer:
(d) All of the above
When number of shares offered for subscription ‘is less than’ no. of shares actually subscribed, it is said to be the case of over subscription. Under this situation, excess applications are rejected and allotment to the applicants may be made on pro-rata basis (i.e. proportionately) when shares are allotted, a condition is imposed to pay calls on their due date, failure of which results in forfeiture of shares. In the given question, since all these conditions are present, it belongs to all of these, i.e. prorata, over subscription and forfeiture.

78. X failed to pay final call on 24,000 shares ₹ 20 per share on 15.12.2013 and paid the same on 15.03.2014. What is the interest of calls in arrears.
(a) 12,000
(b) 6,000
(c) 6150
(c) 6,250
Answer:
(a) 12,000
Final call paid was delayed by 3 months [i.e. 15.02.2013 – 15.03.2014]. Hence interest on calls in arrears will be.
= 24,000 x 20 x \(\frac { 10 }{ 100 }\) x \(\frac { 3 }{ 2 }\) = ₹ 12,000

79. Company cannot issue shares more than _________.
(a) Authorised Capital
(b) Subscribed Capital
(c) Issued Capital
(d) Paid up Capital
Answer:
(a) Authorised Capital
Authorised or nominal capital refers to that maximum amount to which the company is authorised, beyond which company can not issue shares.

80. Premium received on re-issue of forfeited share should be _________.
(a) Debit to share forfeited A/c
(b) Credit to share forfeited A/c
(c) Credit to securities premium A/c
(d) None
Answer:
(c) Credit to securities premium A/c
As per the provisions of Companies Act 2013, the amount of premium on fresh issue after redemption, should be credited to securities premium a/c and face value to share capital account.

81. X Ltd. forfeited 700 shares of ₹ 10 each (9 called up) on which he paid up ₹ per share. Out of these 200 shares were re-issued at ₹ 9. Calculate the amount credited to Share Capital A/c at time of re-issued?
(a) ₹ 6,300
(b) ₹ 4,300
(c) ₹ 1,800
(d) ₹ 2,000
Answer:
(d) ₹ 2,000
Entry for reissue of forfeited shares will be :

Bank A/c (200 x 9)	Dr.	1,800
Share Forfeiture. A/c (200 x 1)	Dr.	200
To Share Capital A/c (200 x 10)			2,000

Hence, option (d) will be correct

82. Y Ltd. forfeited 300 shares of ₹ 10/- each for non-payment of allotment money of ₹ 4/-, first call and second call of ₹ 2/- each. All the shares were re-issued @₹ 10 paid up. Calculate the amount transferred to capital reserve.
capital reserve.
(a) ₹ 800
(b) ₹ 900
(c) ₹ 1,800
(d) ₹ 600
Answer:
(d) ₹ 600
Entry for share forfeiture:

Share Capital A/c (3,00 x 10)	Dr.	3,000
To Share forfeiture (300 x 2)			600
To Share Allotment (300 x 4)			1,200
To Share Calls A/c (300 x 4)			1,200

Entry for reissue of forfeited shares:

Bank A/c	Dr.	3,000
To Share Capital A/c (300 x 10)			3,000

Entry for transfer of share forfeiture balance:

Share forfeiture A/c	Dr.	600
To Capital Reserve A/c			600

83. Gas Ltd. issued 1,00,000 equity shares of ₹ 10 each payable as follows: ₹ 3 on application, ₹ 3 on allotment, ₹ 2 on first call and ₹ 2 on second and final call. The Company received application for 1,50,000 shares. The allotment was made as under:
Applicants for 50,000 shares were allotted in full. Applicants for 80,000 shares were allotted 50,000 shares on pro-rata basis and applicants for 20,000 shares were rejected. The amount of excess application money available for adjustment against allotment is:
(a) ₹ 50,000
(b) ₹ 90,000
(c) ₹ 60,000
(d) ₹ 40,000
Answer:
(b) Journal Entries:

[Being the transfer of surplus application money received on 1,00,000 shares.]
So, the amount of excess application money available for adjustment against allotment is ₹ 90,000.

84. Dabur Ltd. forfeited 400 shares of ₹ 10 each fully called up on which the holder has paid only application money at ₹ 4 per share. Out of these 250 shares were re – issued at ₹ 12 per share fully paid up. Capital reserve will be credited by:
(a) ₹ 3,000
(b) ₹ 1,600
(c) ₹ 4,800
(d) ₹ 1,000
Answer:
(d) ₹ 1,000
Journal Entries

W.N:
400 shares = ₹ 1,600
1 Share = ₹ \(\frac { 1,600 }{ 400 }\)
250 Shares = ₹ \(\frac { 1,600 }{ 400 }\) x 250 = ₹ 1,000

85. A new company wants to issue share at premium. The maximum rate of premium will be?
(a) No limit
(b) 10%
(c) 30%
(d) 15%
Answer:
(a) No limit
The Companies Act requires that when a company issues shares at a premium whether for cash or otherwise, a sum equal to the aggregate amount of the premium collected on shares must be credited to a separate account called “Securities Premium Account”. There are no restrictions in the Companies Act on the issue of shares at a premium, but there are restrictions on its disposal.
So, the maximum rate of premium will be having no limit.

86. Forfeited shares account (not yet re-issued) shown under the heading _________.
(a) Current liabilities
(b) Reserves and surplus
(c) Share capital
(d) Long- term borrowings
Answer:
(c) Share capital
Forfeited shares account (not yet re-issued) shown under the heading Share Capital by way of addition to the paid-up share capital on the liabilities side, until the concerned shares are re-issued.

87. Pious Limited purchases a machine worth ₹ 1,15,000 from Indigo Traders. Payment was made as ₹ 10,000 by cheque and the remaining by issue of equity shares of the face value of ₹ 10 each fully paid – up at an issue price of ₹ 10.50 each. Amount of share premium would be:
(a) ₹ 5,000
(b) ₹ 6,000
(c) ₹ 7,000
(d) ₹ 4,000
Answer:
(a) ₹ 5,000
The following entry will be passed:

Machinery A/c Dr.	1,15,000
To Bank A/c	10,000
To Equity Share Capital A/c	1,00,000
To Securities Premium A/c	5,000

[Being machinery purchased by cheque of ₹ 10,000 and the remaining by issuing 10,000 equity shares @ ₹ 10 face value and ₹ 0.50 as a premium.]

88. As per Section 52 of the Companies Act, 2013, the securities premium reserve can be utilised for the purpose of:
(a) Redemption of preference shares
(b) Transfer of amount to capital redemption reserve
(c) Payment of dividend on preference shares
(d) Payment of premium on redemption of preference shares.
Answer:
(d) Payment of premium on redemption of preference shares.
Securities premium can be utilised only for:

• issuing fully paid shares to members.
• writing off the balance of preliminary expenses of the company.
• writing off commission paid/discount allowed/expenses incurred on issue of shares or debentures of the company.
• for providing for the premium payable on redemption of preference shares.
• for purchase of its own shares.

89. Which of the following statement is not correct?
(a) Equity shares are convertible
(b) Equity shares have voting rights
(c) Equity shares are also known as ordinary shares
(d) Equity shareholders get dividend.
Answer:
(a) Equity shares are convertible
Equity shares are not convertible shares where as preference shares are convertible, they can be converted into equity shares but equity cannot be converted into preference shares.

90. XYZ limited issued 20,000 shares of ₹ 10 each. It received applications for 24,000 shares. Shares were allotted to all shareholders proportionately. The application money was ₹ 6 and allotment and call money was ₹ 4 per share. Ram who was allotted 300 shares could not pay the allotment money. The money due to Ram would be:
(a) ₹ 1,800
(b) ₹ 1,200
(c) ₹ 1,440
(d) ₹ 840
Answer:
(d) ₹ 840
20000 shares allotted ⇒ 24,000 application
if: 300 shares allotted ⇒ \(\frac{24,000}{20,000}\) x 300
= 360 applied
x 6
1.800
⇒ ₹ 360 excess x 6 = 2,160
Amount not paid by Ram on allotted
300 x 4 = 1,200
Excess money given on application by Ram is ₹ 360 will be subtracted Ram ₹ 1,200.
1,200 – 360 = 840.
Amount due by Ram is ₹ 840.

91. Star Ltd. issued 80,000 equity shares of ₹ 10 each. The money was payable as ₹ 3 on application, ₹ 4 on allotment, ₹ 2 on first call and ₹ 1 on final call. The applications were received for 1,20,000 shares. Applicants of 20,000 shares were allotted in full. Applicants of 80,000 shares were allotted 60,000 shares on prorata basis and applications for 20,0 shares were rejected. Amount to be refunded by the company is:
(a) NIL
(b) ₹ 1,80,000
(c) ₹ 60,000
(d) ₹ 1,20,000
Answer:
(c) ₹ 60,000
20,000 shares were rejected, ₹ 3 on application
20,0 x 3 = ₹ 60,000
Amount of refund is ₹ 60,000/-

92. Large Ltd. issued 25,000 equity shares of ₹ 100 each at a premium of ₹ 15 each payable as ₹ 25 on application, ₹ 40 on allotment and balance in the first call. The applications were received for 75,000 equity shares. The above is the case of:
(a) Forfeiture of shares
(b) Pro-rata allotment
(c) Over-subscription
(d) Under-subscription.
Answer:
(c) Over-subscription
When no. of applications received by company is more than no. of share issued by company it is case of over subscription, where large no. of applicants subscribe for no. of shares issued by company.

93. Which of the following statement is not true:
(a) When the shares are forfeited securities premium is debited along with share capital where premium has not been received
(b) Where all the forfeited shares are not re-issued the share forfeited
(c) Loss on re-issue of shares cannot be more than the gain on forfeiture of those shares
(d) Where forfeited shares are re-issued at premium, the amount of such premium is credited to capital reserve account.
Answer:
(d) Where forfeited shares are re-issued at premium, the amount of such premium is credited to capital reserve account.
When forfeited shares are re-issued at a premium, then such premium amount should be credited to securities premium account and not to capital reserve account.

94. The amount paid in advance by a shareholder is called:
(a) Called up capital
(b) Prepaid capital
(c) Calls in advance
(d) Unpaid capital
Answer:
(c) Calls in advance
If authorised by the articles, a company may receive from a shareholder the amount remaining unpaid on shares, even though the amount has not been called-up. This is known as calls-in- advance.

95. Nominal capital is also known as _________.
(a) Authorized capital
(b) Issued capital
(c) Preference capital
(d) None of the above
Answer
(a) Authorized capital
Nominal capital refers to that amount which is stated in the memorandum of association as the Share Capital of the company. The company is registered with this amount of capital. This is the maximum limit of capital which the company is authorised to issue and beyond which company can not issue share. This is also known as authorised capital.

96. A company forfeitured 100 equity shares of ₹ 100 each issue at premium of 50% on which first call of ₹ 30 per share was not received, final call of ₹ 20 is yet to be made. These shares were subsequently reissued @ ₹ 70 per share @ ₹ 80 paid up. The amount credited to capital reserve:
(a) ₹ 4,000
(b) ₹ 2,000
(c) ₹ 3,000
(d) None
Answer:
(a) ₹ 4,000
Following entries will be required:

97. A company issued 5000 shares. Application were received for 6000 shares and company made pro-rata allotment. D a shareholder was allotted 600 shares. Find the applied no. of shares by him:
(a) 820
(b) 720
(c) 900
(d) 800
Answer:
(b) 720
5,000 shares allotted = 6,000 Application
If, 600 Shares allotted = \(\frac{6,000}{5,000}\) x 600
= 720 Applied

98. A company issued ₹ 9,00,000 shares. Offer came for ₹ 8,50,000 shares. Face value is ₹ 10.per share. Application ₹ 2, allotment is ₹ 4 balance in 2 equal calls. Amount transferred to share capital:
(a) ₹ 90,00,000
(b) ₹ 85,00,000
(c) ₹ 80,00,000
(d) ₹ 1,00,00,000
Answer:
(b) ₹ 85,00,000
The Share Capital Account will be credited by number of shares issued multiplied by face value. Excess price over face value will be credited to Security Premium Account. Thus, amount transferred to share capital should be ₹ 85,00,000.

99. If a company issued ₹ 10,000, the application is received for ₹ 12,000 shares, company made pro-rata allotment for applicants of ₹ 6,000 and allotted them ₹ 5,000 shares. Rest applicants were allotted in full. Amount adjusted against allotment is it application is for ₹ 2.
(a) ₹ 2,000
(b) ₹ 1,000
(c) ₹ 3,000
(d) ₹ 1,500
Answer:
(a) ₹ 2,000
Journal Entries:

So, the amount adjusted against allotment is ₹ 2,000.

100. D/P limited issued 10,000 equity shares of ₹ 10 each at a premium of 20%. The share amount was payable as ₹ 2 on application ₹ 5, on allotment (including premium) ₹ 3 on first call and ₹ 2 on second and final call. Application were received for 14,000 shares and shares were allotted to applicants on pro-rata basis. “E” who was allotted 3,000 shares failed to pay the first call. On his subsequent failure to pay the second and final call, all his shares were forfeited. Out of the forfeited shares 200 shares were reissued at the rate of ₹ 9 share. The amount transferred to capital reserve is:
(a) ₹ 200
(b) ₹ 1,100
(c) ₹ 800
(d) 1,300
Answer:
(c) ₹ 800

101. A Co. issues shares of f 10 each at a premium of ₹ 2. The amount was payable as on application of ₹ 3, on allotment ₹ 4 (including premium), on 1st call ₹ 3 and on second and final call ₹ 2. Mr. E who holds 100 shares failed to pay first call money. The Co. has forfeited 100 shares after the first call on forfeiture, the amount debited to share capital account will be:
(a) ₹ 700
(b) ₹ 1,200
(c) ₹ 1,000
(d) ₹ 800
Answer:
(d) ₹ 800

Therefore, amount debited to Share Capital A/c at the time of forfeiture will be ₹ 800.

102. A Co. invited application for 20,000 shares and it received 60,000 application. The shares were allotted as per details given below. Category A – shares applied 40,000 shares allotted 10,000. Category B – shares applied 15,000 shares allotted 10,000. Category C – shares applied 5,000 shares allotted nil. Ram lies in category B and has been allotted 300 shares. The no. of shares applied by him would be:
(a) 100
(b) 450
(c) 300
(d) 200
Answer:
(b) 450
In Category B 10,000 shares have been allotted to the applicants of 15,0 shares. Mr. Ram in this category has been allotted 300 share therefore he must have applied for:
300 x \(\frac { 15 }{ 10 }\) = 450 shares

103. Which of the following statement in false about calls in advance?
(a) According to Table F, maximum interest on calls in advance is paid @12%p.a.
(b) Payment of interest on calls in advance is at the discretion of the company
(c) Interest on calls in advance is paid from the date of receipt of call upto the date of relevant call
(d) Calls in advance are not entitled for any dividend.
Answer:
(b) Payment of interest on calls in advance is at the discretion of the company
The amount received as calls-in-advance is a debt of the company, the company is liable to pay interest on the amount of calls-in- advance from the date of receipt till the date when the call is due. Generally, Articles of the company specify the rate at which interest is payable. If articles do not contain such rates. Table F will be applicable which leaves the matter to the Board of Director.

104. Which of the following statement is true?
(a) Reserve capital can’t be called when required
(b) in case of under subscription pro-rata allotment can be made
(c) A Co. can’t issue shares at a discount
(d) Authorized capital can never be less than subscribed capital.
Answer:
(d) Authorized capital can never be less than subscribed capital.
Authorized capital refers to that amount which is stated in the MOA as share capital of the company. This is the maximum limit of capital which the company is authorized to issue and beyond which the company cannot issue shares unless capital clause is amended. Thus, it can never be less than a subscribed capital.

105. A Ltd. Company forfeited 1000 equity shares of ₹ 10/- each, issued at a premium of 10% for non-payment of first call of ₹ 2/- and second call of ₹ 31- share. For recording this forfeiture, Calls-in-Arrear A/c will be Credited by:
(a) ₹ 10,000
(b) ₹ 4,000
(c) ₹ 5,000
(d) ₹ 7,000
Answer:
(c) ₹ 5,000
When calls are made share allotted, the share holders are bound to pay the call money within date fixed. If shareholder make a default then the amount is transferred to Call in Arrears.
Calls in Arrears = No. of Share x Amt. of Non Payment per share
= 1,000 x (2 + 3)
= 1,000 x 5
= 5,000

106. As per Companies Act, 2013 the interest on calls-in-advance is paid for the period from the:
(a) Date of receipt of allotment money to the date of appropriation.
(b) Date of receipt of calls-in-advance to the date of appropriation of the call.
(c) Date of receipt of application money to the date of appropriation.
(d) Date of appropriation to the date of dividend payment.
Answer:
(b) Date of receipt of calls-in-advance to the date of appropriation of the call.
As per Companies Act, 2013, the interest on call in advance is paid for the period from the date of receipt of call In advance to the date of appropriation of the call.
The call received in advance is a debt of the company and the company is liable to pay interest on the amount.

107. The maximum amount beyond which a company is not allowed to raise funds by issue of its shares (on face value) is called:
(a) Authorized Capital
(b) Called-up Capital
(c) Paid-up Capital
(d) Subscribe Capital
Answer:
(a) Authorized Capital
This is the maximum limit of capital which the company is authorise to issue and beyond which a company cannot issue shares to raise funds. Thus, Maximum limit is called Authorised Capital.

108. Biscuits Limited invited applications for 5000 shares of ₹ 10/- each at a premium of ₹ 21- share. The amount was payable as ₹ 5/- (including premium) on applicants, ₹ 41- on allotment and ₹ 3/- on final Call Allotment was made on prorata bases to the application of 6000 shares. Mr. C to whom. 60 shares were allotted, failed to pay allotment money and call money. Mr. D the holder of 100 share, failed to pay the call money. All these shares were forfeited after proper notice of forfeiture, the amount credited to share forfeiture account will be:
(a) ₹ 300
(b) ₹ 880
(c) ₹ 940
(d) ₹ 320
Answer:
(c) ₹ 940

Amount of money received from Mr. C holder of 60 shares = ₹ 240
Mr. C applied for 72 shares for which he paid ₹ 360
Excess money adjusted against allotment = ₹ 60
Mr. D a holder of 100 shares paid Application and Allotment money i.e. ₹ 7 per share excluding premium = ₹ 7 x 100 = 700

109. When there is an increase in the minimum capital with which the company is registered is to be altered.
(a) Memorandum of association
(b) Article of association
(c) Paid up capital
(d) Subscribed capital.
Answer:
(a) Memorandum of association
When there is any change in the minimum capital with which the company is registered then there is a need to alter the MOA. The company shall file a notice in the prescribed form with the registrar within a period of 30 days of such increase along with a copy of altered MOA.

110. Star Ltd. issued 80,000 equity shares of ₹ 10 each. The money was payable as ₹ 3 on application, ₹ 4 on allotment, ₹ 2 on first call and ₹ 1 on final call. The applications were received for 1,20,000 shares, Applicants of 20,000 Shares were allotted in full. Applicants of 80,000 were allotted 60,000 shares on pro-rata basis and applications for 20,000 Shares were rejected. Amount to be refunded by the company is:
(a) ₹ 1,80,000
(b) ₹ 60,000
(c) Nil
(d) ₹ 1,20,000
Answer:
(b) ₹ 60,000
Refund
20000 share x 3 = ₹ 60,000

111. A Shareholder does not pay his dues on allotment. For the amount due, there will be a _________.
(a) Debit balance in the share allotment account
(b) Credit balance in the share allotment account
(c) Credit balance in the share forfeiture account
(d) Debit balance in the share forfeiture account
Answer:
(a) Debit balance in the share allotment account
In case a share holder does not pay his dues on allotment, there will be a debit Balance in Share Allotment Account.

112. Oil Ltd. issued 1,00,000 equity shares of ₹ 100 each. The money was payable as follows:
On application ₹ 20 on allotment ₹ 30. On first call ₹ 20 and on second and final call ₹ 30. Applications were received for 2,00,000 shares and pro-rata allotment was made to applicants of 1,50,000 shares. Excess money received on application was utilized towards allotment money. The amount adjusted towards allotment is:
(a) ₹ 10,00,000
(b) ₹ 20,00,000
(c) ₹ 18,00,000
(d) ₹ 15,00,000
Answer:
(a) ₹ 10,00,000
Amount Adjusted towards allotment
= Excess Application x Application Money
= (2,00,000 – 1,50,000) x 20
= 50,000 x 20
= ₹ 10,00,000

113. Which of the following statement is true?:
(a) A company cannot reissue shares at discount
(b) Reserved capital cannot be called when required
(c) Authorized capital can never be less than issued capital
(d) In case of under subscription pro-rata allotment can be made.
Answer:
(c) Authorized capital can never be less than issued capital
Point c is true.
Authorised capital can be equal to issued capital but it can never to less than issued capital.

114. The discount allowed on re-issue of forfeited shares is debited to _________.
(a) General reserve account
(b) Share forfeiture account
(c) Capital reserve account
(d) Revaluation reserve account
Answer:
(b) Share forfeiture account
The Discount allowed on reissue of forfeited shares is debited to share forfeiture Accounts.

115. XY Limited issued 2,50,000 equity shares of ₹ 10 each at a premium of ₹ 1 each payable as ₹ 2.5 on Application ₹ 4 on allotment and balance on the first and final call. Application will received for 5,00,000 equity shares but the company allotted to them only 2,50,000 shares. Excess money was refunded after adjustment for further calls. Last call on 500 shares were not received and share were forfeited after due notice. This is a case of:
(a) Over subscription
(b) Pro-rata Allotment
(c) Forfeiture of shares
(d) All of the above
Answer:
(d) All of the above
When application of shares is more than the shares issued then it is said to be our subscription. Pro-rata allotment means reject more applications after adjustment to allotment and further calls. Forfeiture of shares means to take back the shares from the shareholders by a company if he unable to pay calls of shares in a reasonable time.
In this question, all cases are shown
(a) Over – Subscription (2,50,000 shares issued, 5,00,000 received by company)
(b) Pro-rata Allotment (2,50,000 issued and excess money refunded)
(c) Forfeiture of shares (500 shares forfeited)

116. Z Limited forfeited 200 fully called up shares of ₹ 10 each on which ₹ 1,300 had been received later on these shares were reissued as fully paid up @ ₹ 9 per share. The amount to be transferred from share forfeited account to capital reserve account will be:
(a) ₹ 1,800
(b) ₹ 2,000
(c) ₹ 1,100
(d) Nil
Answer:
(c) ₹ 1,100

117. Omega Limited, a listed company acquires assets worth ₹ 7,50,000 from Alpha Limited and issue shares of ₹ 10 each at a premium of 25%. The number of shares to be issued by Omega Ltd. to settle the purchase consideration will be:
(a) 60,000
(b) 75,000
(c) 1,00,000
(d) 1,25,000
Answer:
(a) 60,000
Assets worth ₹ 7,50,000 acquired by Omega Ltd., listed company from Alpha Limited.
Omega Ltd., issued Shares of ₹ 10 each at 25% premium.
No. of Shares issued by Omega Limited to settle purchase consideration
= \(\frac{7,50,000}{12.5}\)
= 60,000 Shares.

118. E Ltd. had allotted 10,000 shares to the applicants of 14,000 shares on pro-rata basis. The amount payable on application was ₹ 2. F applied for 420 shares. The number of shares allotted and the amount carried forward for adjustment against allotment money due from F will be:
(a) 60 shares ₹ 120
(b) 340 shares ₹ 160
(c) 320 shares ₹ 200
(d) 300 shares ₹ 240
Answer:
(d) 300 shares ₹ 240

Excess Shares = 420 – 300
= 120 Shares.
Application was of ₹ 2
Amount carried forward for 300 Shares after adjustment against allotment is 120 x 2 = ₹ 240
300 shares – ₹ 240

119. A company forfeited 1,000 shares of ₹ 10 each (which were issued at par) held by Saurabh for non-payment of allotment money of ₹ 4 per share. The called-up value per share was ₹ 8. On forfeiture, the amount debited to Share Capital account will be:
(a) ₹ 10,000
(b) ₹ 8,000
(c) ₹ 2,000
(d) ₹ 18,000
Answer:
(b) ₹ 8,000
At the time of forfeiture of shares, the share capital account is debited with the value called-up on the shares upto the forfeiture.
Thus, share capital will be debited by 1000 shares @ 8/- 8,000/-
Share Capital A/c Dr. 8,000
(1000 x 8)
To Share Forfeiture a/c 4,000
(1000 x 4)
To Calls-in-arrear a/c 4000

120. The maximum amount beyond which is company is not allowed to raise funds by issue of its shares, is called:
(a) Subscribed capital
(b) Called-up capital
(c) Paid-up capital
(d) Authorised capital
Answer:
(d) Authorised capital
Authorized Capital refers to that capital which is mentioned in Memorandum of Association. This is maximum capital limit which the company is authorized to issue and beyond which the company cannot issue shares.

121. Pious Limited purchases a machine worth ₹ 1,15,000 from Indigo Traders. Payment was made ₹ 10,000 by cheque and the remaining by issue of equity shares of the face value of ₹ 10 each fully paid-up at an issue price of ₹ 10.50 each. Amount of share premium would be:
(a) ₹ 6,000
(b) ₹ 5,000
(c) ₹ 7,000
(d) ₹ 4,000
Answer:
(b) ₹ 5,000

122. Calls-in advance is _________ Calls in Arrears A/c _________.
(a) 10%; 6%
(b) 6%; 5%
(c) 4%; 5%
(d) 10%; 12%
Answer:
(d) 10%; 12%
According to Companies Act, 2013, a company pay interest @ 12% p.a for calls in-advances and charge interests @ 10% in Calls-in-Arrear A/c.

Go through this Partnership Accounts-Dissolution of a Firm – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

Partnership Accounts-Dissolution of a Firm – CS Foundation Fundamentals of Accounting Notes

Topic:
Important highlight:
1. Dissolution of a firm means putting an end to the partnership i.e. closing down the firm as a whole.

2. When the firm is dissolved, all assets are disposed off and all liabilities are paid off.

3. Dissolution of partnership is different from dissolution of a firm.

Dissolution of Partnership	Dissolution of Firm
(1) The partnership dissolves but the business of the firm is continued.	The business of the firm comes to an- end.
(2) Partnership among partners does not exist.	The partnership does not comes to an end but the business comes to an end.
(3) Dissolution of partnership may occur because of expiry of the term, death, retirement or insolvency of the partner.	Dissolution of firm may occur due to the following reasons – mutual agreement, insolvency of all partners except one, business of firm become illegal, etc.

Note : Dissolution of a partnership does not necessarily means dissolution of a firm whereas dissolution of a firm necessarily implies dissolution of partnership. However if, after dissolution of partnership the partners are not willing to carry on the business then, the firm automatically dissolves.

Types of dissolution:

• Voluntary dissolution
• Forced dissolution

(i) Voluntary dissolution:

• This occurs when the partners mutually decide to dissolve the firm.
• In case the partnership is at will then any partner can give notice of dissolution and the firm will be dissolved there after.

(ii) Forced dissolution:
(a) When the court orders dissolution, it is known as forced dissolution.
The court may order dissolution based on following reasons:

• Where a partner has become of unsound mind
• Where partner suffers from permanent incapacity
• Where a partner is guilty of misconduct affecting business.
• Where the court thinks that the dissolution is just and equitable.
• Where the partners disregard the partnership agreement
• Where any of the partner transfers his share to a third person
• Where the business cannot be carried on except for loss i.e. there is no profit.

(b) Where all the partners except one become illegal

(c) Where the business of the firm is declared as illegal.

Settlement of Accounts:
According to Section 48, in setting the accounts of a firm after dissolution. The accounts will be settled as follows:
1. All assets will be disposed off and liabilities paid off.

2. From the amount realized from the sale of assets the payment to the third parties will be made.

3. Any surplus remaining after settling the claims of the third parties, the remaining amount will be distributed among the partners.

Revaluation Account	Realisation Account
It records the effect of assets and liabilities.	It records the sale of assets and liabilities.
It is prepared at the time of reconstitution of the firm.	It is prepared at the time of dissolution of the firm.
It contains only those assets and liabilities which are revalued.	It generally contains all the assets and liabilities.
On revaluation, the accounts of the assets and liabilities are not closed.	On preparing the realisation account the accounts of assets and liabilities are closed.
It is prepared to find out the profit or loss on revaluation of the assets.	It is prepared to calculate the profit or loss on sale of assets and settlement of liabilities.
The balance of this A/c is transferred to the old partner’s Capital A/c.	Accounting entries are made at the book values of asset and liabilities.

Some General Principles Regarding Settlement of Accounts:
(a) Losses or any deficiencies of capital shall be first paid out of profits, then out of capital and lastly, by the partners individually.

(b) The amount realized from sale of assets shall be applied in the following order-

• for paying debts of the firm due to third parties.
• for paying any loans or advances which the firm has taken from partners
• for paying partner’s capital.
• any surplus remaining after that shall be distributed among partners in their profit sharing ratio.

(c) The private property of the partners shall be first used for paying private debts first and remaining amount can be used for paying firm’s liabilities.
Similarly, firm’s asset should first be used for paying firm’s liabilities.

(d) The liabilities of the partners are joint and several.

Accounting Treatment on Dissolution:

• Preparation of Realization Account for settling assets and liabilities.
• Transfer of’profit/loss on realization to Partner’s Capital A/c.
• Repayment of loans of the partners.
• Transfer of accumulated reserves and profit or loss to the capital account of partners.
• Closing the books of account by paying the balances to the partners.

After all above treatments, the books of account will close.
1. Preparation of Realization Account:
(a) For transfer of assets to Realization A/c:
Realization A/c Dr. (at book values)
To Asset A/c

Note:

• Cash and bank balances should not be transferred as they are realized assets.
• Debit balance of P/L A/c should not be transferred.

(b) For sale or disposal of assets:
Cash A/c Dr. (actual sale proceeds)
To Realization A/c

(c) For assets taken over by the partner:
Partner’s Capital A/c Dr. (at agreed value)
To Realization A/c

(d) For transfer of liabilities to realization:
Liability A/c Dr.
To Realization A/c

Note : Only outside liabilities are transferred. Partners Capital A/c and Loan A/c are not transferred.

(e) For payment of liabilities:
Realization A/c Dr.
To Cash A/c

(f) For payment of unrecorded liabilities:
Realization A/c Dr.
To Cash A/c

(g) For sale of unrecorded assets:
Cash A/c Dr. (actual sale proceeds)
To Realization A/c

(h) For any liability assumed by a partner:
Realization A/c Dr.
To Partner’s capital A/c

(i) For payment of realization expenses:
Realization A/c Dr.
To Cash A/c

(2)
(1) For profit on realization:
Realization A/c Dr.
To Partners Capital A/c

(2) For loss on realization:
Partners Capital A/c Dr.
To Realization A/c

(3) Repayment of partner’s loan A/c:
Partners Loan A/c Dr.
To Cash A/c

(4) For transfer of undistributed profits and reserves:
Profit/Loss/Reserve A/c Dr.
To Partners Capital A/c

(5) Settlement of partner’s capital A/c:
(i) If the capital A/c is showing a credit balance
Partner’s Capital A/c Dr.
To Cash A/c

(ii) When the capital A/c shows a debit balance – the partners will be asked to bring sufficient cash to make up the deficiency.
Cash A/c Dr.
To Partner’s Capital A/c

Return of premium on dissolution:
1. Sometimes, an incoming partner pays goodwill to another partner on the assurance that firm will be carried on for a fixed time period.

2. If the firm dissolves before that fixed period then that partner is entitled to claim refund for the goodwill paid by him.

3. If a partner on his admission pays to the other partner an amount for goodwill (also known as premium) and it is agreed that the partnership would be for a fixed term.

4. This refund cannot be claimed:

• When firm is dissolved due to death of a partner.
• When dissolution takes place because of misconduct of the partner making the claim.
• Where dissolution is in pursuance of an agreement that no such refund will be made.

Insolvency of Partner:
1. Insolvency means when nothing can be recovered from a partner.

2. Insolvency can be:

• of a single partner
• of all the partners

(a) Insolvency of a partner

• When dissolution occurs, any amount is due from a partner and he becomes insolvent then, this will be treated as a loss which will be borne by the remaining solvent partners in the Profit sharing ratio.
• The above treatment was changed after the decision of famous case of “Garner Vs Murray”.

Decision of the case: Garner Vs. Murray –

• Loss on realization will be borne by all the partners including the insolvent partner in their profit sharing ratio.
• The solvent partners should then bring in cash equal to their share of realization.
• The deficiency of the insolvent partner must be shared by solvent partners in their capital ratio.

Capital Ratio will be determined based on their capital appearing before dissolution.

In India Garner Vs. Murray Rule is applicable with some modifications:

• Here the loss on realization will not be brought by the solvent partners in cash.
• The deficiency of insolvent partners will be debited to solvent partners in the capital ratio.
• When capital accounts are fluctuating then the balances for determining capital ratio will be taken after necessary adjustments.
• If any partner is having debit balance but is not insolvent, then he will not bear the deficiency of insolvent partner.

Procedure for settlement of account:

• Preparation of Realization Account
• Transfer profit/loss on realization to capital accounts
• Prepare insolvent partners Capital A/c
• The debit balance of insolvent partners capital A/c shall be transferred to solvent partners capital A/c in capital ratio.
• Settle the accounts of solvent partners.

(b) Insolvency of all the partners:

• When all the partners become insolvent, the claims of the creditors will not be satisfied in full.
• Accounting treatment will be done in the following manner
• Prepare Realization A/c (only assets realized and expenses shall be shown in Realization A/c).
• The profit/loss from realization shall be transferred to partner’s capital A/c in profit sharing ratio.
• Prepare Cash A/c and also include the amount which can be recovered from partner’s estate.
• The total cash available shall be distributed to the creditors.
• The balance remaining in the Creditors A/c and Capital A/c of partners shall be transferred to the Deficiency A/c.
• After this, all accounts will be closed.

Steps to be taken for Accounting in case of insolvency:

• Step 1 : Realisation Account is prepared in the usual manner
• Step 2 : Profit/ Loss on realization is transferred to the capital accounts of partners in the profit sharing ratio.
• Step 3 : Insolvent Partner’s Capital A/c is prepared and any thing realised from his personal property is credited to his account. Step 4 : The debit balance of the insolvent partners capital account is transferred to the Capital A/c of other solvent partners in the ratio of their respective capitals before dissolution.
• Step 5 : Claims of the solvent partners are settled there after.

Limited Liability Partnership (LLP):
Limited Liability Partnership entities, the world wide recognized form of business organization has been introduced in India by way of Limited Liability Partnership Act, 2008. A Limited Liability Partnership, popularly known as LLP combines the advantages of both the Company and Partnership into a single form of organization. In all LLP, one partner is not responsible or liable for another partner’s misconduct or negligence; this is an important difference from that of an unlimited partnership.

In an LLP, all partners have a form of limited liability for each individual’s protection within the partnership, similar to that of the shareholders of a corporation. However, unlike corporate shareholders, the partners have the right to manage the business directly. An LLP also limits the personal liability of a partner for the errors, omissions, incompetence, or negligence of the LLP’s employees or other agents.

Limited Liability Partnership is managed as per the LLP Agreement, however in the absence of such agreement the LLP would be governed by the framework provided in Schedule 1 of Limited Liability Partnership Act, 2008 which describes the matters relating to mutual rights and duties of partners of the LLP and of the limited liability partnership and its partners.

LLP has a separate legal entity, liable to the full extent to its assets; the liability of the partners would be limited to their agreed contribution in the LLP. Further no partner would be liable on account of the independent or
un-authorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.

Difference Between Limited Liability Partnership and Partnership Firm:

Basis	Limited Liability Partnership	Partnership Firm
Governing Law	The Limited Liability Partnership Act, 2008 and various Rules made thereunder	The Indian Partnership Act, 1932 and various Rules made thereunder
Registration	Compulsory	Optional
Creation	Created by law	Created by contract
Separate Legal Entity	It is separate legal entity, separate from its partners/designated partners.	It is not separate legal entity from
Perpetual Succession	It has perpetual succession.	Partners are collectively referred as firm.
Common Seal	It denotes the signature of the Company and LLP may have its own common seal, if it besides to have one.	It does not have perpetual succession.
Legal Proceeding	LLP can also sue and be sued	Not required
Liability	Liability of partners is limited up to their capital contribution however in case a partner acts with an intention to conduct fraud, they are personally liable.	Only registered partnership can sue.
Transferability of Interest	Rights/interest of partners are transferable as per the provisions of LLP agreement.	Transferability of Interest subject to the mutual consent of all the members.
Maximum number of Member	No cap of maximum number of its partners.	Maximum 10 for banking business and 20 for other business.

Partnership Accounts-Retirement and Death of a Partner MCQ Questions

1. Retirement or death of a partner.
(a) Is dissolution of partnership agreement
(b) Is dissolution of a firm
(c) May or may not be a dissolution of partnership agreement
(d) None of the above
Answer:
(a) Is dissolution of partnership agreement

2. If all the partners, but one are insolvent it is:
(a) Dissolution of an agreement
(b) Dissolution of firm
(c) May or may not cause dissolution
(d) None of the above
Answer:
(b) Dissolution of firm

3. If all the partners, but one, are solvent it is:
(a) Dissolution of partnership agreement
(b) Dissolution of firm
(c) May or may not cause dissolution
(d) None of the above
Answer:
(b) Dissolution of firm

4. At the time of dissolution:
(a) All the assets are transferred to realization A/c
(b) Only current assets are transferred to realization A/c
(c) Non cash assets are transferred to realization A/c
(d) Only liquid and current asset are transferred to realization A/c
Answer:
(c) Non cash assets are transferred to realization A/c

5. At the time of dissolution non-cash assets are credited with:
(a) Market value
(b) Book value
(c) As the agreed amount among the partners
(d) Cost or market which ever is low
Answer:
(b) Book value

6. If a partner takes over an asset of the firm, his capital account:
(a) Will be debited with the amount as agreed
(b) Will be credited with the market value of the asset
(c) Will be debited with book value of the asset
(d) None of the above
Answer:
(a) Will be debited with the amount as agreed

7. Loss on realization is distributed among partners:
(a) According to profit and loss ratio
(b) According to capital ratio
(c) As decided among them
(d) None of the above
Answer:
(a) According to profit and loss ratio

8. Loss on realization is:
(a) Debited to partners capital A/c
(b) Credited to partners capital A/c
(c) Debited to realization A/c
(d) Credited to realization A/c
Answer:
(a) Debited to partners capital A/c

9. When all partners are insolvent creditors will be:
(a) Paid fully
(b) Paid from private estate
(c) Taken over by the partners
(d) Paid by government
Answer:
(a) Paid fully

10. The persons who have entered into a partnership business are individually called:
(a) Realization A/c
(b) Partners capital A/c
(c) Sundry debtors
(d) Provision for bad debts A/c
Answer:

11. The persons who have entered into a partnership business are individually called:
(a) Vendor
(b) Agents
(c) Partners
(d) A firm
Answer:
(c) Partners

12. If no provision is made in agreement regarding the duration of the partnership:
(a) Limited partnership
(b) Partnership at-will
(c) None
(d) Particular partnership
Answer:
(b) Partnership at-will

13. A person who declares by word of mouth as partner of the firm is called:
(a) Active partner
(b) Estopple partner
(c) Dormant partner
(d) Nominal partner
Answer:
(b) Estopple partner

14. At the time of dissolution all the assets of firm are transferred to the realization A/c:
(a) Market value
(b) Book value
(c) Cost value
(d) Bale value
Answer:
(b) Book value

15. Balance of realization A/c is transferred to the capital A/c of the partners in:
(a) Capital ratio
(b) Profit sharing ratio
(c) Interest Ratio
(d) Equally
Answer:
(b) Profit sharing ratio

16. The decision is Garner Vs. Murray was given in:
(a) 1904
(b) 1905
(c) 1933
(d) 1804
Answer:
(a) 1904

17. The profit/loss revealed by realisation account is transferred to the capital accounts of the partners in:
(a) Profit sharing ratio
(b) Capital ratio
(c) Gaining ratio
(d) Sacrificing ratio
Answer:
(a) Profit sharing ratio

18. What entry will be passed if a partner takes over a liability of a firm?
(a) Debit realisation A/c and credit liability A/c
(b) Debit liability A/c and credit realisation A/c
(c) Debit realisation A/c and credit partner’s capital A/c
(d) Debit partners capital A/c and credit liabilities A/c
Answer:
(c) Debit realisation A/c and credit partner’s capital A/c

19. At the time of realisation, balance standing in the accumulated reserve is transferred to _________.
(a) Balance sheet
(b) P & L A/c
(c) Realisation A/c
(d) Partners capital A/c
Answer:
(d) Partners capital A/c

20. Return of premium on dissolution cannot be allowed if _________.
(a) Firm is dissolved due to the death of a partner
(b) Where the dissolution takes place due to the misconduct of the partner making the claim
(c) Where the dissolution takes place in pursuance of an agreement
(d) All of the above
Answer:
(d) All of the above

21. As per Garner v/s. Murray rule, the loss due to the insolvency of a partner is to be borne by the other partner is _________.
(a) Sacrificing ratio
(b) Capital ratio
(c) Profit sharing ratio
(d) Gaining ratio
Answer:
(b) Capital ratio

22. Which of the following statement is true?
(a) If all the partners are insolvent, then the assets are not transferred to the realisation account
(b) If all the partners are insolvent, then the liabilities are not transferred to the realisation account
(c) Both (a) and (b)
(d) Neither (a) nor (b)
Answer:
(b) If all the partners are insolvent, then the liabilities are not transferred to the realisation account

23. If all the partners become insolvent, then the balance in the capital accounts should be transferred to
(a) Deficiency account
(b) Realisation account
(c) Balance sheet
(d) General reserve
Answer:
(a) Deficiency account

24. Which of the following is true about a partnership –
(a) All partners invest an equal amount of capital in the partnership’s business
(b) All partners are personally liable for the debts of the Partnership business
(c) Partnerships get favourable tax treatment compared to corporations
(d) A partnership requires at least three persons.
Answer:
(b) All partners are personally liable for the debts of the Partnership business
Since contribution to Capital A/c is decided by partner’s in partnership deed so statement. ‘All partners invest an equal amount of capital in the business’ is not correct. Similarly, the statement ‘partnerships get favourable tax treatment compared to corporations’ and ‘A partnership requires atleast three persons’ is not correct because tax levied on firm according to Acts and maximum or minimum numbers of partner in a firm is defined in the Companies Act, 2013.
Thus, option (b) All partners are personally liable for the debts of the partnership business is right.

25. When firm dissolves, then Goodwill is transferred to which A/c?
(a) Realisation A/c
(b) Goodwill A/c
(c) Both (a) and (b)
(d) None of the above.
Answer:
(a) Realisation A/c
When the firm is dissolved, all the assets and liabilities are transferred to Realisation A/c which includes goodwill.

26. When is premium of dissolution is not allowed to partners?
(a) If firm is dissolved due to death of partner
(b) If dissolution takes place due to misconduct of partner making claim
(c) Both (a) and (b)
(d) None of the above.
Answer:
(c) Both (a) and (b)
Premium on dissolution cannot be allowed in the following cases as per Partnership Act:
(a) Firm is dissolved due to death of partner.
(b) When dissolution takes place due to the misconduct of partner’s making claim.
Hence, option (c) is correct.

27. If a partner goes insolvent & is not able to bring his share of deficiency in cash, then his deficiency shall be borne by the remaining solvent partners:
(a) Equally
(b) On the basis of profit sharing ratio
(c) On the basis of their adjusted capital ratio
(d) On the basis of their original investment
Answer:
(c) On the basis of their adjusted capital ratio
In India, it is mentioned in the Partnership deed, that on the insolvency of a partner deficiency of his Capital A/c will be borne in particular ratio, it will be borne accordingly in the case of insolvency of the partner. But if nothing is mentioned about ratio in the partnership deed, the deficiency of the insolvent partner’s capital A/c will be shared by the solvent partners in their capital ratio.

28. When is the realisation A/c made in partnership?
(a) At the time of admission of partner
(b) At the time of death of partner
(c) At the time of retirement
(d) At the time of dissolution of firm.
Answer:
(d) At the time of dissolution of firm.
Realisation A/c is the nominal account prepaid at the time of dissolution of partnership firm showing the realisation of assets and settlement of liabilities. Hence, it is made at the time of dissolution of the firm.

29. Loss on Realisation is:
(a) Debited to Partner’s Capital A/c
(b) Credited to Partner’s Capital A/c
(c) Debited to Partner’s Current A/c
(d) Credited to Partner’s Current A/c
Answer:
(a) Debited to Partner’s Capital A/c
Loss on Realisation is the revenue loss to be debited to Partner’s Capital A/c arising from the realisation of assets & settlement of liabilities.
Hence, option (a) is correct.

30. On dissolution of partnership firm, X one of the partners was to receive ₹ 3,000 as remuneration for the dissolution work, the entry in the books of partnership will be:
(a) Debit x’s Capital A/c ₹ 3,000
Credit Realisation A/c ₹ 3,000
(b) Debit Realisation A/c ₹ 3,000
Credit x’s Capital A/c ₹ 3,000
(c) Debit Revaluation A/c ₹ 3,000
Credit x’s Capital A/c ₹ 3,000
(d) Debit x’s Capital A/c ₹ 3,000
Credit Revaluation A/c ₹ 3,000
Answer:
(b) Debit Realisation A/c ₹ 3,000
Credit x’s Capital A/c ₹ 3,000
The following entry will be passed.
Realisation A/c Dr. 3,000
To X’s Capital A/c 3,000
(Being ₹ 3,000 received as remuneration by X)

31. A Court may dissolve the partnership firm on the grounds of – (i) insanity of a partner (ii) permanent incapacity of partner (iii) misconduct by a partner. The options are:
(a) All (i), (ii) and (iii)
(b) (i) and (iii) only
(c) (ii) and (iii) only
(d) (i) and (ii) only.
Answer:
(a) All (i), (ii) and (iil)
Partnership is dissolved by mutual agreement but in case of insanity of partner, incapacity of partner and misconduct by a partner, court can dissolve partnership.

32. According to Garner vs. Murray rule, realisation loss should be divided among solvent partners _________.
(a) On the basis of their original investments
(b) In profit and loss sharing ratio
(c) In capital ratio
(d) On the basis of their income ratios
Answer:
(b) In profit and loss sharing ratio
Decision of case Garner Vs. Murray –

Loss on realisation will be borne by partners in their Profit Sharing Ratio
The solvent partner should then bring cash equal to their share of realisation
The deficiency must be shared by solvent partner in their Capital Ratio.

33. Realization A/c of partners at the time of dissolution is closed by _________.
(a) Bank A/c
(b) Loan A/c
(c) Partner’s capital A/c
(d) Partner’s loan A/c
Answer:
(c) Partner’s capital A/c
On dissolution, the books of accounts of the partnership firm are closed. “Realisation Account” is opened and transfer to it all the assets except cash in hand and at bank. Sundry Debtors will be transferred at gross amount. Profit or loss revealed by Realisation Account is transferred to all the partners’ capital accounts in their profit sharing ratio. Realisation Account is thus closed.

34. At the time of dissolution all the assets of a firm are transferred to realization A/c _________.
(a) Market value
(b) Cost value
(c) Book value
(d) None of these
Answer:
(c) Book value
Realisation account is prepared to find out the profit (loss) on the realization of assets and settlement of liabilities. Accounting entries are made at the book values of assets and liabilities. The accounts of assets and liabilities are closed on preparation of realization account. Hence, option C is correct.

35. Profit on sale will be debited to?
(a) Depreciation A/c
(b) Fixed asset A/c
(c) Realization A/c
(d) None applicable.
Answer:
(c) Realization A/c
Profit or loss revealed by Realisation Account is transferred to all the partners’ capital accounts in their profit sharing ratio. Realisation Account is thus closed. Thus Transfer profit or loss on realization to all the partners in profit sharing ratio.

36. A partner gave loan of ₹ 20,000 to the firm of dissolution of the firm the net losses of the firm were ₹ 30,000. How much money will the partner get on dissolution?
(a) Nil
(b) 20,000
(c) 20,000 + 6% interest
(d) None of above.
Answer:
(c) 20,000 + 6% interest
Losses shall be paid, first out of profits then out of partner’s capital.
In this question partner gave loan of ₹ 20,000 where firm makes a loss of ₹ 30,000. The money partner get on dissolution will be ₹ 20,000 + 6% of interest.

37. X, Y and Z are partners sharing profits and losses equally. Their capital balances on 31^st March, 2013 are ₹ 80,000, ₹ 60,000 and ₹ 40,000 respectively. Their personal assets are worth as follows: X- ₹ 20,000, Y- ₹ 15,000 and Z-₹ 10,000. In case of dissolution, the extent of their maximum liability in the firm would be (assuming no personal liability)
(a) X – ₹ 1,00,000, Y – ₹ 5,000, Z – ₹ 50,000
(b) X – ₹ 60,000, Y – ₹ 35,000, Z – ₹ 30,000
(c) X – ₹ 20,000, Y – ₹ 15,000, Z – ₹ 10,000
(d) X – ₹ 80,000, Y – ₹ 60,000, Z – ₹ 40,000
Answer:
(c) Maximum liability assuming no personal liability would be:
X ₹ 20,000
Y ₹ 15,000
Z ₹ 10,000

38. X, Y, and Z, are partners sharing profits and losses equality. Their capital balances on March 31.2012 are ₹ 80,000, ₹ 60,000 and ₹ 40,000 respectively. Their personal assets are worth as follows:
X – ₹ 20,000, Y – ₹ 15,000 and Z – ₹ 10,000
The extent of their liability in the firm would be:
(a) X – ₹ 80,000, Y – ₹ 60,000 and Z – ₹ 40,000
(b) X – ₹ 20,000, Y – ₹ 15,000 and Z – ₹ 10,000
(c) X – ₹ 1,00,000, Y – ₹ 75,000 and Z – ₹ 50,000
(d) Equal
Answer:
(d) Equal
Partners profit sharing is equally divided. So, they will share equally in the liability of firm as PSR is equal.

39. The capital for LLP should be _________.
(a) ₹ 1 lakh
(b) ₹ 5 lakhs
(c) No limit
(d) ₹ 15 lakhs
Answer:
(c) No limit
The capital for LLP:
The minimum capital required for limited liability partnership is omitted (No such amount is required; no limit); in latest amendment in LLP Act, 2008. Thus, option (c) is correct.

40. A/c to Garner vs Murray rule. Any deficiency would be shared below partners in _________.
(a) Capital ratio
(b) Profit sharing ratio
(c) Both (a) and (b)
(d) None of the above
Answer:
(a) Capital ratio
Garner v/s Murray rule any deficiency would be shared between partners in:
The Garner vs. Murray rule is applicable in case of dissolution of a firm; the rule says that the loss an account of insolvency of a partner is capital loss which should be borne by solvent partners in the ratio of their capitals. Hence, option (a) is correct.

41. According to Garner Vs. Murray rule, realisation loss should be divided among solvent partner _________.
(a) On the basis of their original investment
(b) In profit and loss sharing ratio
(c) In capital ratio
(d) On the basis of their income ratio
Answer:
(b) In profit and loss sharing ratio
According to Garner vs. Murray Rule: The loss on account of insolvency of a partner is a capital loss which should be borne by the solvent partners in the ratio of their capital standing in the balance sheet on the date of dissolution of the firm.

42. Dissolution of partnership is in which section?
(a) Sec. 39
(b) Sec. 49
(c) Sec. 32
(d) Sec. 31
Answer:
(a) Sec. 39
Section 39 of the Indian Partnership Act, provided that “the dissolution of the partnership between all the partners of the firm is called dissolution of a firm”. It implies the complete break down of the relation of partnership between all the partners.

Go through this Partnership Accounts-Admission of a Partner – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

Partnership Accounts-Admission of a Partner – CS Foundation Fundamentals of Accounting Notes

1. Any change in partnership agreement is known as the reconstitution of partnership.

2. As a result of reconstitution, the existing agreement comes to an end and a new agreement is formed.

Reconstitution may take place because of the following reasons:

• Admission of a new partner
• Retirement of a partner
• Death of a partner
• Change in profit sharing ratio

Admission of a Partner:
Admission means when a new partner enters into the business.

A new partner is needed in the business because of any of the following reasons

• When firm needs‘more capital.
• When an experienced and knowledgeable person is needed in the business.
• For increasing goodwill of the firm by taking any reputed person as partner.
• Any other reason.

Admission of a new partner requires the following adjustments:

• Calculation of new profit sharing ratio
• Transfer of profits and reserves to existing partners
• Revaluation of assets and liabilities
• Treatment of goodwill

Calculation of New Profit Sharing Ratio:

• When a new partner is admitted into the partnership, he acquires his share of profit from the existing partners.
• Due to this, the old partner’s share is reduced, hence a new profit sharing ratio should be calculated.
• After admission, the future Profits/Losses shall be distributed in this new ratio.
• Revaluation of assets and liabilities.
• Treatment of goodwill.

Note: Sacrificing Ratio:
For giving a share of profit to new partner, the old partners have to sacrifice a portion of their share. Therefore, the ratio in which the old partners sacrifice their part is known as the sacrificing ratio.
Sacrificing Ratio = Old Ratio – New Ratio

Example: A, B, C are partners sharing profits in the ratio of 5 : 3 : 2. They admit D into partnership. The new profit sharing ratio of partners is 3 : 2 : 2 : 3. Calculate sacrificing ratio.
Solution:
Sacrificing Ratio = Old Ratio – New Ratio
Sacrifice made by A = \(\frac { 5 }{ 10 }\) – \(\frac { 3 }{ 10 }\) = \(\frac { 2 }{ 10 }\)
Sacrifice made by B = \(\frac { 3 }{ 10 }\) – \(\frac { 2 }{ 10 }\) = \(\frac { 1 }{ 10 }\)
Sacrifice made by C = \(\frac { 2 }{ 10 }\) – \(\frac { 2 }{ 10 }\) = 0.
So sacrificing ratio of A and B is 2 : 1 since C has not sacrificed.

Need for Calculation of Sacrificing Ratio:
→ For distribution of goodwill to old partners.
→ For calculation of new ratio if sacrificing ratio is given.

Calculation of New Profit Sharing Ratio:
Case – 1
When ratio of new partner is given, then in absence of any other agreement, it is presumed that all partners will continue to share remaining profit in the old profit sharing ratio.

Case – 2
When the new partner purchases his share of profit from the old partners in equal ratio.

Case – 3
When the new partner purchases his share from the old partners in a particular ratio.

Case – 4
When the old partners surrender a particular fraction of their share in favour of new partner.

Transfer of accumulated profits and reserves to existing partners:

• At the time of admission of a partner, if there are any accumulated profits or reserves, then they must be transferred to the existing partners’ capital A/c.
• A new partner is not entitled to any such benefit or bear any such liability which occurred before his admission.
• Transfer of reserves is done even when no new partner is admitted but the partner change their profit sharing ratio.

Note: Reason for this is that the reserves and profits were created because of the efforts of the old partners. So, they should be fully utilized by the old partners only. Hence, before a new partner gets admitted, such reserves are distributed among old partners.

(iv) Journal entries effecting such transfer:
(a) For distributing reserves and accumulated profits:
General Reserve A/c Dr.
Reserve Fund A/c Dr.
Profit / Loss (Cr. balance) A/c Dr.
To Old partners’ capital A/c

(b) For transferring accumulated losses:
Old partners’ capital A/c Dr.
To Profit / Loss (Dr. bal.)

(c) For distributing surplus of specific funds:
Workmen compensation fund A/c Dr.
Investment fluctuation fund A/c Dr.
To Old partners’ capital A/c

Revaluation of assets and liabilities:
(i) On admission of a new partner, the assets and liabilities of the firm are revalued to their true and fair figures.

(ii) The value of assets and liabilities may have changed over a period of time.

(iii) The new partner is not to bear any part of profit/loss due to change in value of asset and liability.

(iv) For this purpose, the assets and liabilities are revalued on the admission of the partner and the difference or change in value in form of profit/loss shall be distributed among old partners in the old ratio.
Note:
For this, Revaluation Account is Prepared.

(v) Accounting entries:
(i) For decrease in value of asset:
Revaluation A/c Dr.
To Asset A/c

(ii) For increase in value of asset:
Asset A/c Dr.
To Revaluation A/c

(iii) For increase in value of liability:
Revaluation A/c Dr.
To Liabilities A/c

(iv) For decrease in value of liability:
Liabilities A/c Dr.
To Revaluation A/c

(v) When revaluation A/c shows profit:
Revaluation A/c Dr.
To Old Partners’ Capital A/c [In the old ratio]

(vi) When revaluation A/c shows loss:
Old Partners’ Capital A/c Dr.
To Revaluation A/c
[In the old ratio]

Proforma Revaluation Account

Particulars	₹	Particulars	₹
To Decrease in value of assets. To Increase in value of liabilities. To Unrecorded Liabilities. To Profit on Revaluation transferred to old partners’ capital accounts (in old ratio)		By Increase in value of assets. By Decrease in value of liabilities. By Unrecorded assets. By Loss on Revaluation transferred to old partners’ capital accounts (in old ratio)

Difference between Revaluation A/c and Memorandum Revaluation:

Revaluation A/c	Memorandum Revaluation A/c
Revaluation A/c is prepared to find out the profit and loss on revaluation of assets and liabilities which appear in the new balance sheet at the revalued figures.	It is prepared to record the effect of revaluation of assets and liabilities but they are recorded at their old figures in the new balance sheet.
Revaluation A/c is not divided in parts. The profit or loss of goes to old partners only.	It has two parts. The profit or loss of first part goes to old partners while profit or loss of the second part goes to all the partners including the new partner.

Treatment of Goodwill:
In case of admission of partner-there can be following situations relating to the treatment of goodwill:
(a) When goodwill does not appear in books –

• When the amount of goodwill is paid privately.
• When the new partner brings his share of goodwill in cash.
• When the new partner does not bring his goodwill in cash.

(b) When goodwill already appears in book –
(a) When goodwill does not appears in books
1. When amount of goodwill is paid privately:

• Payment of goodwill privately means that the new partner pays goodwill in cash to the old partners outside the business.
• Since the amount is paid privately outside the business, hence there will be no entry for this in the books of business.

2. When the new partner brings his share of goodwill in cash:

When new partner brings goodwill in cash there can be the following situations
(a) Retained in business –
(i) When new partner brings goodwill in cash
Cash/Bank A/c Dr.
To Goodwill A/c

(ii) Transfer of goodwill to partners’capital A/c
Goodwill A/c Dr.
To Old partners’ A/c
(In sacrificing ratio)

Effect of above two entries:
1. Old partners will be getting goodwill for the share of profit sacrificed by them, from the new partner.

2. Goodwill is transferred to old partners’ account; hence it will be retained in the business.
(b) Withdrawn by old partners:
(i) When goodwill is brought in cash
Cash/Bank A/c Dr.
To Goodwill A/c

(ii) Transfer of goodwill to old partners’ capital A/c
Goodwill A/c Dr.
To Old partners’ capital A/c (In sacrificing ratio)

(iii) When goodwill is withdrawn by old partners
Old partners’ capital A/c Dr.
To Cash/bank A/c

Effect of above entries:

• Old partners will be getting goodwill for the share of profit sacrificed by them for the new partner.
• Since the partners have withdrawn goodwill, hence goodwill is no longer retained in business.

Note :
If some amount is withdrawn, the remaining amount will be retained in business.

Hidden Goodwill:

• Sometimes the value of goodwill is not clearly given in question but is to be inferred from the question.
• In such cases, goodwill is calculated on the basis of total capital of the firm and profit.

Example: A and B are partners with capitals of ₹ 50,000 and ₹ 30,000 respectively. They admit C as partner with share and bring 40,000 as his capital. Calculate goodwill.
Solution :
If C brings ₹ 40,000 for \(\frac { 1 }{ 4 }\)^th share,
So, based on this total capital of firm
= \(\frac { 1 }{ 4 }\) – 40,000
= 1 – 40,000 x 4
= ₹ 1,60,000.
Whereas, total capital of firm after C’s admission = 50,000 + 30,000 + 40,000 = ₹ 1,20,000
Goodwill = ₹ 1,60,000 – ₹ 1,20,000
= ₹ 40,000

Adjustment of old partners’ capital A/c on the basis of new partner:
1. This adjustment is done when it is decided that on admission of new partner, the capital of old partners’ be adjusted on the basis of new partner’s capital to make them proportionate to their share of profit.

2. For this adjustment, there are following steps:

• Step – 1 : Determine the entire capital of the new firm based on new partner’s capital.
• Step – 2 : Determine the capital of each partner by dividing the total capital according to his profit sharing ratio.
• Step – 3 : Ascertain the difference between the old and new capital of old partners.

(i) If old capital is more than the new, the excess amount will be paid off to the partner or credited to his current account.
Old partner’s Capital A/c Dr.
To Bank or partner’s current A/c

(ii) If the old capital is less than the new capital, the capital account of the partner will be increased (either by bringing cash or through current A/c)
Bank A/c or partner’s current A/c Dr.
To Partner’s capital A/c

Partnership Accounts-Admission of a Partner MCQ Questions

1. A new partner may be admitted to partnership:
(a) with the consent of all the old partners
(b) with the consent of any one partner
(c) with the consent of two thirds of the old partners
(d) with the consent of three fourth of the old partners.
Answer:
(a) with the consent of all the old partners

2. The balance of general reserve is to be transferred to the capital accounts of the partners in:
(a) Old profit sharing ratio
(b) New profit sharing ratio
(c) Capital ratio
(d) Sacrificing ratio.
Answer:
(a) Old profit sharing ratio

3. General reserve at the time of admission of a partner is transferred to:
(a) Revaluation account
(b) Partner’s capital accounts
(c) Neither of the two
(d) Profit and Loss Account.
Answer:
(b) Partner’s capital accounts

4. C is admitted in firm for a 1/4 share in the profits for which he brings ₹ 3,000 for goodwill. It will be taken by the old partners in:
(a) Old profit sharing ratio
(b) New profit sharing ratio
(c) Sacrificing ratio
(d) Capital ratio.
Answer:
(c) Sacrificing ratio

5. Goodwill raised by the partners at the time of admission of a partner will be written off in:
(a) Old profit sharing ratio
(b) New profit sharing ratio
(c) Sacrificing ratio
(d) Capital ratio
Answer:
(b) New profit sharing ratio

6. The balance of Memorandum Revaluation Account (second part), is transferred to the capital accounts of the partners in:
(a) Capital ratio
(b) Old profit sharing ratio
(c) New profit sharing ratio
(d) Equal ratio.
Answer:
(c) New profit sharing ratio

7. If the incoming partner is to bring his share of goodwill in cash, and there exists any balance in goodwill account, then this goodwill account is to be written off among old partners in:
(a) New profit sharing ratio
(b) Old profit sharing ratio
(c) Sacrificing ratio
(d) Equal ratio.
Answer:
(b) Old profit sharing ratio

8. A and B share profit and losses equally. They admit C as an equal partner and goodwill was valued as ₹ 30,000. C is to bring in ₹ 30,000 as his capital and necessary cash towards his share of goodwill. What will be the final effect of goodwill in the partner’s capital account?
(a) A and B’s accounts credited with ₹ 5,000 each
(b) All partner’s account credited with ₹ 10,000 each
(c) Only C’s account credited with ₹ 10,000 as cash bought in for goodwill
(d) None of the above.
Answer:
(a) A and B’s accounts credited with ₹ 5,000 each

9. C was admitted in a firm with 1 /4th share of the profit of the firm. C contributes ₹ 30,000 as his capital. A and B are other partners with the profit sharing ratio as 3:2. Find the required capital of A and B, if capital should be in profit sharing ratio taking C’s capital as base capital:
(a) ₹ 54,000 and ₹ 32,000 for A and B respectively
(b) ₹ 54,000 and ₹ 36,000 for A and B respectively
(c) ₹ 64,000 and ₹ 42,000 for A and B respectively
(d) ₹ 62,000 and ₹ 52,000 for A and B respectively.
Answer:
(b) ₹ 54,000 and ₹ 36,000 for A and B respectively

10. X and Y are partners sharing profits in the ratio of 3 : 1. They admit Z as a partner who paid ₹ 40,000 as goodwill, the new profit sharing ratio being 2:1:1 among X, Y and Z respectively. The amount of goodwill will be credited to :
(a) X and Y as ₹ 30,000 and ₹ 10,000 respectively
(b) X only
(c) Y only
(d) None of the above.
Answer:
(b) X only

11. X and Y are partners sharing profit in the ratio of 1 : 1. They admit Z for 1/5th share who contributed ₹ 25,000 for his share of goodwill. The total value of the goodwill of the firm will be:
(a) ₹ 25,000
(b) ₹ 50,000
(c) ₹ 1,00,000
(d) ₹ 1,25,000.
Answer:
(d) ₹ 1,25,000.

12. ‘A’ and ‘B’ are partners in a business sharing profits in the ratio of 5 : 3. They admit ‘C’ as a partner with 1/4 share in the profits which he acquires 3/4 from ‘A’ and 1/4 from ‘B’. He pays ₹ 4,000 as his share of goodwill. ‘A’ and ‘B’ will be credited by
(a) ₹ 2,500 and ₹ 1,500 respectively:
(b) ₹ 2,000 each
(c) ₹ 1,000 and ₹ 3,000 respectively
(d) ₹ 3,000 and ₹ 1,000 respectively.
Answer:
(a) ₹ 2,500 and ₹ 1,500 respectively:

13. A, B and C are equal partners in a firm with capital of ₹ 16,800, ₹ 12,600 and ₹ 6,000 respectively with bills payable ₹ 3,300; creditors ₹ 6,000; cash ₹ 600; debtors ₹ 10,800; stock ₹ 11,400; furniture ₹ 2,400 and building ₹ 19,500. E is admitted to the firm and brings ₹ 9,000 as goodwill and ₹ 15,000 as capital. Half the goodwill is withdrawn by old partners, and stock and furniture is depreciated by 10%. A provision of 5% on debtors is created and value of building is taken at ₹ 27,000. The profit on revaluation will be ________.
(a) ₹ 5,500
(b) ₹ 5,580
(c) ₹ 5,400
(d) ₹ 5,680.
Answer:
(b) ₹ 5,580

14. X and Y are sharing profits in the ratio of 2 : 1. They admit Z into the firm for 1/4 share in profits for which he brings ₹ 12,000 as his share of capital. Hence, the adjusted capital of Y will be –
(a) ₹ 12,000
(b) ₹ 16,000
(c) ₹ 24,000
(d) ₹ 20,000.
Answer:
(a) ₹ 12,000

15. A and B are partners sharing the profits in the ratio 2 : 3. They take C as the new partner who is supposed to bring ₹ 50,000 against capital and 20,000 against goodwill. New profit sharing ratio is 1 : 1 : 1. C is able to bring ₹ 60,000 only. How will this be treated in the books of the firm.
(a) A and B will share goodwill brought by c in the ratio 1 : 4
(b) Goodwill will be raised to ₹ 30,000 in old profit sharing ratio
(c) Both (a) and (b)
(d) None.
Answer:
(c) Both (a) and (b)

16. A and B are partners sharing the profit in the ratio of 3 : 2. They take C as the new partner who is supposed to bring ₹ 25,000 as capital and ₹ 20,000 against goodwill. New profit sharing ratio is 1 : 1 :1. C is able to bring only his share of capital. How will this be treated in the books of the firm.
(a) A and B will be credited by 8,000 and 2,000 for goodwill
(b) Goodwill will be raised to ₹ 30,000 by crediting A and B in old profit sharing ratio
(c) Both (a) and (b)
(d) None.
Answer:
(b) Goodwill will be raised to ₹ 30,000 by crediting A and B in old profit sharing ratio

17. A and B are partners in the ratio of 2 : 1. They admitted C for 1/4 share who contributes ₹ 3,000 for his share of goodwill. The total value of goodwill of the firm is :
(a) ₹ 3,000
(b) ₹ 9,000
(c) ₹ 12,000
(d) ₹ 15,000
Answer:
(c) ₹ 12,000

18. P and Q are partners sharing profits in the ratio of 2 : 1. R is admitted to the partnership with effect from 1st April on the term that he will bring ₹ 30,000 as his capital for 1/5 share and pays ₹ 18,000 for goodwill half of which is to be withdrawn by P and Q. Profit on revaluation is ₹ 6,000 and opening capital of P is ₹ 40,000 and Q 30,000, find the closing balance of each partner’s capital.
(a) ₹ 50,000 : 35,000 : 30,000
(b) ₹ 50,000 : 35,000 : 20,000
(c) ₹ 40,000 : 30,000 : 30,000
(d) ₹ 41,000 : 30,500 : 29,000.
Answer:
(b) 2 : 2 : 3

19. X and Y share profits and losses in the ratio of 4 : 3. They admit Z in the firm with 3/7 share which he gets 2/7 from X and 1/7 from Y. The new profit sharing ratio will be –
(a) 7 : 3 : 3
(b) 2 : 2 : 3
(c) 5 : 2 : 3
(d) 2 : 3 : 3
Answer:
(b) 2 : 2 : 3

20. X and Y are sharing profits and losses in the ratio of 3 : 2. Z is admitted with 1/5th share in profits of the firm which he gets from X. Now, the new profits sharing ratio between X, Y and Z will be ________.
(a) 12 : 8 : 5
(b) 8 : 12 : 5
(c) 2 : 2 : 1
(d) 2 : 2 : 2
Answer:
(c) 2 : 2 : 1

21. A and B are partners in a firm sharing profits in the ratio of 3 : 1. They have agreed to admit C into the partnership firm. C is given 1/4th share of future profits which he acquires in the ratio of 2 : 1 from A and B. The new profit sharing ratio would be:
(a) 4 : 3 : 1
(b) 7 : 2 : 3
(c) 3 : 1 : 7
(d) 7 : 3 : 2
Answer:
(c) 3 : 1 : 7

22. X and Y are partners sharing profits in the ratio 5:3. They admitted Z for 1 /5th profits, for which he paid ₹ 60,000 against capital and ₹ 30,000 against goodwill. Find the capital balance for each partner taking Z’s capital as base capital.
(a) ₹ 1,50,000; 60,000 and 60,000
(b) ₹ 1,50,000; 60,000 and 90,000
(c) ₹ 1,50,000; 90,000 and 60,000
(d) ₹ 1,50,000; 90,000 and 90,000.
Answer:
(c) ₹ 1,50,000; 90,000 and 60,000

23. A and B are partners sharing the profits in the ratio of 3 : 2. They take C as the new partner who brings in ₹ 50,000 against capital and ₹ 20,000 against goodwill. New profit sharing ratio is 1 : 1 : 1. In what ratio will this amount of goodwill be shared among the old partners.
(a) ₹ 16,000, 4,000
(b) ₹ 10,000, 10,000
(c) Old partners will not get any share in the goodwill bought in by C
(d) ₹ 12,000, 8,000.
Answer:
(a) ₹ 16,000, 4,000

24. A and B are partners of a partnership firm sharing profit in the ratio 3 : 2 respectively. C was admitted for 1/5,h share of profit. Machinery would be appreciated by 10% (book value ₹ 80,000) and building would be depreciated by 20% (₹ 2,00,000). Unrecorded debtors of ₹ 1,250 would be bought into books. Profits/Loss on revaluation is :
(a) Loss – ₹ 30,750
(b) loss 40,000
(c) Profits – ₹ 28,000
(d) profits – ₹ 40,000.
Answer:
(a) Loss – ₹ 30,750

25. A and B are equal partners in a firm. They admitted C as one – sixth partner who bought in ₹ 60,000 as goodwill. The new profit sharing ratio is 3 : 2 :1. If goodwill of ₹ 60,000 is to be paid to the old partners as per sacrificing ratio, B will receive:
(a) ₹ 30,000
(b) ₹ 60,000
(c) ₹ 45,000
(d) Nil.
Answer:
(b) ₹ 60,000

26. Goodwill of a firm of A and B is valued at ₹ 30,000. It is appearing in the books at ₹ 12,000, C is admitted for 1/4 share. What amount he is supposed to bring for goodwill?
(a) ₹ 3,000
(b) ₹ 4,500
(c) ₹ 7,500
(d) ₹ 10,500.
Answer:
(b) ₹ 4,500

27. P and Q are partners sharing profits in the ratio of 2 :1. R is admitted to the partnership with effect from 1st April on the terms that he will bring ₹ 30,000 as his capital for 114 share and pays ₹ 18,000 for goodwill, half of which is to be withdrawn by P and Q. How much cash can P & Q withdraw from the firm, if any,?
(a) ₹ 6,000, 3,000
(b) ₹ 12,000, 6,000
(c) Nil
(d) None of the above.
Answer:
(a) ₹ 6,000, 3,000

28. A and B share profits and losses equally. They have ₹ 20,000 each as capital. They admit C as equal partner and goodwill was valued as ₹ 30,000. C is to bring in ₹ 30,000 as his capital and necessary cash towards his share of goodwill. Goodwill Account will not remain open in books. If profit on revaluation is ₹ 13,000, find the closing balance of the capital accounts.
(a) ₹ 31,500; 31,500; 30,000
(b) ₹ 31,500; 31,500; 20,000
(c) ₹ 26,500; 26,500; 30,000
(d) ₹ 20,000; 20,000; 30,000.
Answer:
(a) ₹ 31,500; 31,500; 30,000

29. If A and B who are sharing profits in the ratio of 3 : 1 and they admit C to one – fourth share in the future profits, the new profit sharing ratio shall be .
(a) A : 9/16; B : 3/16; C : 4/16
(b) A : 10/16; B : 2/16; C : 4/16
(c) A : 8/16; B : 4/16; C : 4/16
(d) A : 7/16; B : 5/16; C : 4/16.
Answer:
(a) A : 9/16; B : 3/16; C : 4/16

30. ‘A’ and ‘B’ who are partners, share profits in the ratio of 7 : 3. ‘C’ is admitted as a new partner, ‘A’ Surrenders 1/7 of his share and ‘B’ Surrenders 1/3 of his share in favour of ‘C’, the new profit sharing ratio will be :
(a) 6 : 2 : 2
(b) 4 : 1 : 1
(c) 3 : 2 : 2
(d) None of the above.
Answer:
(a) 6 : 2 : 2

31. Amit and Anil are partners of a partnership firm sharing profits in the ratio of 5 : 3 with capital of ₹ 2,50,000 and ₹ 2,00,000 respectively. Atul was admitted on the following terms. Atul would pay ₹ 50,000 as capital and ₹ 16,000 as goodwill for 1 /5th profit. Find the balance of capital accounts after admission of Atul.
(a) ₹ 2,60,000; 2,06,000; 50,000
(b) ₹ 2,20,000; 1,82,000; 66,000
(c) ₹ 2,92,500; 2,25,500; 50,000
(d) ₹ 2,82,000; 2,10,500; 66,000.
Answer:
(a) ₹ 2,60,000; 2,06,000; 50,000

32. A and B are partners of a partnership firm sharing profits in the ratio of 3 : 2 respectively. C was admitted for 1/5th share of profit. Machinery would be appreciated by 10% (book value ₹ 8,000) and building would be depreciated by 20% (₹ 2,00,000). Unrecorded debtors of ₹ 1,250 would be bought into books now and creditors amounting to ₹ 2,750 died and need not pay anything to its estate. What will be profit/ loss on revaluation?
(a) Loss – ₹ 28,000
(b) Loss – ₹ 40,000
(c) Profits – ₹ 28,000
(d) Profits – 40,000
Answer:
(a) Loss – ₹ 28,000

33. The opening balance of partner’s capital account is credited with:
(a) Interest on capital
(b) Interest on drawings
(c) Profit
(d) All of the above
Answer:
(a) Interest on capital

34. Reserves appearing in the balance sheet will be divided among the partners during admission in:
(a) Gaining ratio
(b) New ratio
(c) Sacrificing ratio
(d) Old ratio
Answer:
(d) Old ratio

35. The balance of memorandum revaluation account is transferred to the capital accounts of the partners in ________.
(a) New profit sharing ratio
(b) Old profit sharing ratio
(c) Capital ratio
(d) Sacrificing ratio
Answer:
(a) New profit sharing ratio

36. The entry for unrecorded investments will be:
(a) Debit partners capital A/c and credit investments A/c
(b) Debit revaluation A/c and credit investment A/c
(c) Debit unrecorded investment A/c and credit revaluation A/c
(d) None of the above
Answer:
(c) Debit unrecorded investment A/c and credit revaluation A/c

37. A, B, C share profit & losses in the ratio of 3:2:1. Z is admitted for 1 /6th share which he gets entirely from A. Find out the new profit sharing ratio.
(a) 2 : 2 : 1 : 1
(b) 3 : 1 : 1 : 1
(c) 2 : 2 : 2 : 1
(d) 2 : 1 : 2 : 1
Answer:
(a) 2 : 2 : 1 : 1

38. A and B are partners sharing profits and losses in the ratio of 3:2. A’s capital is ₹ 1,60,000 and B’s capital is ₹ 1,30,000. They admit C for 1 /5^th share. How much capital should C bring?
(a) ₹ 40,000
(b) ₹ 62,500
(c) ₹ 22,500
(d) ₹ 72,500
Answer:
(d) ₹ 72,500

39. A and B are partners having profit sharing ratio of 1:2. The new profit sharing ratio is 1 : 2 : 3.
Calculate the sacrificing ratio
(a) 1 : 3
(b) 1 : 4
(c) 1 : 2
(d) 2 : 3
Answer:
(c) 1 : 2

40. When the balance sheet is prepared after the new partnership agreement, the assets and liabilities are recorded at:
(a) Historical cost
(b) Current cost
(c) Realisable value
(d) Revalued figures
Answer:
(d) Revalued figures

41. A and B are partners and they admit C with 1 /5th share and C brings ₹ 1,00,000 as his share towards capital. The total net worth of the firm is:
(a) ₹ 5,00,000
(b) ₹ 4,00,000
(c) ₹ 25,000
(d) ₹ 10,00,000
Answer:
(a) ₹ 5,00,000

42. P and Q share profit/loss in the ratio of 5:3. Z, is admitted as a partner for 1/5^th share, which he takes from the old partners equally. New profit sharing ratio will be:
(a) 21 : 11 : 8
(b) 21 : 8 : 7
(c) 15 : 10 : 5
(d) None of the above
Answer:
(a) 21 : 11 : 8

43. A and B are partners. C is admitted with a guaranteed profits of ₹ 10,000 from A and the new profit sharing ratio is 3 : 2 : 1. The net profit for the year is ₹ 1,80,000. How much profit will A & C get respectively:
(a) 40,000 & 30,000
(b) 70,000 & 60,000
(c) 90,000 & 30,000
(d) None of the above
Answer:
(c) 90,000 & 30,000

44. A and B share profits & losses in the ratio of 5:3. P is admitted as the new partner equally. Calculate the new profit sharing ratio:
(a) 20 : 8 : 7
(b) 21 : 11 : 8
(c) 20 : 12 : 18
(d) None of these
Answer:
(b) 21 : 11 : 8

45. P and Q share profits and losses in the ratio of 3 : 2 and their respective capitals are ₹ 1,20,000 and ₹ 54,000. C is admitted for 1 /5^th share and brings ₹ 1,20,000 as his share of capital. Calculate the amount to be refunded to A
(a) ₹ 45,000
(b) ₹ 1,68,000
(c) ₹ 1,00,000
(d) ₹ 1,20,000
Answer:
(b) ₹ 1,68,000

46. A and B share profits/losses equally. They admit C with 1 /5^th share. The new profit sharing ratio will be:
(a) 2:2:1
(b) 2:2:2
(c) 1:2:1
(d) 2:3:1
Answer:
(a) 2:2:1

47. A, B and C are partners sharing profits in the ratio of 3:2:1. They agree to take C in the firm. A, B and C agree to take 1/3^rd, 1 /6^th and 1/9^th share respectively. Calculate the share of D in profits.
(a) 1/10
(b) 11/54
(c) 13/54
(d) 26/54
Answer:
(c) 13/54

48. A and B are partners sharing profits in the ratio of 3 : 2 respectively. C is admitted in the firm for 1 /3^rd share in profits. The new profit sharing ratio amongst A, B and C will be:
(a) 12 : 08 : 05
(b) 08 : 12 : 05
(c) 05 : 05 : 12
(d) None of the above.
Answer:
(d) None of the above.
Old profit sharing ratio of A = \(\frac { 3 }{ 5 }\)
Old profit sharing ratio of B = \(\frac { 2 }{ 5 }\)
New partner C’s profit = \(\frac { 1 }{ 3 }\)
Hence, remaining profit = 1 – \(\frac { 1 }{ 3 }\) = \(\frac { 2 }{ 3 }\)
New Profit sharing ratio of A = \(\frac { 2 }{ 3 }\) x \(\frac { 3 }{ 5 }\) = \(\frac { 6 }{ 15 }\)
New Profit sharing ratio of B = \(\frac { 1 }{ 3 }\) x \(\frac { 5 }{ 5 }\) = \(\frac { 5 }{ 15 }\)
New Profit sharing ratio of C = \(\frac { 1 }{ 3 }\) x \(\frac { 5 }{ 5 }\) = \(\frac { 5 }{ 15 }\)
So, A : B : C = \(\frac { 6 }{ 15 }\) x \(\frac { 4 }{ 15 }\) = \(\frac { 5 }{ 15 }\) = 6 : 4 : 5

49. A’s capital in a business is ₹ 20,000 and B’s capital is ₹ 25,000. Their profit sharing ratio is 4 : 5. They admit C in the firm as a new partner and ask him to contribute ₹ 40,000 for 1/3rd share of profit. Find the premium paid by C on account of goodwill:
(a) ₹ 17,500
(b) ₹ 20,000
(c) ₹ 15,000
(d) None of the above
Answer:
(a) ₹ 17,500
Remaining share of A and B = 1 – \(\frac { 1 }{ 3 }\)
Total capital (after admission of C) = (20,000 + 25,000) x \(\frac { 2 }{ 3 }\)
= 67,500
Capital of C = 67,500 – (20,000 + 25,000) = 22,500
Total contribution of cash by C = 40,000
So, Premium paid by C = 40,000 – 22,500 = ₹ 17,500

50. A and B are partners in a firm having capital balances of ₹ 54,000 and ₹ 36,000 respectively. They admit C in partnership for 1 /3^rd share and C is to bring proportionate amount of capital. The capital amount of C would be:
(a) ₹ 90,000
(b) ₹ 45,000
(c) ₹ 5,400
(d) ₹ 36,000
Answer:
(b) ₹ 45,000
Total capital (before the admission of C)
= 54,000 + 36,000
= ₹ 90,000
Remaining share of A and B = 1 – \(\frac { 1 }{ 3 }\)
= \(\frac { 2 }{ 3 }\) shares
Total capital of the firm (after admission of C) will be = 90,000 x \(\frac { 3 }{ 2 }\)
= ₹ 1,35,000
So, Capital amount of C would be = ₹ 1,35,000 – ₹ 90,000
= ₹ 45,000

51. A and B are partners in a business sharing profits and losses in the ratio of 7 : 3 respectively. They admit C as a new partner A sacrificed Ml’h share of his profit and B sacrificed 1 /3rd of his share in favour of C. The new profit sharing ratio of A, B, and C will be:
(a) 3 : 1 : 1
(b) 2 : 1 : 1
(c) 2 : 2 : 1
(d) None of the above
Answer:
(a) A : B = 7 : 3
A Sacrificing 1/7^th of his share
\(\frac { 7 }{ 10 }\) x \(\frac { 1 }{ 7 }\) = \(\frac { 1 }{ 10 }\)
B Sacrificing 1/3^th of his share
\(\frac { 3 }{ 10 }\) x \(\frac { 1 }{ 3 }\) = \(\frac { 1 }{ 10 }\)
Total Share of C = \(\frac { 1 }{ 10 }\) + \(\frac { 1 }{ 10 }\) = \(\frac { 2 }{ 10 }\)
New share of A = \(\frac { 7 }{ 10 }\) – \(\frac { 1 }{ 10 }\)
= \(\frac { 6 }{ 10 }\)
New share of B = \(\frac { 3 }{ 10 }\) – \(\frac { 1 }{ 10 }\) = \(\frac { 2 }{ 10 }\)
New profit sharing ratio of
A : B : C = \(\frac { 6 }{ 10 }\) : \(\frac { 2 }{ 10 }\) : \(\frac { 2 }{ 10 }\)
= 3 : 1 : 1

52. Ramesh and Suresh are partners sharing profits in the ratio of 2 : 1 respectively. (Ramesh Capital is ₹ 1,02,000 and Suresh Capital is ₹ 73,000). They admit Mahesh and agree to give him 1/5th share in future profit. Mahesh brings ₹ 14,000 as his share of goodwill. He agrees to contribute capital in the new profit share ratio. How much capital will be brought by Mahesh?
(a) ₹ 43,750
(b) ₹ 45,000
(c) ₹ 47,250
(d) ₹ 48,000.
Answer:
(c) ₹ 47,250

Capital of A	₹ 1,02,000
Capital of B	₹ 73,000
Goodwill	₹ 14,000
Total capital for 4/5<sup>th</sup> Share	₹ 1,89,000

∴ Overall capital of firm will be 1,89,000 x \(\frac { 5 }{ 4 }\) = 2,36,250
Mahesh brings in 1/5^th of ₹ 2,36,250 = ₹ 47,250

53. M and N are partners sharing profit and loss in equal ratio. Their capital balances stood at ₹ 23,000 and ₹ 27,000 respectively. They wanted to grow their business and admitted P as a working partner for 1/3rd share. P is to bring capital in the proportion of his share of profit and besides capital, he is to bring ₹ 9,000 as goodwill. What will be the amount of capital to be brought in by P _______.
(a) ₹ 27,000
(b) ₹ 23,000
(c) ₹ 36,000
(d) ₹ 29,500
Answer:
(d) Sacrifice Ratio of M and N = 1 : 1
M’s capital A/c and N’s capital A/c will be credited by the amount of goodwill in sacrifice ratio.
After distribution of goodwill capital balance will be:
M’s Capital = 23,000 + 4,500 = ₹ 27,500
N’s Capital = 27,000 + 4,500 = ₹ 31,500
Remaining share of old partner’s = 1 – \(\frac { 1 }{ 3 }\) = \(\frac { 2 }{ 3 }\)
Total capital of the firm would be = (27,500 + 31,500) x \(\frac { 3 }{ 2 }\) = ₹ 88,500
Capital will be bought by P = 88,500 x \(\frac { 1 }{ 3 }\) = ₹ 29,500

54. A & B are sharing profits and loss in ratio of 3 : 2. C was admitted for 1 /5^th share, which he takes equally from A & B, i.e. 1/10th from A and 1/10lh from B. New profit sharing ratio will be ________.
(a) 5 : 3 : 2
(b) 29 : 19 : 10
(c) 9 : 6 : 5
(d) None of these
Answer:
(a) 5 : 3 : 2
Old profit sharing ratio of A and B = 3 : 2
∴ C is admitted for 1/5^th share which he takes equally from A & B i.e. \(\frac { 1 }{ 10 }\) from A and \(\frac { 1 }{ 10 }\) from B.
Net profit sharing ratio A : B : C
A = \(\frac { 3 }{ 5 }\) – \(\frac { 1 }{ 10 }\) = \(\frac { 6 – 1 }{ 10 }\) = \(\frac { 5 }{ 10 }\)
B = \(\frac { 2 }{ 5 }\) – \(\frac { 1 }{ 10 }\) = \(\frac { 4 – 1 }{ 10 }\) = \(\frac { 3 }{ 10 }\)
C = \(\frac { 1 }{ 10 }\) + \(\frac { 1 }{ 10 }\) = \(\frac { 2 }{ 10 }\)
Hence, new profit sharing ratio is 5 : 3 : 2.

52. A & B are partners sharing profits in the ratio of 2:1 respectively (A’s capital is ₹ 1,02,000 & B’s capital is ₹ 73,000). They admit C & agreed to give him 1 /5th share in future profit. C brings ₹ 14,000 and share of goodwill. He agreed to contribute capital in the new profit sharing ratio. How much capital will be brought by C.
(a) ₹ 43,750
(b) ₹ 45,000
(c) ₹ 47,250
(d) ₹ 48,000
Answer:
(a) ₹ 43,750

Capital of Ramesh	1,02,000
Capital of Suresh	73,000
Goodwill	14,000
Total capital for	1,89,000

Overall capital of firm will be = 1,89,000 x \(\frac { 5 }{ 4 }\) = \(\frac { 5 }{ 4 }\) = ₹ 2,36,250/
C brings in 1/5,h of ₹ 2,36,250 – ₹ 47,250/-

53. At the time of admission of partner, amount of general reserve, revaluation a/c will be transferred to _______.
(a) Old Partners Capital A/c
(b) New Partners Capital A/c
(c) All Partners Capital A/c
(d) None of the above.
Answer:
(a) Old Partners Capital A/c
At the time of admission of partners, all the reserves and profits of existing partners are transferred to existing partners i.e. to old partners capital a/c.

54. If A and B are sharing profits in the ratio of 5 : 3 and on admission of C, the new profit sharing ratio becomes 7 : 5 : 4. Calculate the sacrificing ratio.
(a) 3 : 1
(b) 1 : 3
(c) 5 : 4
(d) 7 : 5
Answer:
(a) 3 : 1
Old Ratio of A & B = 5 : 3
New Profit Sharing Ratio for A, B and C = 7 : 5 : 4
→ Sacrificing Ratio = Old share – New share
→ A’s new share = \(\frac { 7 }{ 16 }\)
→ A’s old share = \(\frac { 5 }{ 8 }\)
→ A’s sacrifice = \(\frac { 5 }{ 8 }\) – \(\frac { 7 }{ 16 }\) = \(\frac { 10 – 7 }{ 16 }\) = \(\frac { 3 }{ 16 }\)
→ B’s new share = \(\frac { 5 }{ 16 }\)
→ B’s old share = \(\frac { 3 }{ 8 }\)
→ B’s sacrifice = \(\frac { 3 }{ 8 }\) – \(\frac { 5 }{ 16 }\) = \(\frac { 6-5 }{ 16 }\) = \(\frac { 1 }{ 16 }\)
→ Sacrificing ratio = 3 : 1
→ Hence, option (a) is correct.

55. A started a business with ₹ 18,000 after 4 months B joins with ₹ 24,000. After 2 more months C joins with ₹ 30,000. At the end of 10 months from A started the business. C received ₹ 1,850 as his share. They decided to share profit or losses in the ratio of capital. The total profit of the firm would be:
(a) ₹ 7,955
(b) ₹ 8,510
(c) ₹ 7,030
(d) ₹ 6,845
Answer:
(d) ₹ 6,845
Total profit for 10 months = 1850
A’s capital = 18000, duration = 10 months
B’s capital = 24000, duration = 6 months
C’s capital = 3000C, duration = 4 months
Total weighted capital ratio = (18000 x 10) : (24000 x 6) : (30000 x 4)
= 180000 : 144000 : 120000 = 180 : 144 : 120 (or)
(1 1 1) = 45 : 36 : 30.
Total profit of the firm = C’s share in profits x \(\frac { Total Capital }{ Cs Capital }\)
= 1,850 x \(\frac{4,44,000}{1,20,000}\) = 6,845
Alternatively, = 1,850 x \(\frac{111}{30}\) = 6,845

56. The balance of Revaluation account created at the time of admission of a new partner is:
(a) Transferred to old partners capital account
(b) Transferred to all partners capital account
(c) Transferred to profit and loss account
(d) Transferred to new partners capital account
Answer:
The balance of Revaluation account created at the time of admission of a new partner is transferred to old partners capital account because before a new partner is admitted, the assets and liabilities of the firm are revalued and any profit or loss resulting from such a revaluation is transferred to old partner’ capital accounts in the old profit sharing ratio.

57. A and B are partners sharing profit losses in ratio 2 : 3. C is admitted for 1/4 share in profit find new profit share ratio :
(a) 2 : 4 : 5
(b) 3 : 2 : 6
(c) 6 : 9 : 5
(d) 1 : 2 : 3
Answer:
(c) 6 : 9 : 5
Old Ratio = 2 : 3
C, admitted for = \(\frac{1}{4}\) share
Remaining share = 1 – \(\frac{1}{4}\)
= \(\frac{3}{4}\)
New Profit sharing ratio of A = \(\frac{2}{5}\) x \(\frac{3}{4}\) = \(\frac{6}{20}\)
New Profit sharing ratio of B = \(\frac{3}{5}\) x \(\frac{3}{4}\) = \(\frac{9}{20}\)
New Profit sharing ratio of C = \(\frac{1}{4}\) x \(\frac{5}{5}\) = \(\frac{5}{20}\)
New Profit Ratio = \(\frac{6}{20}\) : \(\frac{9}{20}\) = \(\frac{5}{20}\)
= 6 : 9 : 5

58. A and B are partner in a business sharing profit and losses in the ratio of 7 : 3 respectively. They admit “C” as a partner. “A” sacrifices 1/7^th share of his profit and “B” sacrifices 1 /3rd share of his profit in favour “C”. The new profit sharing ratio of A, B, C will be :
(a) {3 : 2 : 1}
(b) {3 : 1 : 1}
(c) {2 : 2 : 1}
(d) {3 : 2 : 2}
Answer:
(b) {3 : 1 : 1}
Share sacrificed by A → \(\frac{7}{10}\) x \(\frac{1}{7}\) = \(\frac{1}{10}\)
Share sacrificed by B → \(\frac{3}{10}\) x \(\frac{1}{3}\) = \(\frac{1}{10}\)
Share of C → \(\frac{1}{10}\) + \(\frac{1}{10}\) = \(\frac{2}{10}\) = \(\frac{1}{5}\)
A = \(\frac{7}{10}\) – \(\frac{1}{10}\) = \(\frac{6}{10}\)
B = \(\frac{3}{10}\) – \(\frac{1}{10}\) = \(\frac{2}{10}\)
New ratio = \(\frac{6}{10}\),\(\frac{2}{10}\),\(\frac{2}{10}\) i.e 3 : 1 : 1

59. At the time of admission of a new partner, if the value of goodwill recorded is overstated in the books, it is written back by ________.
(a) Old partners in old profit/loss sharing ratio
(b) All the partners including the new partner in new profit/loss sharing ratio
(c) Old partners in sacrificing ratio
(d) New partners in gaining ratio
Answer:
(a) Old partners in old profit/loss sharing ratio
The Goodwill overstated will be written back in the old partners account in the old Profit Sharing Ratio.

60. A & B are partners sharing profits and losses in the Ratio of 5 : 3. C was admitted as a new partner and bring capital ₹ 70,000 and goodwill ₹ 48,000. The new profit ratio between A : B : C is 7 : 5 : 4. The sacrificing ratio A & B is ________.
(a) 3 : 1
(b) 5 : 4
(c) 2 : 1
(d) 3 : 5
Answer:
(a) 3 : 1
Old profit Sharing Ratio = 5 : 3
New profit Sharing Ratio = 7 : 5 : 4
Sacrificing Ratio = Old Ratio – New Ratio
A = \(\frac{5}{8}\) – \(\frac{7}{16}\) = \(\frac{10-7}{16}\) = \(\frac{3}{16}\)
B = \(\frac{3}{8}\) – \(\frac{5}{16}\) = \(\frac{6-5}{16}\) = \(\frac{1}{16}\)
Sacrificing Ratio = 3 : 1

61. A and B are Partners is a business sharing profit and losses in the ratio of 7 : 3 respectively. They admit C as a new partners. A sacrificed 1/7^th share of his profit and B sacrificed 1/3^th of his share in favour of C. The new profit sharing ratio of A, B, and C will be :
(a) 3 : 1 : 1
(b) 2 : 1 : 1
(c) 2 : 2 : 1
(d) None of the above
Answer:
(a) 3 : 1 : 1
A’s sacrifice = \(\frac{1}{7}\) x \(\frac{7}{10}\) = \(\frac{1}{10}\)
B’s sacrifice = \(\frac{1}{3}\) x \(\frac{3}{10}\) = \(\frac{1}{10}\)
A’s new share = \(\frac{7}{10}\) – \(\frac{1}{10}\) = \(\frac{6}{10}\)
B’s new share = \(\frac{3}{10}\) – \(\frac{1}{10}\) = \(\frac{2}{10}\)
C’s new share = \(\frac{1}{10}\) + \(\frac{1}{10}\) = \(\frac{2}{10}\)
A : B : C = 6 : 2 : 2 = 3 : 1 : 1

62. Ramesh and Suresh are partners sharing profits in the ratio of 2 : 1 respectively. (Ramesh capital is ₹ 1,02,000 and Suresh capital is ₹ 73,000). They admit Mahesh and Agree to give him 1/5^th share in future profit. Mahesh brings ₹ 14,000 as his share of goodwill the agrees to contribute capital in the new profit share ratio. How much capital will be brought by Mahesh?
(a) ₹ 43,750
(b) ₹ 45,000
(c) ₹ 47,250
(d) ₹ 48,000
Answer:
(a) ₹ 43,750
Combined capital of Suresh and Ramesh is ₹ 1,75,000 (73,000 + 1,02,000).
When \(\frac{4}{5}\)th share of profit then Mukesh’s capital is ₹ 1,75,000
When 1 ___________________ is ₹ \(\frac{1,75,000 \times 5}{4}\)
When \(\frac{1}{5}\)th share of profit then Mukesh’s capital is
= \(\frac{1,75,000}{4}\) x 5 x \(\frac{1}{5}\)
= ₹ 43, 750

63. A, B sharing profits and losses in the ratio of 3 : 5. C is admitted in the partnership and new ratio below them is 3 : 5 : 2. Sacrificing ratio below A and B is
(a) 3 : 1
(b) 3 : 5
(c) 5 : 3
(d) None
Answer:
(b) 3 : 5
Sacrifice Ratio: A and B sharing profit ratio 3 : 5, new partner entered and new ratio of profit sharing is 3 : 5 : 2
Sacrifice by A = A’s old share – A’s new share
= \(\frac{3}{8}\) – \(\frac{3}{10}\) = \(\frac{30-24}{80}\) = \(\frac{6}{10}\)
Sacrifice by B = B’s old share – Bs new share
= \(\frac{5}{8}\) – \(\frac{5}{10}\) = \(\frac{50-40}{80}\) = \(\frac{10}{80}\)
Hence. Ratio of sacrifice between A & B = \(\frac{6}{80}\) : \(\frac{10}{80}\)
= 6 : 10 or 3 : 5
Hence, option (b) is correct.

64. M and N are partners sharing profit and loss in equal ratio. Their capital balances stood at ₹ 23,000 and ₹ 27,000 respectively. They wanted to grow their business and admitted P as a working partner for 1/3 share. P is to bring capital in the proportion of his share of profit and besides capital, he is to bring ₹ 9,000 as goodwill. What will be the amount of capital to be brought in by P:
(a) ₹ 27,000
(b) ₹ 23,000
(c) ₹ 36,000
(d) ₹ 29,500
Answer:
(d) ₹ 29,500
Total Capital of M&N = 23,000 + 27,000 + 9,000
= 59,000
This represents 2/3^rd Share of firm
full Value of Capital = 59,000 x \(\frac{3}{2}\)
= 88,500
P share of capital in above = 88,500 x \(\frac{1}{3}\)
= ₹ 29,500

65. A, B & C started a business by investing ₹ 45,000, ₹ 55,000 and ₹ 60,000 respectively and sharing profit or losses in the ratio of capital. At the end of a year they got a total of ₹ 11,200. How much ‘B’ get more than ‘A’ in the profit.
(a) 780
(b) 700
(c) 710
(d) 750
Answer:
(b) 700
To A : B : C share profit and losses in
Ratio 45 : 55 : 60
Profit of the years = 11,200
A’s share = 11,200 x \(\frac{45}{160}\)
= 3,150
B’s share = 11,200 x \(\frac{55}{160}\)
= 3,850
B get more than A = 3,850 – 3,150 = 700

Go through this Computerized Accounting Environment – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

Computerized Accounting Environment – CS Foundation Fundamentals of Accounting Notes

Introduction:

• Computerized Accounting System and its awareness among professional has become a necessity in the globalised environment.
• The manual process is more time-consuming cumbersome and exposed to human error.
• The shift to computerised accounting systems has revolutionized the way businesses are managed.
• They have empowered organizations to project accurate information of financial performance.

Important features of Computerized Accounting System.

• Simple and integrated
• Accuracy and speed
• Scalability
• Instant Reporting
• Security
• Quick Decision Making
• Reliability

Introduction to TALLY:
Tally is most popular software for accounts and inventory management. Latest version of Tally has lets of advanced features like better data migrating, fast data speed, payroll management, TDS, TCS, Job costing and point of sale invoicing etc.

Function Key Combination:

Key	Functionality	Available Screen
F1	To select a Company	At all masters menu screen
F1	To select the Accounts Button	At the Accounting voucher creation and alteration screen.
F1 (Alt + F1)	To select the Inventory	At the inventory/payroll/ voucher creation and alteration screen.
F1 (Ctrl + F1)	To open payroll vouchers to after	At the Accounting/ inventory/ voucher creation or alteration screen.
F2	To change the current date	At almost all screen in TALLY- ERP9.
F3	To select the company	At almost all screens in TALLY. ERP9.
F4	To open contra voucher	At Accounting/Inventory voucher creation and alteration screen.
F5	To open payment voucher	At Accounting/ Inventory voucher creation and alteration screen
F6	To open receipt voucher	At Accounting/ inventory voucher creation and Alteration screen.
F7	To open journal Voucher	At Accounting/inventory voucher creation and alteration screen.
F8	To open sales voucher	At Accounting/ inventory voucher creation and alteration screen.
F9	To open purchase voucher	At Accounting/ inventory voucher creation and alteration screen.
F10	To open reversing journal voucher	At Accounting/inventory/payroll voucher creation and Alteration screen.
F11	To select the functions and features screen	At almost all screen in Tally ERP9.
F12	To open configure screen	At almost all screen in TALLY ERP9.

TALLY ERP 9 shortcut special keys combination:

• These are most important short cut keys to speed up the work in Tally.
• Duplication of a voucher is one of the most used short cut key in this section.
• ALT + C is used to create secondary ledger creation while you are working with TALLY.

Special Keys Combination:

Key	Functionality
ALT + D	1. To delete a voucher / 2. To delete a master / 3. To delete a column in any columnar report.
ALT + E	To export the report in ASCII, HTML or XML format
ALT + I	1. To insert a voucher/ 2. To toggle between item and accounting invoice
ALT + L	To select the language configuration
ALT + K	To select the keyboard configuration.
ALT + 0	To upload the report at your website.
ALT + L	To select language for TALLY ERP9 interface.
ALT + M	To E- mail the Report
ALT + N	To view the report in automatic columns.
ALT + P	To print the report
ALT + R	To remove a line in a report
ALT + S	To bring back a line you removed using ALT + R
ALT + U	To retrieve the last line which is deleted using ALT + R
ALT + V	From invoice screen to bring stock journal screen
ALT + X	To cancel a voucher is Day Book/list of vouchers.
ALT + R	To register Tally
CTRL + A	To accept a form / whenever you use this key combination that screen or report gets accepted as it is.
CTRL + B	To select the Budget
CTRL+ALT+B	To check the company statutory Details
CTRL + C	To select the cost centre.
CTRL + E	To select the currencies.
CTRL + G	To select the Group
CTRL + H	To view the support centre.
CTRL + I	To select the stock Items.
CTRL + ALT+I	To import statuary masters.
CTRL + K	To login as Remote TALLY. NET USER.
CTRL + L	To select the Ledger
CTRL + 0	To select the Godowns.
CTRL + Q	To abandon a form
CTRL + R	To repeat narration in the same voucher type.
CTRL + ALT + R	Rewrite data for a Company.

Key Combination Used For Navigation:

Windows	Functionality	Availability
Page up	Display previous voucher during voucher entry /alter	At voucher entry and alteration screen
Page Down	Display next voucher during voucher entry/ alter	At voucher entry and alteration screen
ENTER	To accept anything you type into a field.	You have to use this key at most asseas in TALLY. At the receivables report.
ESC	To accept or voucher or master	At almost all screens in TALLY.
SHIFT	To get a report with further details of an item in a report.	At voucher Register screen and trial balance report.
ENTER	To remove what you typed into a field.	In almost all Reports.
SHIFT + ENTER	To come out of a screen. To indicate you do not want to accept a voucher or master.	At voucher entry. At all reports.

ERP:
1. Enterprise resource planning (ERP) software deals with accounting transactions such as payroll, accounts receivable, accounts payable, and trial Balances.

2. ERP software is a resource management system, tracking tangible and intangible assets, materials, human resources and financial resources.

3. It also covers intangible like human work hours, product life cycles, performance units and customer relations.

4. Some of the popular ERP accounting package are being mentioned here.

• Sage 300
• Microsoft Dynamic NAV
• SAP Business one
• Epicor 9 (formerly vantage)
• Microsoft Dynamics G.P.
• Macola ES (Exact software)
• Sage 100
• Net suite
• Sys Pro
• Sage X3

SAP Business One
1. It is one of the most widely used and popular accounting package.

2. ‘SAP Business One’ offers fully integrated financial and banking functionality for complete, across the board tracking, management, reporting, and control of all key financial and accounting processes.

3. Important functions of SAP Business one are being mentioned here.

• Accounting.
• Journal entries.
• Journal Vouchers.
• Posting templates.
• Recurring Postings.
• Reversing Journals.
• Exchange rate differences.
• Financial report templates.
• Budgets.
• Profit center definition.
• Distribution rule definitions.
• Profit centre report.

Computerized Accounting Environment MCQ Questions

In each of the following one of them is correct. Indicate the correct answer:

1. Which is not the feature of computerized Accounting System.
(a) Simple and integrated
(b) Non-secure
(c) Accuracy and speed
(d) Instant Reporting.
Answer:
(b) Non-secure

2. Quality Report is real time can be generated because of:
(a) Speed and accuracy
(b) Security
(c) Quick Decision Making
(d) Reliability
Answer:
(a) Speed and accuracy

3. Which is the most popular software for accounts and inventory management.
(a) MICRO Soft
(b) TALLY
(c) Windows XP
(d) Windows 8
Answer:
(b) TALLY

4. _______ process is more time -consuming, cumbersome and exposed to human error.
(a) Mechanical Process
(b) Technical Process
(c) Computerised Process
(d) Manual Process
Answer:
(d) Manual Process

5. Full form of ERP:
(a) Entrepreneurship resource planning
(b) Enterprise research planning
(c) Enterprise resource planning
(d) Entrepreneurship research planning.
Answer:
(c) Enterprise resource planning

6. Functions of SAP are:
(a) Accounting
(b) Journal Entries,
(c) Journal Vouchers
(d) All of these
Answer:
(d) All of these

7. Which shortcut Keys are used to enter a stock journal in tally?
(a) F7
(b) Control + F7
(c) Alt + F7
(d) Shift + F7
Answer:
(c) Alt + F7

8. How many types of uses are present in tally?
(a) 1
(b) 2
(c) 3
(d) 4
Answer:
(c) 3

9. We can create multiple users in TALLY activating.
(a) Tally Audit
(b) Use security control
(c) Both (a) and (b)
(d) None
Answer:
(b) Use security control

10. TALLY package is developed by _______.
(a) Peutronics Co.
(b) Coral software
(c) Tally solutions
(d) Vedalia software
Answer:
(c) Tally solutions

11. Which shortcut key is used in TALLY to print any repon.
(a) Ctrl + P
(b) Shift + P
(c) Alt + P
(d) Alt + ctrl + P
Answer:
(c) Alt + P

12. Which shortcut key is used to shut opened company in Tally?
(a) Fi
(b) Alt + Fi
(c) F3
(d) Alt + F3_______
Answer:
(b) Alt + Fi

13. Which shortcut key is used to change current period in Tally.
(a) F2
(b) Alt + F2
(c) F3
(d) Alt + F3
Answer:
(b) Alt + F2

14. ‘Inventory books’ is used to view.
(a) Stock items
(b) Both A and B above
(c) Group summary
(d) None.
Answer:
(b) Both A and B above

15. To change current Data from Gateway of Tally press the key _______.
(a) F1
(b) F5
(c) F2
(d) F9
Answer:
(c) F2

16. Which reports are prepared monthly in Tally?
(a) Profit & Loss A/c
(b) Balance sheet
(c) Trial Balance
(d) Cash flow of fund flows
Answer:
(c) Trial Balance

17. Which is not a ERP accounting package?
(a) Sys Pro
(b) Sage 300
(c) Sage 100
(d) Sage X4
Answer:
(d) Sage X4

18. _______ is one of the most widely used popular accounting package.
(a) SAP Business one.
(b) ERP
(c) PDF
(d) None of these.
Answer:
(a) SAP Business one.

19. Which key is pressed to post entries in double entry accounting system intended of single entry system in Tally ERP of?
(a) F11
(b) F12
(c) Alt + F11
(d) Alt + F12
Answer:
(b) F12

20. Which of the following file is usually used a master file?
(a) Inventory subsidiary
(b) Cash Receipts
(c) Cash disbursement
(d) Payroll transactions
Answer:
(a) Inventory subsidiary

21. What is the advantage of computer based transaction processing system?
(a) Does not require as stringent a set of internal controls.
(b) Will produce a more accurate set of financial statements.
(c) Eliminates the need to reconcile control accounts and subsidiary ledgers.
(d) Will be more efficient at producing financial statements.
Answer:
(d) Will be more efficient at producing financial statements.

22. To create purchase order press _______.
(a) Alt + F4
(b) Ctrl + F4
(c) F4
(d) None of these
Answer:
(a) Alt + F4

23. Which of the following user type can view audit list?
(a) Tally vault
(b) Owner
(c) Data Entry
(d) Administrator
Answer:
(d) Administrator

24. For selecting purchase voucher which function key is selected?
(a) f 2
(b) f 4
(c) f 9
(d) f 7
Answer:
(c) f 9
Shortcut key for selecting purchase voucher is f9 in Tally.

25. Which short cut key is used to change current period in Tally.
(a) f 1
(b) Alt + f 2
(c) f 2
(d) Alt + f 3
Answer:
(b) Alt + f 2
To change current period in tally, shortcut key Alt + f 2.

26. ERP not contain all accounting software:
(a) True
(b) False
(c) Partly true
(d) Partly false
Answer:
(b) False
ERP: Enterprise Resource Planning contains all accounting software relating to operation of an enterprise. Thus, the statement is false.

27. Functions of SAP:
(a) Accounting
(b) Journal Entries
(c) Journal Vouchers
(d) All of these
Answer:
(d) All of these
SAP: Systems Applications and products in data processing comprises all accounting activities (journal entries, vouchers, sale proceeding etc.) hence, option (d) is correct.

28. ERP stands for:
(a) Entrepreneurship Resource Planning
(b) Enterprise Resource Planning
(c) Electronic Resource Planner
(d) None of the above.
Answer:
(b) Enterprise Resource Planning
ERP stands for Enterprise Resource Planning

29. Which shortcut key is used to change current period in Tally _______.?
(a) F1
(b) Alt + F2
(c) F2
(d) Alt + F3
Answer:
(b) Alt + F2
To change current period in Tally, shortcut key Alt +F2

30. _______ key helps to select a company in Tally.
(a) F2
(b) F3
(c) F4
(d) F5
Answer:
(b) F3
The key ’F3′ is help to select the company and is available at almost all screen in Tally ERP9.

31. Which of key combination is used for receipt voucher _______.
(a) F9
(b) F6
(c) F3
(d) None of the above
Answer:
(b) F6
F6 is the key combination is used for receipt voucher.

32. _______ is most popular software for accounts & inventory.
(a) SAP business one
(b) Tally
(c) Both ‘a’ and ‘b’
(d) None of these
Answer:
(b) Tally
Tally is the most popular software for accounts and inventory management. Latest version of tally has lots of advanced features like better data migrating, fast data speed, payroll, management etc.

33. Display previous voucher during voucher entry/alter.
(a) Pg. Up
(b) Pg. Down
(c) Pg. Next
(d) Pg. Previous
Answer:
(a) Pg. Up
Key combination used for navigation in which ‘Page UP’ is used to display previous voucher during voucher entry/ alter.

34. What is the use of ERP?
(a) Tracking tangible and intangible assets
(b) Resource management system
(c) Factoring human work hours
(d) All of the above
Answer:
(d) All of the above
ERP software is a resource management system, tracking tangible and intangible assets, materials, human resources, and financial resources. ERP software covers a range of functionality not generally offered by accounting software, often factoring in intangibles like human work hours, product life cycles, performance units, and customer relations.

35. ERP and Tally are save _______.
(a) Yes
(b) No
(c) Can’t say
(d) Partly yes
Answer:
(b) No
Tally is not a full scale ERP System, it is called ERP because the company named it ERP. ERP system are huge business management software with function defined for virtually everything a business needs.

36. Which key is used for memorandum of voucher _______?
(a) F5
(b) F6
(c) F10
(d) F8
Answer:
(c) F10
F10 is the key used for memorandum of vouchers.

37. Which key is used for Selecting Bale Voucher _______
(a) F2
(b) F8
(c) F7
(d) F4
Answer:
(b) F8
‘F8’ is a key which is used for selecting sale voucher.

Go through this Partnership Accounts-Fundamentals – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

Partnership Accounts-Fundamentals – CS Foundation Fundamentals of Accounting Notes

Definition:
1. (As per Section – 4 of Indian Partnership Act 1932:
“Partnership is the relationship between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all.”)

2. In simple words, a partnership is an arrangement whereby two or more people agree to carry on a business together and to share the profits.

Features of partnership:

• There must be an agreement between partners.
• There should be two or more persons.
• The agreement must be entered into by the person concerned.
• It should be formed for the purpose of carrying on a business for earning profit.
• The Partnership Act does not lay down any maximum number of partners. But according to Section 464, Rule 10 of Companies Miscellaneous Rule 2014, maximum number of partners is 100.
• Partnership follows the principle of mutual agency. This means that every partner is an agent as well as principle of another partner.
• The business should be carried on by all or any one of them acting for all.
• In a partnership, the partners have unlimited liability.

Partnership Firm:
Collection of partners is known as the partnership firm and the name in which this collection is carried on is known as the “firm name.”

Note:

• The assets of the firm are the joint property of partners.
• The partners are personally liable for the liability of the firm.

Partnership Deed:

• It is an agreement determining the rights and liabilities of partners.
• It is a written contract between the partners.

Features of a partnership deed:

• It is an agreement between the partners.
• The Partnership Act does not lay down any maximum number of partners; But according to Section 464, Rule 10 of Companies Miscellaneous Rule 2014, maximum number of partners is 100.
• It should be in black and white (i.e. in writing).
• It is not compulsory to have a partnership deed. The terms and conditions may be in oral also.
• Partnership deed is a legal document.
• It helps in easy settlement of disputes among partners.
• Its purpose of earning profit which would be divided among partners.

Contents of partnership deed:

• Name and address of the firm.
• Name and address of partners.
• Type and nature of business firm.
• Amount of capital contributed by each partner.
• Details of interest on capital of the partners.
• Details of drawings and rates of interest on drawings.
• Profit sharing ratio.
• Other points like salary to partners, duration of partnership etc.
• The best course is to have a written partnership deed duly signed by all the partners and registered under the Act.

Rules applicable in absence of partnership deed:
1. It is not compulsory to have a partnership deed.

2. If there is a partnership deed, the terms and conditions as mentioned in the deed will be followed.

3. If there is no partnership deed, the following rules will be applicable:

• Profit sharing ratio – Equal
• Interest on capital – No interest on capital will be allowed.
• Interest on drawings – No interest on drawings is charged.
• Salary to partner – No salary/commission should be given to partners.
• Interest on loan – Even if there are losses, interest @ 6% per annum shall be paid.
• Participation in firm – Every partner has a right to take part in the business of the firm.
• Admission of a partner – A new partner can be admitted only with the consent of all other partners.

Note:
Even if a firm has a partnership deed but it is silent on any of the above matters, the above rules will be applicable.

Joint Venture:
1. A joint venture is a business venture in which two or more parties agree to join together for doing a specific business.

2. It is a temporary partnership.

3. Although joint venture form of business is much like partnership, still both are different in the following ways

Basis of difference	Joint Venture	Partnership
1. Name of the business	Joint Venture does not have a specific name.	A partnership firm has a name of its own.
2. Name of the members	In Joint Venture, each member is called coventurer.	In partnership, each member is called partner.
3. Number of members	In Joint Venture, minimum number of coventurer is two and there is no limit for maximum.	In partnership, minimum number is two and maximum number is 50. (As per Companies Act, 2013)
4. Registration	There is no need of its registration.	Companies Act lays down the maximum no. of association of person as 100 whereas as per companies rules the presently applicable limit is 50.
5. Duration	It is temporary and comes into existence for doing a specific job. Hence, it comes to an end when the job is completed.	In order to make claim of partnership enforceable against third parties, partnership must be registered.

Partnership Accounts:
Partnership Accounts involves the preparation of:

• Partner’s capital accounts (fixed and fluctuating).
• Partner’s loan account.
• Profit and loss Appropriation A/c.

Partner’s Capital Account:
In a partnership, every partner has a separate capital account. Amount contributed as capital by the partner is shown in this account.

Types of Capital Account:

• Fixed Capital A/c.
• Fluctuating Capital A/c.

(i) Fixed Capital:
1. Under this system, the capital accounts of the partners are to be kept intact (fixed).

2. The regular earnings or drawings should not effect the fixed capital of the partners.

3. For this purpose, under this system two capital accounts are prepared:

• Partner’s Capital Account
• Partner’s Current Account

Partners Capital Account:
It shows the fixed capital of the partner. Any amount of capital further introduced or withdrawn by the partner are also shown in this account. Apart from this, no other entry is shown in this account.

Partner’s Current Account:
All entries relating to partner capital A/c other than capital contributed or withdrawn are shown in this account. It records the entries of drawings, interest on drawings, interest on capital, salary to partner, share of profit/loss etc. are made in separate account called current A/c.

Under this method fixed capital remains intact in the Capital A/c and changes are made in Current A/c.
Sometimes an additional drawings A/c is also prepared to record the frequent drawings made by the partner. At the end, the balance of drawings A/c is transferred to Capital A/c.

Capital Accounts (when the capitals are Fixed):

Current Accounts

(ii) Fluctuating Capital Account:

• Under this system, capital accounts need not be kept fixed.
• Here only one account (capital a/c) is maintained which contains all the entries of capital introduced, drawings, interest on drawings, interest on capitals, salary to partners etc.
• Due to these entries, the amount of capital keeps on fluctuating.

Capital Accounts (When the capitals are fluctuating):

Distinction Between Fixed Capital Account and Fluctuating Capital Accounts:

Basis of Distinction	Fixed Capital Accounts	Fluctuating Capital Accounts
1. Change in Capital	When the capitals are fixed, the balances in capital accounts usually remain unchanged during the life time of business, except in extraordinary circumstances.	When the capital are fluctuating, the balance in capital accounts keep on changing from time to time.
2. Number of accounts	When the capitals are fixed, each partner has two accounts, namely Capital Account and a Current Account.	When the Capitals are fluctuating, each partner has only one account, namely capital account.
3. Recording of Transactions	When the capitals are fixed, transactions relating to drawing, interest on capital, interest on drawings, salary, share of profit or loss etc. are not made in Capital Accounts but are entered in separate Current Accounts.	In this case, all the transactions relating to partners are made directly in the Capital Account itself.
4. Account that can show a negative balance	Fixed Capital Account can never show a negative balance.	Fluctuating Capital Account can show a negative balance.

Partner’s Loan A/c:

• It represents the amount given by the partners to the firm in the form of loans.
• These are treated as liability of the firm and are not shown in the Capital A/c of partners.
• Repayment of partner’s loan is a priority over repayment of partner’s capital.
• Firm pays interest to the partners for this loan at an agreed rate [If no rate is agreed it is paid @ 6% p.a.
• If capital is insufficient to meet losses on dissolution the amount of the loan can be used to meet losses.

Profit and Loss Appropriation A/c:

• Profit and Loss Appropriation A/c is an extension of Profit and Loss A/c which shows the appropriation of profit among various partners.
• Apart from entries relating to the adjustments made from the profit in the form of interest on capital, interest on drawing etc. are shown in this A/c.

Items of Profit and Loss Appropriation A/c:
(i) Interest on Capital –

• Firm pays interest on the amount of capital contributed by the partners at an agreed rate in the deed.
• Interest on capital will be paid only when there are profits in the firm.
• Interest on capital is calculated on time basis (i.e. it takes into account any tresh capital introduced or withdrawn).

Provisions relating to interest on capital:

Case	Provision
When partnership deed is silent about interest on capital.	No interest will be allowed.
When the partnership agreement provides for interest on capital but it is silent whether to treat it as a charge or appropriation	1. Interest on capital will be allowed only when there is profit. 2. When there is loss, no interest will be allowed on capital. 3. When profit before interest is more than or equal to the amount of interest – full interest will be allowed. 4. When profit before interest is less than interest – interest will be restricted to the amount of profit. Hence, profit will be distributed in the ratio of interest on capital of each partner.
When partnership agreement provides for treating interest as a charge.	Full interest will be allowed whether there ids profit or loss.

Distinction between Charge Against Profit and Appropriation Out of Profit:

Basis of Distinction	Charge Against Profit	Appropriation Out of Profit
1. Nature	It indicates expenses to be deducted from profits while calculating net profit or loss.	It indicates distribution of net profit to various heads.
2. Recording	It is debited to Profit and Loss Account.	It is debited to Profit and Loss Appropriation Account.
3. Necessary or Not	It is necessary to make charges against profits even if there is loss.	Appropriations are made only when there is profit.
4. Example	Interest on partner’s loan and rent paid to a partner etc.	Interest on capital, partner’s salary, etc.

Calculation of Interest:
Amount of capital x Time period x \(\frac { Rate }{ 100 }\)

Entry of Interest on Capital:
(i) Interest on Capital A/c Dr.
To Partner’s Capital A/c (Being interest on Capital at – % p.a.)

(ii) Profit and Loss Appropriation A/c Dr.
To Interest on Capital A/c
(Being interest on capital transferred)

Example:
Ajay contributed ₹ 30,000 as an initial capital on 1^st January, 2012. He introduced additional capital of ₹ 10,000 on 1^st July, 2012 and withdraw ₹ 5,000 on 1^st October, 2012. Interest was paid @ 10% p.a. Calculate the interest on capital at the year ending 31^st December, 2012.
Solution:

Amount of Capital	Duration	Months
1. ₹ 30,000	Jan. – June	6 Months
2. ₹ 30,000 + ₹ 10,000	July – Sep.	3 Months
3. ₹ 30,000 + ₹ 10,000 – 5,000	October – Dec.	3 Months

Amount of Interest:

(ii) Interest on Drawings:

• Drawings refers to the amount withdrawn by the partner for personal use.
• The firm charges interest on the amount of such withdrawals.
• Interest on drawings will be calculated from the date of withdrawal of the amount.
• Rate of interest on drawings shall be decided in the partnership agreement. If nothing is decided, no interest on drawings shall be provided for.
• Interest on drawings is an income for the firm and hence, recorded on the credit side of profit/loss appropriation account.

Calculation of interest on drawings:
(i) If date of withdrawal is not Months – It is assumed that drawings are known made evenly throughout the year and hence, will be charged for 6 months.
Amount of drawings x \(\frac { Rate }{ 100 }\) x \(\frac { 6 }{ 12 }\)

(ii) When drawings are made at the beginning of every month – Interest will be charged on whole amount for 6.5 months. (interest for 6.5 months will be equal to the interest calculated on monthly basis).
Amount of drawings x \(\frac { 6.5 }{ 12 }\) x \(\frac { Rate }{ 100 }\)

(iii) When drawings are made at end of every month – Interest will be charged on whole amount for 5.5 months (interest for 5.5 months will be equal to the interest calculated on monthly basis).
Amount of drawings x \(\frac { 5.5 }{ 12 }\) x \(\frac { Rate }{ 100 }\)

(iv) When drawings are made in the middle or at any time – Interest will be charged on whole amount for 6 months, during the month.
Amount of drawings x \(\frac { 6 }{ 12 }\) x \(\frac { Rate }{ 100 }\)

(v) When drawings of equal amount are made in the beginning of each quarter – Interest will be charged on whole amount for 7.5 months.
Amount of drawings x \(\frac { 7.5 }{ 12 }\) x \(\frac { Rate }{ 100 }\)

(vi) When drawings of equal amount are made at the end of each quarter – Interest will be charged on whole amount for 4.5 months.
Amount of drawings x \(\frac { 4.5 }{ 12 }\) x \(\frac { Rate }{ 100 }\)

(vii) When drawings of equal amount are made during middle of each quarter – Interest will be calculated on whole amount for 6 months.
Amount of drawings x \(\frac { 6 }{ 12 }\) x \(\frac { Rate }{ 100 }\)

Note:

• The above method or formulas will be used only and when there are equal monthly or quarterly drawings.
• If the drawings are not equal or are drawn at unequal intervals, then rate of drawing will be calculated using the product method.

Product Method:

• Step 1: Calculate the product by multiplying drawings with its duration.
• Step 2: Calculate the sum of all products.
• Step 3: Calculate interest on drawing as follows:
  Total of products x \(\frac { Rate }{ 100 }\) x \(\frac { 1 }{ 2 }\)

Entry for Interest on Drawings:
(i) Partner’s capital A/c Dr.
To Interest on drawings A/c

(ii) Interest on drawings A/c Dr.
To P/L appropriation A/c

(iii) Salary Payable to Partners

• The firm may provide salary to some active partners for their work.
• Salary may be determined as per the agreement between the partners.

Entry:
(a) Partners Salary A/c Dr.
To Capital A/c

(b) Profit/Loss Appropriation A/c Dr.
To Partner’s Salary A/c

(iv) Commission Payable to Partners:
1. The firm may provide commission to the partners based on net profits.

2. Calculation of Commission:
(a) If commission is based on net profits before charging such commission.
Profit before charging commission x \(\frac { Rate }{ 100 }\)

(b) If commission is based on net profits after charging such commission
Net profit before charging commission x \(\frac { Rate }{ 100+Rate }\)

Example: If the profit before charging commission is ₹ 30,000 and manager is entitled to a commission of 10%
(i) before charging commission
(ii) after charging commission.
Calculate manager’s commission.
Solution:
(i) Before Charging Commission:
Net profit before commission x \(\frac { Rate }{ 100 }\)
= ₹ 30,000 x \(\frac { 10 }{ 100 }\)
= ₹ 3,000

(ii) After Charging Commission:
Net profit before commission x \(\frac { Rate }{ 100+Rate }\)
₹ 30,000 x \(\frac { 10 }{ 100+10 }\) = ₹ 2,727.27

Entry for Partner’s Commission:
(i) Partner’s Commission A/c Dr.
To Partner’s Capital A/c

(ii) Profit/Loss Appropriation A/c Dr.
To Partners Commission A/c .

Past Adjustment of Profits:
1. If any error is disclosed, after the accounts have been closed, then in order to correct the errors, these accounts cannot be reopened.

2. For this purpose, the following steps should be followed to correct the errors –

• Step 1: Write the amounts (in rough) which have been actually debited or credited.
• Step 2: Write the amounts (in rough) which should be debited or credited.
• Step 3: Note the difference in the two amounts.
• Step 4: Pass the adjusting entry.

Guarantee of Profit to a Partner:

• Sometimes, in order to induce a person to join as partner in the firm, other partners guarantee him a certain share of profit.
• Guarantee of profit means that the partner will be getting the profit which is guaranteed to him even if the firm does not have sufficient profits.
• For this purpose, firstly the actual profits are divided among partners and then, the shortfall to the partner is borne-by the other partners.
  Shortfall = Guaranteed profit – Actual profit
• The shortfall shall be credited to the new partner and debited to old partners in their mutual profit sharing ratio.
• A guarantee to the other partners that the share of the new partner will not exceed a stipulated figure.

Partnership Accounts-Fundamentals MCQ Questions

1. The relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all is known as:
(a) Partnership
(b) joint Venture
(c) Association of Persons
(d) Body of Individuals.
Answer:
(a) Partnership

2. Features of a partnership firm are:
(a) Two or more persons are carrying common business under an agreement.
(b) They are sharing profits and losses in the fixed ratio.
(c) Business is carried by all or any of them acting for all as an agent.
(d) All of the above.
Answer:
(d) All of the above.

3. In the absence of any agreement, partners are entitled to receive interest on their loans at the rate of:
(a) 12% Simple Interest
(b) 12% Compounded Annually
(c) 6% Simple Interest
(d) 6% p.a. Simple Interest.
Answer:
(d) 6% p.a. Simple Interest.

4. Following is the difference between partnership deed and partnership agreement.
(a) Partnership deed is’ in writing and partnership agreement may be oral.
(b) Partnership deed is signed by all the partners but partnership agreement is signed by majority of the partners.
(c) Partnership deed is registered in the court of law whereas partnership agreement is not.
(d) Partnership deed is not subject to changes unless all partners agree to it. Partnership agreement can be amended with the consent of more than 50% partners.
Answer:
(a) Partnership deed is’ in writing and partnership agreement may be oral.

5. In the absence of an agreement to the contrary, the partners are:
(a) entitled to 6% interest on their capitals, only when there are profits.
(b) entitled to 9% interest on their capitals, only when there are profits.
(c) entitled to interest on capital at the bank rate, only when there are profits.
(d) not entitled to any interest on their capitals.
Answer:
(d) not entitled to any interest on their capitals.

6. What time would be taken into consideration for calculation of interest on drawings if equal monthly amount is drawn as drawing at the beginning of each month?
(a) 7 months
(b) 6 months
(c) 5 months
(d) 6.5 months.
Answer:
(d) 6.5 months.

7. Is rent paid to a partner appropriation of profits?
(a) It is appropriation of profit
(b) It is not appropriation of profit
(c) If partner’s contribution as capital is maximum
(d) If partner is a working partner.
Answer:
(b) It is not appropriation of profit

8. A is drawing ₹ 500 regularly on the 16th of every month. He will have to pay interest in a year on ₹ 6,000 (at the given rate of interest) for a total period of:
(a) 5 months
(b) 6 months
(c) 7 months
(d) 61/2 months.
Answer:
(b) 6 months

9. A is drawing ₹ 1,000 p.m. on the last day of every month. If the rate of interest is 5% p.a., then the total interest chargeable from him in to accounting year will be:
(a) ₹ 325
(b) ₹ 275
(c) ₹ 300
(d) ₹ 350.
Answer:
(b) ₹ 275

10. Bill and Monica are partners sharing profits and losses in the ratio of 3:2 having the capital of ₹ 80,000 and ₹ 50,000 respectively. They are entitled to 9% p.a. interest on capital before distributing the profits. During the year firm earned ₹ 7,800 before allowing any interest on capital. Profits apportioned among Bill and Monica is:
(a) ₹ 4,680 and 3,120
(b) ₹ 4,800 and 3,000
(c) ₹ 5,000 and 2,800
(d) None of these.
Answer:
(a) ₹ 4,680 and 3,120

11. Seeta and Geeta are partners sharing profits and losses in the ratio 4:1. Meeta was manager who received the salary of ₹ 4,000 p.m. in addition to a commission of 5% on net profits after charging such commission. Profits for the year is ₹ 6,78,000 before charging salary. Find the total remuneration of Meeta.
(a) ₹ 78,000
(b) ₹ 88,000
(c) ₹ 87,000
(d) ₹ 76,000.
Answer:
(a) ₹ 78,000

12. Firm has earned exceptionally high profits from a contract which will not be renewed. In such a case, the profit from this contract will not be included in __________.
(a) Profit share of the partners
(b) Calculation of the Goodwill
(c) Both
(d) None.
Answer:
(b) Calculation of the Goodwill

13. Interest on capital will be paid to the partners if provided for in the agreement but only from __________.
(a) Profits
(b) Reserves
(c) Accumulated Profits
(d) Goodwill.
Answer:
(a) Profits

14. Partners are suppose to pay interest on drawing only when __________ by the __________.
(a) Provided, Agreement
(b) Permitted, Investors
(c) Agreed, Partners
(d) ‘a’ & ‘c’ above.
Answer:
(d) ‘a’ & ‘c’ above.

15. When a partner is given guarantee by other partners, loss on such guarantee will be borne by:
(a) Partnership firm
(b) All the other partners
(c) Partners who give the guarantee
(d) Partner with highest profit sharing ratio.
Answer:
(c) Partners who give the guarantee

16. What would be the profit sharing ratio, if the partnership act is complied with:
(a) As per Agreement
(b) Equally
(c) In Capital Ratio
(d) None of the above.
Answer:
(b) Equally

17. Where will you record interest on drawings:
(a) Debit Side of Profit & Loss Appropriation Account
(b) Credit Side of Profit & Loss Appropriation Account
(c) Credit Side of Profit & Loss Account
(d) Debit Side of Capital/Current Account Only.
Answer:
(b) Credit Side of Profit & Loss Appropriation Account

18. What balance does a Partner’s Current Account has:
(a) Debit Balance
(b) Credit Balance
(c) Either ‘a’ or ‘b’
(d) None of the above.
Answer:
(c) Either ‘a’ or ‘b’

19. How would you close the Partner’s Drawing Account:
(a) By transfer to Capital or Current Account Debit Side.
(b) By transfer to Capital Account Credit Side.
(c) By transfer to Current Account Credit Side.
(d) Either ‘b’ or ‘c’
Answer:
(a) By transfer to Capital or Current Account Debit Side.

20. A, B and C were Partner’s with capitals of ₹ 50,000; ₹ 40,000 and ₹ 30,000 respectively carrying on business in partnership. The firm’s reported profit for the year was ₹ 80,000. As per provision of the Indian Partnership Act, 1932, find out the share of each partner in the above amount after taking into account that no interest has been provided on an advance by A of ₹ 20,000 in addition to his capital contribution.
(a) ₹ 26,267 for Partner B and C & ₹ 27,466 for Partner A.
(b) ₹ 26,667 each partner.
(c) ₹ 33,333 for A, ₹ 26,667 and ₹ 20,000 for C.
(d) ₹ 30,000 each partner.
Answer:
(a) ₹ 26,267 for Partner B and C & ₹ 27,466 for Partner A.

21. X, Y and Z are partners in a firm. At the time of division of profit for the year, there was dispute between the partners. Profits before interest on partner’s capital was ₹ 6,000 and Y determined interest @ 24% p.a. on his loan of ₹ 80,000. There was no agreement on this point. Calculate the amount payable to X, Y and Z respectively.
(a) ₹ 2,000 to each partner.
(b) Loss of ₹ 4,400 for X and Z & Y will have ₹ 14,800.
(c) ₹ 400 for X, ₹ 5,200 for Y and ₹ 400 for Z.
(d) None of the above.
Answer:
(c) ₹ 400 for X, ₹ 5,200 for Y and ₹ 400 for Z.

22. X, Y and Z are partners in a firm. At the time of division of profit for the year there was dispute between the partners. Profits before interest on partner’s capital was ₹ 6,000 and Z demanded minimum profit of ₹ 5,000 as his financial position was not good. However, there was no written agreement on this point.
(a) Other partners will pay Z the minimum profit and will share the loss equally.
(b) Other partners will pay Z the minimum profit and will share the loss in capital ratio.
(c) X & Y will take ₹ 500 each and Z will take ₹ 5,000.
(d) ₹ 2,000 to each of the partners.
Answer:
(d) ₹ 2,000 to each of the partners.

23. Following are the differences between Partnership and Joint Venture Except.
(a) Joint Venture is essentially planned for short term mainly for one transaction. However, partnerships are normally undertaken as going concerns and are expected to last for a very long period.
(b) The persons involved in a Joint Venture are called co-ventures whereas persons involved in a partnership are called partners.
(c) Any specific statute of the Government does not govern Joint Ventures but the India Partnership Act, 1932, governs partnerships.
(d) Memorandum of Undertaking is mandatory to be drafted to spell the relationship between the Co-ventures whereas the basic relationship between the partners is defined by the partnership deed.
Answer:
(d) Memorandum of Undertaking is mandatory to be drafted to spell the relationship between the Co-ventures whereas the basic relationship between the partners is defined by the partnership deed.

24. Every partner is bound to attend diligently to his __________ in the conduct of the business.
(a) Rights
(b) Meetings
(c) Capital
(d) Duties.
Answer:
(d) Duties.

25. In the absence of agreement, partners are not entitled to:
(a) Salary
(b) Commission
(c) Equal share in profit
(d) Both (a) and (b).
Answer:
(d) Both (a) and (b).

26. Profit on Profit/Loss Appropriation Account should be transferred to:
(a) Partner Capital A/c. Credit Side
(b) Partner Capital A/c. Debit Side
(c) B/S Assets Side
(d) B/S Liability Side.
Answer:
(a) Partner Capital A/c. Credit Side

27. If any loan or advance is provided by partner then, balance of such Loan Account should be transferred to:
(a) B/S Assets side
(b) B/S Liability Side
(c) Partners Capital A/c.
(d) Partners Current A/c.
Answer:
(b) B/S Liability Side

28. Out of the following which item is not shown in Partners Capital A/c:
(a) Managerial Commission
(b) Partners Salary
(c) Partners Commission
(d) None.
Answer:
(a) Managerial Commission

29. Loss in P/L App. A/c will:
(a) Reduce capital of partners
(b) Increase capital of partners
(c) Both (a) and (b).
(d) None.
Answer:
(a) Reduce capital of partners

30. Partner’s Current A/c are opened in case there Capital A/c are:
(a) Fluctuating
(b) Fixed
(c) Both (a) and (b)
(d) None.
Answer:
(b) Fixed

31. Partnership is defined under which section of the Partnership Act, 1932?
(a) Section 4
(b) Section 2
(c) Section 3
(d) Section 5
Answer:
(a) Section 4

32. Which one of the following is NOT an essential feature of a partnership?
(a) There must be an agreement
(b) There must be a business
(c) The business must be carried on for profits
(d) The business must be carried on by all the partners
Answer:
(d) The business must be carried on by all the partners

33. In the absence of partnership deed.
(a) Every partner has the right to participate in the business
(b) Profit sharing ratio is equal
(c) Partners are not entitled to interest on capital
(d) All of the above
Answer:
(d) All of the above

34. In the absence of partnership deed, interest on loan is payable at the rate of:
(a) 5%
(b) 7%
(c) 6%
(d) 4%
Answer:
(c) 6%

35. In the absence of partnership deed, interest on drawing is payable at:
(a) 2%
(b) Not payable
(c) 5%
(d) 6%
Answer:
(b) Not payable

36. Which of the following is NOT a feature of Joint Venture?
(a) There is no common firm name
(b) There is no specific act for joint ventures
(c) The profit/loss is to be ascertained at the starting of the joint venture
(d) The doctrine of implied authority is not applicable
Answer:
(c) The profit/loss is to be ascertained at the starting of the joint venture

37. Which of the following is a type of capital A/c?
(a) Fixed Capital A/c
(b) Fluctuating Capital A/c
(c) Both (a) & (b)
(d) None of these
Answer:
(c) Both (a) & (b)

38. Partners Capital A/c and Partners Current A/c are prepared in the case of _____________.
(a) Fixed Capital A/c
(b) Fluctuating Capital A/c
(c) Both (a) and (b)
(d) Neither (a) nor (b)
Answer:
(a) Fixed Capital A/c

39. In the case of fixed capital method, adjustments in respect of profit, loss, drawings etc. are made in __________.
(a) Current Account
(b) Capital A/c
(c) Both (a) and (b)
(d) None of these
Answer:
(a) Current Account

40. Which of the following statement is true?
(a) Fixed capital account will always have a credit balance
(b) Current account can have a positive or negative balance
(c) Fluctuating capital can have a positive or a negative balance
(d) All of the above
Answer:
(d) All of the above

41. Goodwill is valued when:
(a) When the profit sharing ratio amongst the partner is changed
(b) When a partner retires or dies
(c) In the case of amalgamation
(d) All of the above
Answer:
(d) All of the above

42. If a firm makes exceptional profits which are not routine in nature, then such profits will not be included in:
(a) Profit share of the partners
(b) Calculation of goodwill
(c) Both (a) and (b)
(d) None of the above
Answer:
(b) Calculation of goodwill

43. In the absence of a agreement, the partners are entitled to:
(a) Salary
(b) Interest on loan
(c) Commission
(d) All of the above
Answer:
(b) Interest on loan

44. If A, B & C are three partners in a firm and C pays ₹ 20,000 against the liability of the firm, then the entry passed will be:
(a) No entry
(b) Debit C’s capital A/c & credit liability A/c
(c) Debit liability A/c and credit C’s capital A/c
(d) None of the above
Answer:
(c) Debit liability A/c and credit C’s capital A/c

45. Interest on drawing is __________.
(a) Debited to P & L A/c
(b) Credited to P & L Appropriation A/c
(c) Debited to Capital A/c
(d) Both (b) & (c)
Answer:
(d) Both (b) & (c)

46. A draws ₹ 1,000 p.m. on the last day of every month. If the rate of interest is 5% p.a., then the total interest on drawings will be:
(a) ₹ 825
(b) ₹ 275
(c) ₹ 300
(d) None of these
Answer:
(b) ₹ 275

47. A and B are partners sharing profits and losses in the ratio of 4:1 N, the manager was entitled to a commission @ 5% of net profits after charging such commission. If the profit before commission is t 6,30,000 find out the commission:
(a) ₹ 78,000
(b) ₹ 30,000
(c) ₹ 28,000
(d) ₹ 32,000
Answer:
(b) ₹ 30,000

48. A and B are the two partners having a capital of ₹ 50,000 and ₹ 60,000. Interest on capital is @ 5% p.a. If the profit before appropriation is ₹ 4,600, then find out the interest allocated to the partners:
(a) ₹ 3,500 1,100
(b) ₹ 600 & ₹ 400
(c) ₹ 2,090 & ₹ 2,509
(d) ₹ 2,112 & ₹ 4,111
Answer:
(c) ₹ 2,090 & ₹ 2,509

49. In a partnership firm, a partner withdraws ₹ 5,000 per month in the beginning of month for personal use. The rate of interest on drawings is 6% p.a. What is the amount of interest on drawings for the year?
(a) ₹ 1,950
(b) ₹ 1,800
(c) ₹ 300
(d) ₹ 1,650
Answer:
(a) ₹ 1,950
When a fixed amount is drawn regularly at the beginning of every month, the amount of interest on total drawings for the year will be on an average for 6.5 months.
So, Interest = 5,000 x 12 x \(\frac { 6 }{ 100 }\) x \(\frac { 6.5 }{ 12 }\) = ₹ 1,950
Interest on drawings for the year is ₹ 1,950.

50. Interest on capital will be paid to the partners if provided for in the partnership deed but only out of __________.
(a) Profits
(b) Reserves
(c) Accumulated profits
(d) Goodwill
Answer:
(a) Profits
Provisions relating to interest on capital:

Case	Provision
1. When partnership deed is silent about interest on capital.	No interest will be allowed.
2. When the deed provides for interest on capital but it is silent whether to treat it as a charge.	Interest on capital will be allowed only when there is profit.
3. When partnership deed provides for treating interest as a charge.	Full amount of interest will be allowed whether there is profit or loss.

51. In case of partnership the act of any partner is:
(a) Binding on all partners
(b) Binding on that partner only
(c) Binding on all partners except that particular partner
(d) None of the above
Answer:
(a) Binding on all partners
Partnership follows the principle of mutual agency. This means that every partner is an agent as well as principle of another partner. Therefore, the act of any partner is binding on all partners.

52. X, Y and Z are partners sharing profits and losses equally. Their capital balances on March, 31, 2012 are ₹ 80,000, ₹ 60,000 and ₹ 40,000 respectively. Their personal assets are worth as follows: X – ₹ 20,000, Y – ₹ 15,000 and Z – ₹ 10,000. The extent of their liability in the firm would be:
(a) X – ₹ 80,000 : Y – ₹ 60,000 : and Z – 140,000
(b) X – ₹ 20,000 : Y – ₹ 15,000 : and Z – ₹ 10,000
(c) X – ₹ 1,00,000 : Y – ₹ 75,000 : and Z – ₹ 50,000
(d) Equal.
Answer:
(b) X – ₹ 20,000 : Y – ₹ 15,000 : and Z – ₹ 10,000
In case of a partnership firm the liability of each partner is unlimited. Still this liability is limited to the value of personal assets of the partners as they cannot contribute anything more than that. Hence liability is X : 20,000; Y : 15,000; Z : 10,000.

53. In a partnership firm, in the beginning of the year, capital of one partner is ₹ 80,000. During the year, he introduced ₹ 7,000 as additional capital. In addition to this, he withdraws ₹ 2,000 in the middle of every month. The firm does not pay any interest on capital but charges 6% interest on drawings. His share of profit after interest on drawings is ₹ 20,000. At the end of the year, his capital in the firm would be __________.
(a) ₹ 83,000
(b) ₹ 1,05,000
(c) ₹ 82,280
(d) ₹ 1,09,000.
Answer:
(c) ₹ 82,280
Calculation of closing balance of capital:

54. If partnership deed is not there, then profit is shared in:
(a) Old Ratio
(b) Capital Ratio
(c) Equally
(d) New Ratio
Answer:
(c) Equally
It is not compulsory to have a partnership deed. If there is no partnership deed, profit sharing ratio is equal.

55. What will be the interest on Partner’s loan when there is no partnership deed₹
(a) 6% p.a.
(b) 6%
(c) 6% simple interest p.a.
(d) 6% compound interest p.a.
Answer:
(c) 6% simple interest p.a.
If there is no partnership deed, interest on loan even if there are losses, to be paid at the rate of 6%.

56. In a firm of A & B having equal profit sharing ratio. Salary of A is ₹ 20,000, B is ₹ 10,000. Profit of the firm is ₹ 75,000. What is the total remuneration of A.
(a) ₹ 20,000
(b) ₹ 30,000
(c) ₹ 42,500
(d) ₹ 22,500
Answer:
(c) ₹ 42,500

57. Calculate interest on drawings of A and B if accounts are closed on 31^st March, 1973.
A – ₹ 10,000 – 1^st April, 1972.
B – ₹ 20,000 – 17 August, 1972.
Interest – 8.5%
(a) ₹ 1,894.94
(b) ₹ 1,890
(c) ₹ 1,900
(d) ₹ 1,902.6
Answer:
(c) ₹ 1,900

58. Under Fixed capital method. __________ A/c remains fixed and changes are made in current A/c.
(a) Partner’s Capital A/c
(b) Partner’s Current A/c
(c) Both (a) and (b)
(d) None of these.
Answer:
(a) Partner’s Capital A/c
Under fixed capital method, Partner’s Capital A/c remain fixed until and unless addition or deletion to the capital is made.
While all the adjustments are made through the Partner’s current A/c.
Hence, capital remains fixed under fixed capital method.

59. A partner that doesn’t take part in the management of business, but he/she has made investment in business and liable to creditors of the business is known as:
(a) Dormant partner
(b) Active partner
(c) Minor partner
(d) Junior partner
Answer:
(a) Dormant partner
Dormant partner doesn’t take part in the management of business, but he/she has made investment in business and is liable to creditors of the business.

60. On 1^st April, 2012 Raghu invested capital of ₹ 2,00,000. He withdrew ₹ 50,000 during the ₹ear. Interest on drawings is charged @ 10% per annum. The amount of interest on drawings deducted from capital at the end of financial year is:
(a) ₹ 15,000
(b) ₹ 2,500
(c) ₹ 7,500
(d) ₹ 5,000
Answer:
(b) ₹ 2,500
The amount of interest on drawings:
Int. on drawings:
→ Amt. x \(\frac { Rate of Drawings }{ 100 }\) x \(\frac { 6 }{ 12 }\)
→ 50,000 x \(\frac { 10 }{ 100 }\) x \(\frac { 6 }{ 12 }\) = ₹ 2,500

61. Which of the following is not recorded in the partners current accounts₹
(a) Interest on Drawings
(b) Administrative Expenses
(c) Drawings
(d) Partners Salaries.
Answer:
(b) Administrative Expenses

Particulars	₹	Particulars	₹
Drawings A/c Int. on drawing A/c		Salaries
Administrative expenses are shown in Profit & Loss A/c.

62. Total capital employed by a partnership firm is ₹ 1,00,000 and its average profit is ₹ 25,000. Normal rate of return is 20% in similar firms working under similar conditions. The firm earns super profit of:
(a) ₹ 5,000
(b) ₹ 2,000
(c) ₹ 4,000
(d) ₹ 3,000.
Answer:
(b) ₹ 2,000
Super profit = Average Prof it – Normal Profit
Normal profit = Capital x Rate
Normal profit = 1,00,000 x 20%
= ₹ 20,000
= ₹ 25,000 – 20,000
= ₹ 5,000

63. The investment of personal assets by the owner in the business will:
(a) Increase total assets and increase owners equity
(b) Increase assets and decrease liabilities
(c) Increase total assets only
(d) Has no effect on assets but increase owners equity.
Answer:
(a) Increase total assets and increase owners equity
Introduction of personal assets by the owner in the business will increase total assets of the business and will also have effect of increase in owner’s equity.

64. A, B and C started a business by investing ₹ 45,000, ₹ 55,000 and ₹ 60,000 respectively and sharing profit or losses in the ratio of capital. At the end of a year they got a total profit of ₹ 11,200. How much “B” get more than “A” in the profit?
(a) ₹ 780
(b) ₹ 700
(c) ₹710
(d) ₹ 750
Answer:
(b) ₹ 700
The ration of capital = 45 : 55 : 60
= 9 : 11 : 12
Share of A in Profit = 11200 x 9/32 = 3150
Share of B in Profit = 11200 x 11/32 = 3850
Therefore, the amount by which profit of B exceeds that of A is (3,850 – 3,150) = ₹ 700

65. In the general form of partnership, liability of partner are:
(a) Limited
(b) Limited to the capital invested by them
(c) Unlimited
(d) Limited to an amount guaranteed by them.
Answer:
(c) Unlimited
Generally speaking, every partner in a partnership has unlimited liability for all of the partnership’s debts. Each partner can be held responsible not only for liabilities resulting from a lawsuit but also for liabilities stemming from a contract signed by only one of the partners This is due to the fact that each partner is an “agent” of the partnership.

66. Which of the following is not recorded in the partners current accounts?
(a) Interest on drawings
(b) Partners salaries
(c) Administrative expenses
(d) Drawings
Answer:
(c) Administrative expenses
The Partner’s Current Account under the Fixed Capital A/c contains

• Interest on capital
• Interest on drawing
• Salary on commission to partner
• Adjustment of profit
• Drawings

67. In case if partnership deed is silent, profit is divided as follows?
(a) Gaining ratio
(b) Equally
(c) Sacrifice ratio
(d) Either of (a) & (b)
Answer:
(b) Equally
If there is no partnership deed or if there is no provision in it indicating a contrary intention, the following provisions of the Partnership Act, apply.

• Every partner has a right to take part in the conduct of the business of the firm and also the right of free access to all records, books and accounts of the firm.
• Partners share profits and losses equally. It is so, even when partners contribute capital unequally.
• Partners are not entitled to any interest on capital contributed by them nor can they claim any salary for the work done by them for the firm. In case a partnership deed provides for payment of interest on capital or salary, it is payable only if there is a profit.
• On amounts advanced by a partner to the firm in excess of his agreed share of capital, the partner is entitled to receive interest on such excess at the rate of 6% per annum. Such interest is payable even if there is a loss.
• No interest is to be charged on drawings.

68. If profit is divided equally so it is necessary that loss should also be divided?
(a) Partly yes
(b) Partly no
(c) Yes
(d) No
Answer:
(c) Yes
The business must be carried on for the purpose of earning profits which would be divided among the partners i.e. there must be an agreement among the partners to share the profits (including negative profits, i.e., losses) of a business. Hence, the above statement is correct.

69. As per the Partnership Act, 1932 if a partner with a capital deficiency is unable to pay the amount owed to the partnership, the deficiency is borne by other partners with credit balances:
(a) On the basis of their income ratio’s
(b) On the basis of their capital balances
(c) Equally
(d) On the basis of their original investments.
Answer:
(b) On the basis of their capital balances
As per the Decision in Garner, vs Murray Case. The loss should be divided among the other partners in the ratio of capitals then standing.

70. As per Partnership Act, 1932 the following are characteristics of partnership except:
(a) Earning of profit
(b) Co-ownership of property
(c) Unlimited liability
(d) Mutual agency
Answer:
(b) Co-ownership of property
The Partnership form of business organisation is characterised by the Co-ownership of property.

71. If capital at the end of the year is ₹ 70,000 capital introduced during the year is ₹ 50,000 is drawing would be equal to?
(a) ₹ 30,000
(b) ₹ 12,000
(c) ₹ 16,000
(d) ₹ 20,000
Answer:
(d) ₹ 20,000
Capital shown at the end is ₹ 70,000 and Capital introduced during year ₹ 50,000. So, ₹ 20,000 is drawing due to which capital shown at the end is ₹ 70,000.

72. In general partnership, liability of a partner is:
(a) Limited
(b) Unlimited
(c) Limited up to the capital contributed by partner
(d) None of the above.
Answer:
(b) Unlimited
In general partnership liability of partner is unlimited, hence, option

73. Registration of partnership is:
(a) Voluntary
(b) Mandatory
(c) Compulsory
(d) None of the above.
Answer:
(a) Voluntary
Registration of a firm is voluntary. Hence, option (a) is correct.

74. Which of the following is true about a partnership
(a) All partners invest an equal amount of capital in the partnership’s business
(b) All partners are personally liable for the debts of the partnership business
(c) Partnerships get favourable tax treatment compared to corporations
(d) A partnership requires at least three persons
Answer:
(b) All partners are personally liable for the debts of the partnership business
In a partnership due to existence of mutual agency, all partner are principal as well as agent of the other partners. Hence, all partners are personally liable for the debts of the partnership business.

75. In a partnership firm, in the beginning of the year, capital of one partner is ₹ 80,000. During the year, he introduced ₹ 7,000 as additional capital. In additional to this, he withdraws ₹ 2,000 in the middle of every month. The firm does not pay any interest on capital but charges 6% interest on drawings. His share of profit after interest on drawings is ₹ 20,000. At the end of the year, his capital in the firm would be:
(a) ₹ 83,000
(b) ₹ 1,05,000
(c) ₹ 82,280
(d) ₹ 1,09,000
Answer:
Interest on drawings = (2000 x 12) x \(\frac { 6 }{ 12 }\) x \(\frac { 6 }{ 100 }\) = ₹ 720
Note: Since, drawings are made at middle of every month, interest for 6 months is charged on an average.

Beginning	80,000
Add: Additional Capital Introduced	7,000
Less: Interest on drawings	(720)
Less: Drawings	(24,000)
Add: Share of Profit	20.000
Closing Capital	82.280

76. A & B share capital ratio in 2:3. A withdraws after 9 months from business. How long did B invest his capital __________?
(a) 8 Months
(b) 12 Months
(c) 11 Months
(d) 10 Months
Answer:
(b) 12 Months
A : B Share Capital Ratio in 2: 3. A withdraws his capital after a months hence A’s capital is invested in the bushiness for 9 months, but it does not mean that B also withdrawal his capital. Concluded, B’s capital is invested in the partnership till year end i.e for 12 months.

77. Find Goodwill of 3 years purchase if super profit of 5 years is 1^st year – 30,000 2^nd – 32,000; 3^rd year = 30,000 (including gain 2,000) 4^th year (26,000) 5^th year (14,000) and capital employed 1,00,000 and normal rate of return 15% __________.
(a) 45,000
(b) 30,000
(c) 24,000
(d) 10,000
Answer:
(a) 45,000
Average profit for last 5 years
= 30,000 + 32,000 + 30,000 – 2,000 – 26,000 – 14,000 – \(\frac { 50,000 }{ 5 }\)
= 10,000
Normal profit = Capital employed x \(\frac { R% }{ 100 }\)
= 10,000 x \(\frac { 15 }{ 100 }\)
= 15.000.
Super Profit = 15,000 – 10,000
= 5,000 x 3
= 15.000
Goodwill = 15,000 x 3 = 45,000

Go through this Introduction to Company Accounts-Redemption of Preference Shares – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

Meaning:

• it refers to the process of repaying an obligation, at amounts and timings that are pre decided.
• Redemption date means the maturity date.
• Company adjusts its financial structure through the process of redemption.

Purpose of Issuing Redeemable Preference Shares:

• Provides a proper way of raising finance.
• Encourages the potential investors to buy redeemable shares
• Redeemed out of surplus capital which cannot be utilised for profitable purpose.
• Medium term projects generates enough funds which enables their redemption.

Provisions of Companies Act, 2013 (Section 55):
1. No shares can be redeemed except (I) out of profits which are available for dividends or, (II) out of proceeds of fresh issue of shares made for redemption purpose.
Only fully paid shares can be redeemed.

2. If any premium has to be paid on redemption, it must be paid (I) out of company’s profit or (II) out of company’s share premium account. (Securities Premium)

3. If shares are redeemed out of profits, a sum equal to nominal value of shares redeemed must be transferred out of profits to Capital Redemption Reserve Account which would otherwise have been available for dividend.
Note: Its main objective is that with the repayment of redeemable preference shares, the creditors security should not be reduced.

5. Capital Redemption Reserve Account can be utilised only for paying unissued shares as fuily paid bonus shares.

6. According to Section 55 of Companies Act, 2013 a company cannot issue any preference share which is redeemable or irredeemable after expiry of 20 years from the date of its issue. A company may issue preference shares for a period exceeding 20 years but not exceeding 30 years for infrastructure projects (specified in Schedule VI) However, it is subject to redemption of minimum 10% of such preference shares per year from 21^st year onwards or earlier, on proportionate basis, at the option of preference shareholders.

7. When the company redeems preference shares then it can issue shares upto the amount of nominal value of shares redeemed as if those shares have never been issued.

8. Redemption does not mean reduction of company’s authorised share capital.

9. Issue of new equity shares for the purpose of redemption does not mean increase of capital.

10. Non-compliance of above provisions leads to a default which is punishable with a fine extending to ? 10,000.

Methods of Redemption:

• By proceeds of a fresh issue of shares
• By capitalisation of undistributed profits
• By combination of the above two

Redemption of Preference Shares by Fresh Issue of Shares:
1. Company can issue new shares i.e. equity or preference and proceeds are utilised for redemption.
Note: Proceeds from issue of debentures cannot be used for redemption.

2. If fresh issue is made at a premium: Only nominal value of shares issued should be considered for transferring amount to CRR A/c. Note: The amount of premium has to be transferred to Securities Premium A/c which can be utilised only for purposes mentioned u/s 52

3. if fresh issue is made at a discount – As per Companies Act 2013, fresh issue cannot be made on discount.

Advantages	Disadvantages
(i) No cash outflow. (ii) Shares can be valued at premium. (iii) No capital gain tax. (iv) Retention of equity interest by shareholders.	(i) Dilution of earnings. (ii) Change in Shareholdings.

Journal Entries:
(I) When new shares are issued at par
Bank A/c Dr.
To Share Capital A/c

(II) When new shares are issued at a premium
Bank A/c Dr.
To Share Capital A/c To Securities Premium A/c

(III) Redemption at par
Redeemable Preference Share Capital A/c Dr.
To Preference Shareholders A/c

(IV) Redemption at premium
Redeemable Preference Share Capital A/c Dr.
Premium on Redemption A/c Dr.
To Preference Shareholders A/c

(V) When payment is made to Preference Shareholders
Preference Shareholders A/c Dr.
To Bank A/c

(Vi) Adjustment of Premium on Redemption
Profit and Loss A/c Dr.
Securities Premium A/c Dr.
To Premium on Redemption of Preference Shares A/c

Redemption of preference shares by capitalisation of undistributed profits:
In this case, an amount equal to the face value of shares redeemed is transferred to CRR A/c.

Advantages	Disadvantages
(i) No change in shareholdings. (ii) No dilution of earnings.	(i) Reduction in liquidity (ii) Capital gain tax liability

Journal Entries:
(I) When Shares are redeemed at par
Redeemable Preference Share Capital A/c Dr.
To Preference Shareholders A/c

(II) When Shares are redeemed at Premium
Redeemable Preference Share Capital A/c Dr.
Premium on Redemption A/c Dr.
To Preference Shareholders A/c

(III) When payment is made to Preference Shareholders
Preference Shareholders A/c Dr.
To Bank A/c

(IV) Adjustment of Premium on Redemption
Profit and Loss A/c Dr.
Securities Premium A/c Dr.
To Premium on Redemption A/c

(V) Transferring nominal amount of shares redeemed to Capital
Redemption Reserve Account (CRR)
General Reserve A/c Dr.
Profit and Loss A/c Dr.
To CRR A/c

Redemption of Preference Shares by Combination of Fresh Issue and Capitalisation of Undistributed Profits
→ In this case,

→ Redeemable Pref. Share Capital
= CRR A/c + New Share Capital A/c

→ Amount to be transferred to CRR A/c
= Face value of shares redeemed – Proceeds from new issue.

→ Proceeds to be collected from New Issue
= Face value of shares redeemed – Profits available for distribution as dividend.

Introduction to Company Accounts-Redemption of Preference Shares MCQ Questions

1. According to Sec-55 of Companies Act, 2013, a company cannot redeem its preference shares out of:
(a) Revenue Profits
(b) Net proceeds of fresh issue of shares
(c) Partly out of revenue profits and partly out of net proceeds of fresh issue of shares
(d) Out of redemption of debentures
Answer:
(d) Out of redemption of debentures

2. Redeemable preference shares of ₹ 2,00,000 are redeemed at par for which purpose, fresh equity shares are issued for ₹ 80,000 at 10% premium.
The amount to be transferred to Capital Redemption Reserve will be:
(a) ₹ 80,000
(b) ₹ 1,20,000
(c) ₹ 2,00,000
(d) ₹ 1,12,000
Answer:
(b) ₹ 1,20,000

3. Which of the following accounts can be transferred to Capital Redemption Reserve A/c?
(a) General Reserve A/c
(b) Forfeited Share A/c
(c) Profit prior to incorporation
(d) Share Premium A/c
Answer:
(a) General Reserve A/c

4. Which of the following cannot be used for the purpose of creation of Capital Redemption Reserve A/c?
(a) Credit Balance of Profit/Loss Account
(b) General Reserve Account
(c) Dividend Equalisation Reserve Account
(d) Unclaimed Dividend Account
Answer:
(d) Unclaimed Dividend Account

5. If preference shares are redeemed at premium, such premium may be provided out of:
(a) Share Forfeited A/c
(b) Security Premium A/c
(c) Proceeds of fresh issue of shares
(d) CRR A/c
Answer:
(b) Security Premium A/c

6. S Ltd. issued 2000, 10% preference shares of ₹100 each at par, which are redeemable at a premium of 10%. For the purpose of redemption, the company issued 1,500 equity shares of ₹ 100 each at a premium of 10%. At the time of redemption of preference shares, the amount to be transferred by the company to CRR will be:
(a) ₹ 50,000
(b) ₹ 45,000
(c) ₹ 55,000
(d) ₹ 60,000
Answer:
(a) ₹ 50,000

7. T Ltd. issued 30,000 12% preference shares of ₹10 each at a premium of 5% which are redeemable at par. The company, since it did not have sufficient cash resources to redeem the preference shares, issued 20,000,14% debentures of 0 each at a premium of 10%. The amount to be transferred to CRR will be:
(a) ₹ 85,000
(b) ₹ 1,00,000
(c) ₹ 3,00,000
(d) ₹ 1,10,000
Answer:
(c) ₹ 3,00,000

8. Preference shares amounting to ₹ 2,50,000 are redeemed at a premium of 5% by issue of shares amounting to ₹ 1,50,000 at a premium of 10%. The amount to be transferred to CRR will be:
(a) ₹ 1,05,000
(b) ₹ 1,00,000
(c) ₹ 2,00,000
(d) ₹ 1,11,000
Answer:
(b) ₹ 1,00,000

9. The balance appearing in the books of company at the end of the year were: CRR A/c- ₹ 50,000, Security Premium ₹ 5,000 Revaluation Reserve – ₹ 2,000; P/L A/c (Dr.) 10,000, maximum amount available for distribution as bonus shares will be __________.
(a) ₹ 50,000
(b) ₹ 55,000
(c) ₹ 45,000
(d) ₹ 57,000
Answer:
(b) ₹ 55,000

10. Which of the following method cannot be used to redeem the preference shares?
(a) Capitalisation of undistributed profits
(b) Proceeds of fresh issue of shares
(c) Both (a) and (b)
(d) The proceeds from issue of debentures
Answer:
(d) The proceeds from issue of debentures

11. Which of the following statement is false?
(a) A company has to redeem its preference shares within 20 years.
(b) Preference Shareholders are creditors of the company.
(c) The part of authorised capital which can be called up only in the event of liquidation of a company is called reserve capital.
(d) Capital Redemption Reserve can be utilized only for issuing fully paid bonus shares.
Answer:
(c) The part of authorised capital which can be called up only in the event of liquidation of a company is called reserve capital.

12. On redemption of preference shares, money cannot be arranged (for payment to shareholders) from __________.
(a) issue of new shares
(b) sale of investment
(c) sale of fixed asset
(d) bank loan or overdraft
Answer:
(d) bank loan or overdraft

13. Share premium cannot be used to __________.
(a) issue bonus shares
(b) redeem preference shares
(c) write off preliminary expenses
(d) write off discount on issue of shares
Answer:
(b) redeem preference shares

14. Preference shares can be redeemed:
(a) Even if they are partly paid
(b) After getting permission from the court only
(c) Only if they are fully paid
(d) All of the above
Answer:
(c) Only if they are fully paid

15. The preference share which carry the right of participating jn the surplus left after paying the equity dividend are called:
(a) Convertible Preference Shares
(b) Cumulative Preference Shares
(c) Participating Preference Shares
(d) All of the above
Answer:
(c) Participating Preference Shares

16. Redeemable preference shares must be redeemed within:
(a) 5 years
(b) 20 years
(c) 15 years
(d) 10 years
Answer:
(b) 20 years

17. Irredeemable preference shares:
(a) Cannot be issued at all
(b) Can be issued only after taking permission from the ROC
(c) Can be issued after taking approval of the Central Government
(d) Can be issued after obtaining the permission of the court
Answer:
(a) Cannot be issued at all

18. ₹ 10,00,000 preference shares are to be redeemed by issue of 8,000 equity shares @ ₹ 100 each for ₹ 120 each. Then, the Capital Redemption Reserve is to be credit by:
(a) ₹ 4,00,000
(b) ₹ 10,00,000
(c) ₹ 8,00,000
(d) ₹ 2,00,000
Answer:
(d) ₹ 2,00,000

19. Preference shares can be redeemed from:
(a) Out of profits
(b) Proceeds of fresh issue of equity shares
(c) Proceeds of fresh issue of preference shares
(d) All of the above
Answer:
(d) All of the above

20. If the preference shares are redeemed at a premium, then the premium payable on redemption is provided out of:
(a) Securities Premium Account
(b) Profits of the Company
(c) Both (a) and (b)
(d) Neither (a) nor (b)
Answer:
(c) Both (a) and (b)

21. When the shares are redeemed out of profits then an amount equal to the nominal value of such shares is transferred to:
(a) General Reserve
(b) Capital Redemption Reserve
(c) Capital Reserve
(d) Securities Premium
Answer:
(b) Capital Redemption Reserve

22. The maximum fine which can be charged on the company or its members for non compliance of section 55 is:
(a) ₹ 1,00,000
(b) ₹ 10,000
(c) ₹ 5,000
(d) ₹ 25,000
Answer:
(b) ₹ 10,000

23. Which of the following statement is false?
(a) Capital Redemption Reserve can be applied for issuing bonus shares of the company
(b) Partly paid up shares can be redeemed
(c) Both (a) and (b)
(d) Neither (a) nor (b)
Answer:
(b) Partly paid up shares can be redeemed

24. A company cannot issue redeemable preference shares for a period exceeding:
(a) 6 Years
(b) ₹ Years
(c) 8 Years
(d) 20 Years.
Answer:
(d) 20 Years.
According to Sec 55 of Companies Act, 2013 a company cannot issue any preference share, which is irredeemable or is redeemable after the expiry of a period of twenty years from the date of its issue.

25. Solid Ltd. issued 2,000, 10% preference shares of ₹ 100 each at par, which are redeemable at a premium of 10%. For the purpose of redemption, the company issued 1,500 equity shares of ₹ 100 each at a premium of 20% per share. At the time of redemption of preference shares, the amount to be transferred by the company to the Capital Redemption Reserve Account will be __________.
(a) ₹ 50,000
(b) ₹ 40,000
(c) ₹ 2,00,000
(d) ₹ 2,20,000
Answer:
(a) ₹ 50,000
Amount to be transferred to Capital Redemption Reserve:

Thus, amount of Capital Redemption Reserve Account will be ₹ 50,000.

26. Which of the following accounts can not be transferred to capital redemption reserve account?
(a) Dividend equalisation account
(b) General reserves
(c) Profit and loss appropriation account.
(d) Securities premium reserves.
Answer:
(d) Securities premium reserves.
Whenever the redemption or buy-back of shares is made out of the profits of the company, a sum equal to the nominal amount of the shares to be redeemed, shall be transferred to a reserve called the Capital Redemption Reserve Account. For this purpose, following accounts are used:

• General Reserves
• Profit & Loss Appropriation A/c
• Dividend Equalization A/c
• Other free Reserves

Hence, Securities premium reserves cannot be transferred.

27. Which of the following cannot be utilized for redemption of preference share?
(a) General Reserve
(b) Capital Reserve
(c) Credit balance of profit and loss account
(d) Dividend equalisation account.
Answer:
(b) Capital Reserve
At the time of redemption of Preference Shares, capital redemption reserve is to be created. Since it is a capital reserve, it can be created only out of revenue profits. Hence, capital reserve cannot be used for redemption of preference share.

28. Solid Ltd. issued 2000, 10% preference shares of ₹ 100 each at par, which are redeemable at a premium of 10% for the purpose of redemption the company issued 1500 equity shares of ₹ 100 each at a premium of 20% per share. At the time of redemption of preference shares, the amount to be transferred by the company to the capital redemption reserve account will be __________.
(a) ₹ 50,000
(b) ₹ 2,20,000
(c) ₹ 2,00,000
(d) ₹ 40,000
Answer:
(a) ₹ 50,000
If the redeemable preference share are redeemed partly out of profits of company and partly out of fresh issue of shares equity or preference. Then Capital Redemption Reserve Account is created with the amount of difference between share capital redeemed and share capital account.
Capital Redemption Reserve = 2,000 x 100/-
Preference Share – 1500 x 100/- New equity share
Capital Redemption Reserve = 2,00,000 – 1,50,000
= ₹ 50,000

29. Capital Redemption Reserve A/c is prepared when __________.
(a) Redemption is done out of issue of fresh shares
(b) Redemption is done out of profit of the company
(c) Redemption is done through company’s capital fund
(d) All of the above
Answer:
(b) Redemption is done out of profit of the company
Whenever a company redeems its preference shares. Then the nominal value or face value of the shares is put into capital redemption reserve fund. It is transferred from the undistributed profits i.e. general reserve, profit or loss account.

30. During the year 2008-2009. Tin Ltd. issued 20,000, 12% preference shares of ₹ 10 each at a premium of 5%, which are redeemable after 4 years at par. During the year 2012-2013, as the company did not have sufficient cash resources to redeem the preference shares, it issued 10,000, 14% preference shares of ₹ 10 each at a premium of 10%. At the time of redemption of 12% preference shares, the amount to be transferred to capital redemption reserve would be:
(a) ₹ 2,00,000
(b) ₹ 1,10,000
(c) ₹ 90,000
(d) ₹ 1,00,000
Answer:
(d) ₹ 1,00,000
When preference shares are to be redeemed out of profit, a sum equal to the nominal value of shares redeemed out of profit shall be transferred to Capital Redemption Reserve A/c.

31. A company cannot issue redeemable preference shares for a period exceeding __________.
(a) 6 years
(b) 7 years
(c) 8 years
(d) 20 years
Answer:
(d) 20 years
A company cannot issue redeemable preference shares for a period exceeding 20 years and for infrastructure projects, redeemable preference shares issued for 25 to 30 years.

32. S Ltd. issued 8,000,10% preference shares of ₹ 100 each at par which is redeemable at premium of 10% company issued 1500 equity shares of ₹ 100 each @ 20% premium per share. The amount transferred by company to CRR A/c will be.
(a) ₹ 1,50,000
(b) ₹ 2,00,000
(c) ₹ 2,50,000
(d) None of the above
Answer:
(a) ₹ 1,50,000
If preference shares are proposed to be redeemed out of the profits of the company, a sum equal to the nominal amount of shares to be redeemed shall be transferred to a reserve called Capital Redemption Reserve. In following question; company issued 1500 equity shares at premium amount of ₹ 100 per each with 20% premium respectively.
Nominal value of share: 1500 x 100 = ₹ 1,50,000, Thus, option (a) is correct.

33. Solid Ltd. issued 2,000, 10% preference shares of ₹ 100 each at par, which are redeemable at a premium of 10%, for the purpose of redemption, the company issued 1,500 equity shares of ₹ 100 each at a premium of 20% per share. At the time of redemption of preference shares, the amount to be transferred by the company to the capital Redemption Reserve Account will be:
(a) ₹ 50,000
(b) ₹ 40,000
(c) ₹ 2,00,000
(d) ₹ 2,20,000
Answer:
(a) ₹ 50,000
At the time of redemption of preference shares, replacement of capital to be effected is equal to the nominal value of preference shares redeemed.
Nominal Value of Equity Issue = 1500 x 100
= 1,50,000
∴ CRR to be created is ₹ 50,000

34. Preference shares cannot be redeemed after?
(a) 10 years
(b) 20 years
(c) 50 years
(d) 5 years
Answer:
(b) 20 years
A company may issue preference shares which are liable to be redeemed within a period not exceeding twenty years from the date of their issue under section 55 of the Companies Act, 2013. The company should be authorized by its articles.

35. ‘A’ company purchase land for ₹ 1,00,000 and paid debenture of ₹ 10 each at 10% premium. Find number of debenture issued?
(a) 50,000
(b) 5,000
(c) 10,000
(d) None
Answer:
(b) 5,000

Go through this Preparation of Final Accounts for Sole Proprietorship – CS Foundation Fundamentals of Accounting and Auditing Notes will help students in revising the entire subject quickly.

Preparation of Final Accounts for Sole Proprietorship – CS Foundation Fundamentals of Accounting Notes

Final Accounts:
The final step of the process of accounting is the preparation of such accounts which depict the end results.

1. Net Profit of the trading activities in terms of Profit made or loss incurred for a given period.
2. It’s financial position in terms of asset & liabilities.

These involve the preparation of:

• Trading Account
• Profit and Loss Account
• Balance Sheet

Since the preparation of these accounts is the final stage of accounting, hence these are known as Final Accounts.
Final accounts are prepared from the balance appearing in Trial Balance.

Objectives of maintaining final Accounts:
(i) To ascertain Profit or Loss of the business

(ii) To ascertain the financial position of a business.

Trading Account:

• The first step in the preparation of final accounts is the preparation of trial balance.
• Trading Account shows the results of buying and selling of goods and services in the form of gross profit or gross loss for a given accounting year.

Features of Trading Account:

• It is prepared in the final accounts of a trading concern.
• It shows the result of trading activities.
• The balance of this account discloses the gross profit or gross loss.
• The balance of this account is transferred to the Profit/Loss Account.
• The trading account is based on the following equation:
• Gross Profit = Net Sales – Cost of Goods Sold OR
• Gross Loss= Cost of Goods Sold – Net Sales

Where:

• Cost of Goods Sold (COGS) = Opening Stock + Purchases + Direct Expenses – Closing Stock.
• Net Sales = Sales Sales Returns (Return Inwards)
• Net Purchases = Total Purchase – Purchase Return

This account matches the selling price and cost of goods and services sold during an accounting year.

Items of Trading Account (Debit Side):
(i) Opening Stock:

• This is the closing stock of the previous year which has been brought forward.
• In the first year of commencement, there will be no opening stock.

(ii) Purchases Less Purchase Return:

• It refers to the materials purchased by the business (either on cash or credit)
• Purchase Returns refers to the material returned to the supplier.
• Purchase Returns are riot included and hence, are deducted from purchases.
• Net Purchase = Purchase – Purchase Returns (Return Outward)

Note: Sometimes material or goods are taken for personal use, for giving as charity or by way of samples.
The purpose of these goods is not to earn profits. Hence, these are deducted from purchases.

(iii) Direct Expenses:

• Expenses directly associated with the goods are called direct expenses.
• These include the expenses to purchase the goods and to bring them to the business premises.
• Examples of these expenses are: Freight inwards, clearing charges, custom duty, cartage, octroi etc.

(iv) Gross Profit:

• This is the balancing figure of the trading account.
• It shows the excess of Net Sales over Cost of Goods Sold.
• It is transferred to the credit side of Profit and Loss Account.

Items of Trading Account (Credit Side):
(i) Sales Less Returns –

• Sales refers to the amount received or to be received from sale of goods.
• Since it is an income for the business hence, sales always has a credit balance.
• Sales Returns refers to the returns made by the customers due to detects in goods or any other reason.
• Sales Returns should be deducted from sales.
• Net Sales = Sales – Sales Returns

Note:

• Purchase Returns are also known as Return Outwards as the goods are going out of the business.
• Sales Return is also known as Return Inwards as the sold goods are coming back to the business.

(ii) Closing Stock –

• Unsold stock at the end of the accounting period.
• It refers to the stock unsold at the end of the accounting year.
• Closing stock appears on the credit-side of trading account as well as on the asset side of Balance Sheet.
• Closing stock does not appear in the Trial Balance.

Note:
As per the concept of conservatism studied in ch-1, closing stock should be measured at cost or market price whichever is lower.

(iii) Gross Loss:

• It is the net result of the Trading Account.
• it occurs when cost of goods sold is in excess of net sales.
• It is transferred to the debit of Profit and Loss Account.

Format
Trading Account for the year ended….

Profit and Loss Account:

• The next step after preparation of Trading Account is the preparation of Profit and Loss Account.
• Profit and Loss Account is prepared to ascertain the net profit or loss from the business.

Note:
Trading Account tells us the profit/loss from the trading activity (i.e. buying and selling of goods). Hence, it is known as Gross Profit/Gross Loss. Whereas, Profit/Loss Account tells us the profit earned or loss incurred from the whole business (i.e. after deducting expenses of the business or indirect expenses).
Hence, it is known as Net Profit/Loss.

Features of Profit and Loss Account:

• P/L A/c relates to a particular accounting period and is prepared at the year end.
• It is prepared based on accrual basis of accounting.
• It helps us to know the net results of the business in the form of Net Profit or Net Loss.
• The net profit/loss so ascertained is transferred to the capital account of proprietor.
• Profit and Loss account is also known as the income statement.

Items of Profit and Loss Account [Debit Side]:
(i) Gross Loss :

• As transferred from the trading account.
• It has been already discussed earlier.

(ii) Indirect Expenses:
Those expenses which are not directly related to the buying of goods but are necessary for conducting the business are called indirect expenses.

These can be classified as –
(i) Administrative or Office Expenses
(salaries, office rent, electricity, legal expenses, stationery, postage and stamp, etc.)
Net Profit = Total Revenue – Total Expenses Net Loss = Total Expenses – Total Revenue

(ii) Selling and Distribution Expenses
(commission of agents, advertising expenses, salesman salary, freight, cartage on sales, etc.)

(iii) Financial Expenses
(interest on loan, interest on capital, discount allowed, etc.)

(iv) Abnormal Losses
Abnormal Losses include loss of stock by fire, loss by theft, loss on sale of fixed assets etc.

(v) Bad Debts
Bad debts refers to the debts given by the company which will not be recovered. Since it is a loss to the company hence they will be shown in the P/L A/c.

Items of Profit and Loss Account [Credit Side]:
(i) Gross Profit

As transferred from the trading account.
It has been already discussed earlier.

(ii) Indirect incomes
1. Income other than from sale of goods are known as indirect incomes.

2. Some of the examples are

• Commission received
• Interest on fixed deposit
• Rent received
• Discount received
• Interest on drawings
• Income from investment, etc.

Note: The balance of P/L A/c is a Net Profit or Net Loss which is transferred to the Capital A/c.
Net Revenue = Total Revenue – Total expenses Net Loss = Total expenses – Total revenue

Note: Profit and Loss Account is based on the fundamental principle of “matching cost with revenue” of an accounting period.

Format of Profit and Loss Account:
Profit and Loss Account for the year ended ……….

Difference between Trading Account and Profit and Loss Account:

Basis	Trading Account	Profit and Loss Account
1. Relation	Trading Account is a part of Profit and Loss Account.	Profit and Loss Account is the main account.
2. Nature	The Gross Profit or Gross Loss is ascertained from the Trading Account.	The Profit and Loss Account is prepared to ascertain the Net Profit or Net Loss of the business.
3. Transfer of Balance	The balance of the Trading Account is transferred to the Profit and Loss Account.	The balance of the Profit and Loss Account is transferred to Balance Sheet.
4. Items	Items shown in the Trading Account are Purchases, Sales, Stock, direct expenses, etc.	Items like indirect expenses related to sales, distribution, administration, finance, etc.. are shown in the Profit and Loss Account.

Balance Sheet:

• Balance Sheet is a statement which shows the balances of various assets and liabilities of a business on a particular date.
• It shows the financial position of a business as at a given time.
• A Balance Sheet is prepared from the balances of the real and personal accounts.
• Balance Sheet is also known as the position statement as it tells us the financial position of a business on a particular date.
• The two sides of Balance Sheet should always be equal. If any differences arises then the same should be placed on the deficit side as Suspense A/c.
• The total of both sides of the Balance Sheet must agree because of the equation, viz. Assets = Liabilities + Capital

Items of Balance Sheet [Left Side]:
(i) Capital (Fixed Liability) –

• It refers to the amount contributed by the proprietor into the business.
• Net Profit is added to the capital while drawings are deducted from it.

It can be expressed as –

• Net Assets of the Business, Or
• Difference between Assets and liabilities.

(ii) Liabilities:
1. The obligations of the business are known as liabilities.

2. They can be classified into –

• Long term Liabilities (Fixed Liabilities)
• Current Liabilities
• Contingent Liabilities

Long term Liabilities:

• The obligation which are not to be paid in the near future are termed as long term liabilities.
• These include long term loans or debentures which are mainly raised for a period of more than one year.
• These are the fixed liabilities which are payable on the termination of the business. Example – Capital of proprietor

Current Liabilities:

• Short term obligations of the business are termed as current liabilities.
• These liabilities are payable within a period of one year.
• These include trade creditors, bills payable, outstanding expenses, bank overdraft and other short term liabilities.

Contingent Liabilities:

• These are actually not a liability but their possibility of becoming liability depends upon happening or non happening of an uncertain event.
• These are not shown in Balance Sheet, but are disclosed by way of footnotes. E.g.- Liability in respect of pending suit, bills discounted with a bank etc.
• If such events do not occur, no liability is incurred.

Items of Balance Sheet [Right Side]
(i) Assets:
The property or legal rights which are owned by a business are known as assets.

• Assets can be classified as follows:
• Fixed Assets:

Assets which are acquired for long term use and not for resale.
Examples: Land and building, plant and machinery, furniture, etc.

Current Assets (floating assets):

• Assets which have been acquired for resale or for converting into cash are called current assets.
• Current assets are likely to be realised within one accounting year.
• Examples: stock, debtors, bills receivable, etc.

Liquid Assets:

• Assets which are in cash or are readily convertible into cash are known as liquid assets.
• Example: cash, government securities etc.

Wasting Assets:

• Assets which have a fixed content and will deplete as and when the content is taken out are called wasting assets.
• Examples: coal mine, iron ore mine etc.

Intangible Assets:

• Assets which are intangible in nature (i.e. they cannot be felt or touched) are called intangible assets.
• Such assets do not have a physical existence but have a value.
• Example: goodwill of the business.

Fictitious Assets:
1. These assets can be in two forms:

• Valueless assets (i.e. patents, trademarks)
• Expenses treated as assets (preliminary expenses)

2. These include deferred revenue expenditure not yet written off.

(ii) Investments:

• They represent the capital expenditure made on purchase of shares, debentures, bonds or any other security.
• Investments will earn benefits for the firm in the form of dividend, interest etc.
• These are shown under a separate head in the right side of balance sheet along with assets.

Marshalling of Balance Sheet:

• The arrangement of asset and liabilities in a particular order in a Balance Sheet is termed as Marshalling.
  It is also known as grouping.
• Assets and liabilities can be arranged in the following order
• Order of liquidity (according to time)
• Order of permanence (according to purpose)

Order of Liquidity:
1. Liquidity means how quickly an asset or liability will convert into cash.

2. Here the items of Balance Sheet are arranged in descending order of liquidity (i.e. starting from most liquid and ending with least liquid).
Example:
Balance Sheet:

	Liabilities	Assets
	Bills payable Sundry creditors ………………. ………………. ………………. ………………. Capital	Cash in hand Cash at bank ……………….. ……………….. ……………….. Plant and machinery Land and building

Order of permanence
1. Order of permanence means starting with those assets which are to be used permanently in business and. those liabilities which are a permanent obligation of the business.
Example:

	Liabilities	Assets
	Capital ………………. ………………. ………………. ………………. Sundry creditors Bills payable	Goodwill Plant and machinery ……………….. ……………….. ……………….. Cash in hand

Format
Balance Sheet of As at ……………

Difference between Balance Sheet and Trial Balance:

Basis	Balance Sheet	Trial Balance
1. Purpose	The purpose is to portray the financial position.	The purpose is to establish the arithmetical accuracy of the books of account.
2. Information about Profits	It provides information as to the profitability and financial position of the firm.	No such information is possible from the Trial Balance.
3. Headings	The two sides are headed as assets and liabilities.	The two columns are headed as debit and credit.
4. Coverage	Only personal and real accounts appear in the Balance Sheet.	In the Trial Balance, all accounts must be written. No account should be left out.
5. Use	Prepared for external use (Creditors, shareholders etc.)	Prepared for internal use.
6. Period	Normally, it is prepared only at the end of the trading period.	A Trial Balance is prepared normally every month on whenever desired.

Final Accounts with adjustments:
1. In a business there are certain transactions of expenses and incomes which need to be adjusted.
At the time of preparing final accounts, it is important to take into account these transactions. These are known as adjustments and the entries required to give them effect are called adjusting entries.

2. While bringing out any adjustment, the principle of double entry system should be kept in mind. If any one account is debited, then any other account should be credited.

Some of the items requiring adjustments are as follows:

• Outstanding expenses
• Prepaid expenses
• Bad debts/bad debt recovered etc.

Example:
Business pays salary to Mr. A at the rate of ₹ 10,000 p.m. Actually salary paid during the year is only ₹ 1,10,000. Hence ₹ 10,000 is outstanding. This amount of ₹ 10,000 is an expense related to current year but still not paid. As per the mercantile concept, this expense should be recognized and hence an adjustment entry is required to be passed

Difference between cash discount and trade discount:

Basic	Cash Discount	Trade Discount
Reason	It is granted by supplier from the invoice price in consideration of prompt payment.	Granted by supplier to promote sales.
Shown in invoice	It is not shown in the invoice.	It is shown by way of deduction in the invoice itself.
Ledger posting	Cash discount account is opened in the ledger.	Trade discount is not opened in the ledger.
Allocation of discount	It is allowed on payment of money.	It is allowed on purchase of goods.
Time period	It vary with the time period of payment within which payment is received	It vary with the quantity of goods purchased.

Closing Entries:

• Closing entries mean entries required for closing the books of accounts.
• These are the final entries which lead to the preparation of final accounts.

(i) Transfer to Trading Account –
(a) Trading A/c Dr.
To Stock A/c
To Purchases A/c
To Sales returns A/c
To Carriage inwards A/c
(Transfer of various accounts to Trading A/c)

(b) Sales A/c
Purchase Returns A/c Dr.
Closing Stock A/c Dr.
To Trading A/c
(Transfer of sales A/c and purchases return account to trading A/c and recording of closing stock)

(ii) Transfer of gross profit/ gross loss to P/L A/c –
(a) For Gross Profit:
Trading A/c Dr.
To P/L A/c

(b) For Gross Loss:
Profit/Loss A/c Dr.
To Trading A/c

(iii) Transfer entries to P/L A/c –
(a) Transfer of expenses and losses:
Profit/Loss A/c Dr.
To Rent A/c
To Salaries A/c
To Depreciation A/c
To Abnormal Losses A/c
(Transfer of various nominal A/c of Profit & Loss Account)

(b) Transfer of incomes:
Indirect incomes A/c Dr.
To Profit/Loss A/c

(iv) Transfer of Net Profit/Loss to Capital A/c –
(a) Transfer of Net Profit:
Profit/Loss A/c Dr.
To Capital A/c

(b) Transfer of Net Loss:
Capital A/c Dr.
To Profit/Loss A/c.

Manufacturing Account:
1. Trading refers to buying and selling of goods whereas manufacturing means production of goods.

2. Trading A/c does not disclose the cost of goods manufactured hence for this purpose a Manufacturing A/c is prepared.
Cost of goods manufactured = Cost of raw material + expenses incurred on production.

3. Manufacturing account shows cost of production, trading account shows the gross profit or gross loss while, profit & loss a/c shows the net profit earned or net loss suffered by the organisation during a particular period.

4. The cost of goods manufactured calculated from this account is transferred to the Trading A/c.

5. This account is prepared by manufacturing firms in addition to other final accounts which we have studied earlier.

Manufacturing A/c for the year ended…

Limitations of financial statements:
1. Final gain or loss of the business cannot be ascertained as a business is a continuing one.

2. Financial statements are based on figures which may not be exact and accurate.

3. Different firms follow different accounting policies and hence, inter firm comparison is not possible.

4. There may be undisclosed or concealed errors in financial statements which may distort their true picture.

5. Managers resort to window dressing i.e. preparing the financial statements in such a manner that it gives a wrong impression to the users of these statements.

6. Financial statements are basically prepared for the shareholders and may not contain the information required by the third parties. Financial Statements does not consider the non financial factors e.g. employees are the biggest asset of any organisation but are not recorded as assets in the balance sheet.

7. The assets are recorded at the historical cost and does not consider the realisable value or replacement cost of the asset.

Preparation of Final Accounts for Sole Proprietorship MCQ Questions

1. Which one of the following is correct:
(a) Gross profit + Sales + Direct expenses + Purchases + Closing stock – Opening stock
(b) Gross profit + Direct expenses + Purchases + Closing stock – Opening stock = Sales
(c) Gross profit + Direct expenses + Purchases + Opening – Closing stock = Sales
(d) Gross profit + indirect expenses + Purchases + Opening – Closing stock = Sales
Answer:
(c) Gross profit+Direct expenses+Purchases+Opening-Closing stock = Sales

2. The adjustment to be made for interest on capital is:
(a) Debit Profit and Loss account and deduct interest from capital
(b) Credit Profit and Loss account and deduct interest from capital
(c) Debit Profit and Loss account and add interest,to capital
(d) Credit Profit and Loss account and deduct interest from capital
Answer:
(c) Debit Profit and Loss account and add interest,to capital

3. The adjustment to be made for provision for doubtful debt is:
(a) Credit profit and Loss account and deduct the provision from debtors
(b) Debit profit and Loss account deduct the provision from debtors.
(c) Credit profit and Loss account and add the provision to debtors
(d) Debit profit and Loss account and add the provision to debtors.
Answer:
(b) Debit profit and Loss account deduct the provision from debtors.

4. Gross profit is equal to:
(a) Net profit minus expenses
(b) Purchases plus stock minus net sales
(c) Net sales plus selling price of stock minus purchases
(d) Net sales minus cost price of sales.
Answer:
(d) Net sales minus cost price of sales.

5. Net profit is equal to:
(a) Gross profit minus expenses
(b) Net sales plus purchases minus gross profit
(c) Expenses minus gross profit
(d) Gross profit minus net sales plus purchases
Answer:
(a) Gross profit minus expenses

6. Under- statement of closing work in progress in the period will:
(a) Understate cost of goods manufactured in that period
(b) Overstate current assets
(c) Overstate gross profit from sales in that period
(d) Understate net income in that period.
Answer:
(d) Understate net income in that period.

7. A decrease in the provision for doubtful debts would result in :
(a) An increase in liabilities
(b) A decrease in working capital
(c) A decrease in net profit
(d) An increase in net profit.
Answer:
(d) An increase in net profit.

8. Which of the following accounts would be closed by transfer to the Trading and Profit and Loss Account at the end of a period.
(a) Sales
(b) Salary expenses
(c) Both sales and salary expense
(d) Neither sales nor salary expense
Answer:
(c) Both sales and salary expense

9. In a Trading and Profit and Loss Account, the excess of net sales over the cost of goods sold is called:
(a) Operating income
(b) Income from operations
(c) Gross profit
(d) Net income.
Answer:
(c) Gross profit

10. In general, the accounts in the income statement are known as:
(a) Permanent accounts
(b) Temporary accounts
(c) Unearned revenue accounts
(d) Contra-asset accounts
Answer:
(b) Temporary accounts

11. If beginning and ending goods inventories are ₹ 400 and ₹ 700, respectively, and cost of goods sold is ₹ 3,400 net purchase are _________.
(a) ₹ 3,700
(b) ₹ 3,400
(c) ₹ 3,100
(d) Cannot be determined
Answer:
(a) ₹ 3,700

12. Which of the following would appear as an operating expenses in the P/L A/c of trading firm:
(a) Freight inward
(b) Freight outward
(c) Sales returns and allowances
(d) Purchases returns and allowances
Answer:
(b) Freight outward

13. Which one of the following statement is correct?
(a) Gross profit on trading is entered on the right side of the Trading account and carried down to the Left side of the Profit and Loss Account
(b) Gross profit on trading is entered on the Left side of the Trading account and carried down to the right side of the Profit and Loss Account
(c) Net profit on trading is entered on the right side of the Trading account and carried down to the left side of the Profit and Loss Account
(d) Net profit on trading is entered on the left side of the Trading and carried down to the right side of the Profit and Loss Account
Answer:
(b) Gross profit on trading is entered on the Left side of the Trading account and carried down to the right side of the Profit and Loss Account

14. After all closing entries have been posted, the balance of the P&L Account will be:
(a) A debit if a net income has been earned
(b) A debit if a net loss has been incurred
(c) A credit if a net loss has been incurred
(d) Zero
Answer:
(b) A debit if a net loss has been incurred

15. Closing Stock appearing in the Trial Balance is shown:
(a) On the Dr. side of Trading A/c
(b) On the Cr. side of Trading A/c
(c) On the Assets side of Balance Sheet
(d) On the Cr. side of Trading A/c and on the assets side of Balance sheet
Answer:
(c) On the Assets side of Balance Sheet

16. If ‘Prepaid Wages’ is given in Trial Balance, it is shown in :
(a) Debit of Trading A/c
(b) Debit of Trading A/c and Assets side of B/S
(c) Debit of P & L A/c
(d) Assets side of the B/S
Answer:
(d) Assets side of the B/S

17. If the manager is entitled to a Commission of 5% on profits before deducting his commission, he will get a commission of on a profit of ₹ 8,400.
(a) 400
(b) 442.11
(c) 420
(d) None of these
Answer:
(c) 420

18. The Trial Balance Shows Debtors ₹ 2,400; Bad Debts ₹ 221; Bad Debts Reserve ₹ 324; for Creating a Reserve for doubtful debts @ 10% on debtors, the P & L A/c will be debited by :
(a) 137
(b) 240
(c) 343
(d) 9
Answer:
(a) 137

19. Income earned but not received is shown in:
(a) Liabilities
(b) Assets
(c) Foot- note
(d) None of them
Answer:
(b) Assets

20.

	₹
Opening capital	50,000
Closing capital	52,000
Net profit during the year	5,000

If the above figures are drawn from the books of a trader, then his drawings, if any, are:
(a) ₹ 5,000
(b) ₹ 3,000
(c) ₹ 1,000
(d) ₹ 6,000
Answer:
(b) ₹ 3,000

21.

	₹
Opening capital	80,000
Closing capital	1,20,00
Net profit during the year	20,000

The trader has
(a) Drawings of ₹ 20,000
(b) Brought additional capital of ₹ 30,000
(c) Brought additional capital of ₹ 40,000
(d) Both (a) and (c) above
Answer:
(d) Both (a) and (c) above

22.

	₹
Opening Stock	40,000
Closing Stock	50,000
Sales	70,000

Assuming there is no gross profit and direct expenses, the purchases made during the year are:
(a) ₹ 80,000
(b) f 90,000
(c) ₹ 1,10,000
(d) ₹ 1,60,000
Answer:
(a) ₹ 80,000

23. Rent prepaid is shown as:
(a) Current asset
(b) Current liability
(c) Fixed asset
(d) Income
Answer:
(a) Current asset

24. The Balance Sheet gives information regarding the:
(a) Results of Operations for a particular period
(b) Financial position during a particular period
(c) Profit earning capacity for a particular period
(d) Financial position as on a particular date
Answer:
(d) Financial position as on a particular date

25. The Books of Accounts of Z Ltd. shows that the balance of sundry debtors is ₹ 50,000 and reserve for doubtful debts is ₹ 2,000. Later, the management of the company realized that debts to the extent of ₹ 1,000 will become bad and hence decided to create a reserve at 5% on debtors. The amount of reserve for doubtful debts to be shown in Profit and Loss Account is:
(a) ₹ 2,500
(b) ₹ 2,350
(c) ₹ 2,450
(d) ₹ 1,450
Answer:
(d) ₹ 1,450

26. Opening balance of debtors is ₹ 18,000 5% provision for bad debt is required to be provided on debtors. If the debtors balance is increased during the year by ₹ 5,000 and the provision for bad debts has a debit balance of ₹ 350 after transferring bad debts, the charge against the Profit and Loss Account is:
(a) ₹ 1,950
(b) ₹ 1,500
(c) ₹ 650
(d) ₹ 550
Answer:
(b) ₹ 1,500

27. Final Accounts are prepared:
(a) At the end of calender year
(b) At the end of assessment year
(c) On every Diwali
(d) At the end of accounting year.
Answer:
(d) At the end of accounting year.

28. Interest on drawing is:
(a) Expenditure for the business
(b) Expense for the business
(c) Gain for the business
(d) Loss of the business
Answer:
(c) Gain for the business

29. While making an adjusting entry in respect of closing stock, we debit:
(a) Closing Stock
(b) Trading Account
(c) Purchases Account
(d) Sales Account
Answer:
(a) Closing Stock

30. Trading account is a:
(a) Personal account
(b) Nominal account
(c) Real account
(d) None of these
Answer:
(b) Nominal account

31. The withdrawal of goods from the business by the proprietor should be debited to:
(a) Drawings account
(b) Purchases account
(c) Capital account
(d) P&L A/c
Answer:
(a) Drawings account

32. Goods given as charity should be credited to:
(a) Purchases account
(b) Charity account
(c) Sales account
(d) Trading A/c
Answer:
(a) Purchases account

33. The Loss on the sale of old machinery is debited to:
(a) Profit and Loss account
(b) Machinery account
(c) Depreciation account
(d) Trading A/c
Answer:
(a) Profit and Loss account

34. Only personal and real account are shown in:
(a) Trial Balance
(b) Balance Sheet
(c) Profit and Loss A/c
(d) Trading A/c
Answer:
(b) Balance Sheet

35. If Net Loss is ₹ 5,000. General expenses are ₹ 14,500, sales amount to ₹ 25,000, the Gross Profit will be:
(a) ₹ 20,000
(b) ₹ 11,000
(c) ₹ 9,000
(d) ₹ 9,500
Answer:
(d) ₹ 9,500

36. A firm had a Capital Balance of ₹ 1,00,000 at the beginning of a year. At the end of the year, the firm has total assets of ₹ 1,50,000 and total liabilities of ₹ 70,000. If the total withdrawals during the period were ₹ 30,000, what was the amount of net profit/net loss for the year:
(a) ₹ 10,000 Profit
(b) ₹ 20,000 Loss
(c) ₹ 50,000 Loss
(d) 7 10,000 Loss
Answer:
(a) ₹ 10,000 Profit

37. If sales are ₹ 14,900, Gross Profit ₹ 3,300, Net Loss ₹ 500. The operating expenses will be:
(a) ₹ 2,800
(b) ₹ 3,800
(c) ₹ 11,100
(d) ₹ 11,600
Answer:
(b) ₹ 3,800

38. The General Manager is entitled to a commission of 10% on net profit after charging the commission of works manager. The works manager is entitled to a commission of 5% on the net profits after charging the commission of general manager. The profit before charging any commission is ₹ 7,500. The commission of the work manager to the nearest rupee will be:
(a) ₹ 321
(b) ₹ 333
(c) ₹ 337
(d) ₹ 339
Answer:
(d) ₹ 339

39. Which of the following sets of expenses are the direct expenses of the business:
(a) Salaries, wages, and shop rent
(b) Stationery, postage and telephone
(c) Wages, carriage inward, Local taxes
(d) Advertisement, Legal fees, audit fees.
Answer:
(c) Wages, carriage inward, Local taxes

40. If the profit is 1/4 of the sales, then it is:
(a) 1/4 of the cost price
(b) 1/3 of the cost price
(c) 1/5 of the cost price
(d) 1/6 of the cost price
Answer:
(b) 1/3 of the cost price

41. If the profit is 25% of the cost price, then it is:
(a) 25% of the sales price
(b) 33.33% of the sales price
(c) 20% of the sales price
(d) None of these
Answer:
(c) 20% of the sales price

42. Sales are equal to:
(a) Cost of goods sold + Gross profit
(b) Cost of goods sold – Gross profit
(c) Gross profit – Cost of goods sold
(d) None of these
Answer:
(a) Cost of goods sold + Gross profit

43. If the Closing Stock at the end of the year is overstated by ₹ 7,500, the error causes an:
(a) Overstatement of cost of goods sold for the year by ₹ 7,500
(b) Understatement of gross profit for the year by ₹ 7,500
(c) Overstatement of net income for the year by ₹ 7,500
(d) Understatement of net income for the year by ₹ 7,500.
Answer:
(c) Overstatement of net income for the year by ₹ 7,500

44. Discount Allowed appearing in the Trial Balance are shown:
(a) On the debit side of Trading Account
(b) On the debit side of Profit and Loss A/c
(c) On the asset side of the Balance Sheet
(d) On the credit side of P/L A/c
Answer:
(b) On the debit side of Profit and Loss A/c

45. A Trial Balance contains the following information:
Discount received ₹ 2,000, Provision for discount on Creditors ₹ 1,600.
It is desired to maintain a provision for discount of creditors at ₹ 1,100.
The amount to be credited to the Profit and Loss Account is:
(a) ₹ 2,500
(b) 7 3,500
(c) ₹ 2,000
(d) ₹ 1,500
Answer:
(d) ₹ 1,500

46. Capital on 1 January ₹ 65,000, Interest on drawing ₹ 5,000, Interest on capital ₹ 2,000, Drawings ₹ 14,000, Profit for the year ₹ 15,000. His capital as on 31 December will be:
(a) ₹ 67,000
(b) ₹ 63,000
(c) ₹ 77,000
(d) ₹ 89,000
Answer:
(b) ₹ 63,000

47. Return Outwards appearing in Trial Balance are deducted from:
(a) Sales
(b) Purchases
(c) Returns Inwards
(d) Closing stock
Answer:
(b) Purchases

48. Salaries and wages appearing in Trial Balance are shown:
(a) On the debit side of Trading Account
(b) On the debit side of Profit and Loss Account
(c) On the liabilities side of the Balance sheet
(d) On the assets side of the Balance sheet
Answer:
(b) On the debit side of Profit and Loss Account

49. The Trial Balance shows opening stock ₹ 50,000, it is:
(a) Debited to the Trading Account
(b) Debited to the Profit and Loss Account
(c) Deducted from the closing Stock in the Balance Sheet
(d) Shown as an asset
Answer:
(a) Debited to the Trading Account

50.
From the above, answer the following –
(i) The value of closing stock is:
(a) ₹ 18,000
(b) ₹ 8,000
(c) ₹ 16,000
(d) ₹ 14,000
Answer:
(d) ₹ 14,000

(ii) Gross profit will be:
(a) ₹ 12,000
(b) ₹ 10,000
(c) ₹ 16,000
(d) ₹ 14,000
Answer:
(a) ₹ 12,000

(iii) Net profit will be:
(a) ₹ 12,000
(b) ₹ 10,000
(c) ₹ 4,000
(d) ₹ 7,000
Answer:
(c) ₹ 4,000

51. Rent paid on 1 October, 2004 for the year upto 30 September, 2005 was ₹ 2,400 Rent paid on 1 October, 2005 for the year upto 30 Sepetember ,2006 was ₹ 3,200. Rent payable as shown in the profit and loss account for the year ended 31 December 2005, would be:
(a) ₹ 6,000
(b) ₹ 3,200
(c) ₹ 2,600
(d) ₹ 3,000
Answer:
(c) ₹ 2,600

52. If sales are ₹ 6,000 and the rate of gross profit on cost of goods sold is 25%, then the cost of goods sold will be:
(a) ₹ 6,000
(b) ₹ 4,500
(c) ₹ 4,800
(d) ₹ None of the above
Answer:
(c) ₹ 4,800

53. Sales for the year ended amounted to ₹ 10,00,000, sales included goods sold to Mr. A for ₹ 50,000 at a profit of 20% on cost. Such goods are still lying in the godown at the buyer’s risk. Such goods should be treated as part of _________.
(a) Sales
(b) Closing stock
(c) Goods in transit
(d) Sales return
Answer:
(a) Sales

54. A’s trial balance provides you the following information: Bad debts ₹ 1,000. It is desired to maintain a provision for bad debts at ₹ 2,000. Amount debited to Profit and Loss A/c will be:
(a) ₹ 1,000
(b) ₹ 3,000
(c) ₹ 4,000
(d) ₹ 2,000
Answer:
(b) ₹ 3,000

55. A new firm commenced business on 1^st January, 2006 and purchased goods costing ₹ 90,000 during the year. A sum of ₹ 6,000 was spent on freight inwards. At the end of the year the cost of goods still unsold was ₹ 12,000. Sales during the year ₹ 1,20,000. What is the gross profit earned by the firm?
(a) ₹ 36,000
(b) ₹ 30,000
(c) ₹ 42,000
(d) ₹ 38,000
Answer:
(a) ₹ 36,000

56. From the following figures ascertain the gross profit:

	₹
Opening Stock (1.1.2006)	35,000
Goods Purchased during	1,20,000
Freight and packing on above	15,000
Closing stock	25,000
Sales	1,90,000
Office expenses	4,000
Selling expenses on sales	5,000

(a) ₹ 36,000
(b) ₹ 45,000
(c) ₹ 50,000
(d) ₹ 59,000
Answer:
(b) ₹ 45,000

57. Following are the given figures:

	₹
Opening Stock	30,000
Closing Stock	28,000
Purchases	85,000
Carriage on Purchases	2,300
Carriage on sales	3,000
Rent of office	5,000
Sales	1,40,700
Selling Expenses	600
Drawings	10,000

(i) Gross profit will be
(a) ₹ 50,000
(b) ₹ 47,600
(c) ₹ 42,600
(d) ₹ 50,600
Answer:
(d) ₹ 50,600

(ii) Net profit will be
(a) ₹ 42,000
(b) ₹ 32,000
(c) ₹ 45,600
(d) ₹ 47,600
Answer:
(a) ₹ 42,000

58. A business concern provides the following details :

	₹
Cost of goods sold	1,50,000
Sales	2,00,000
Opening stock	60,000
Closing stock	40,000
Debtors	45,000
Creditors	50,000

The concern’s purchases would amount to (in ₹):
(a) 1,30,000
(b) 2,20,000
(c) 2,60,000
(d) 2,90,000
Answer:
(d) 2,90,000

59. What would be the amount of sales when Opening Stock is ₹ 50,000, purchases ₹ 1,50,000, wages ₹ 20,000, closing stock ₹ 40,000 and gross profit is 1/7^th of sales?
(a) ₹ 2,00,000
(b) ₹ 1,86,669
(c) ₹ 1,80,000
(d) ₹ 2,10.000
Answer:
(a) ₹ 2,00,000

60. A had started business with ₹ 20,000 in the beginning of the year. During the year he borrowed ₹ 10,000 from B. He further introduced ₹ 20,000 in the business. He also gave ₹ 5,000 as loan to his son. Goods given away as charity by him was ₹ 2,000. Profits earned by him was ₹ 25,000. He also withdraw:
(a) ₹ 50,000
(b) ₹ 40,000
(c) ₹ 62,000
(d) ₹ 48,000
Answer:
(c) ₹ 62,000

61. The balances in the books of X, a sole proprietor were: Opening stock ₹ 17,000, Purchases ₹ 52,000, Wages ₹ 46,500, Fuel ₹ 15,000, Sales ₹ 1,45,000 and Closing Stock on hand ₹ 25,000, whose net realizable value was ₹ 28,000.
The Gross Profit calculated would be:
(a) ₹ 39,500
(b) ₹ 42,500
(c) ₹ 54,500
(d) ₹ 57,000
Answer:
(a) ₹ 39,500

62. Balance Sheet is prepared by _________ method:
(a) Liquidity Order
(b) Permanently Order
(c) Both (a) and (b)
(d) None of the Above
Answer:
(c) Both (a) and (b)

63. Purpose of preparing manufacturing A/c:
(a) To know cost of production
(b) To know cost of goods sold
(c) To know profit
(d) To know loss
Answer:
(a) To know cost of production

64. Bad debts recovered is shown:
(a) Cr. of Trading A/c.
(b) Dr. of Trading A/c.
(c) Cr. of P/L A/c.
(d) Assets Side of B/S.
Answer:
(c) Cr. of P/L A/c.

65. If sale is ₹ 1,00,000, Operating expenses ₹ 10, 000 and cost of goods sold is ₹ 40,000, the gross profit is:
(a) ₹ 60,000
(b) ₹ 50,000
(c) ₹ 70,000
(d) ₹ 40,000
Answer:
(a) ₹ 60,000

66. If cost of goods sold is 20,000 & profit is 33.33% on S.P. then find S.P. of goods:
(a) ₹ 30,000
(b) ₹ 40,000
(c) ₹ 32,000
(d) ₹ 31,000
Answer:
(c) ₹ 32,000

67. If Opening capital is 50,000, drawings ₹ 10,000 and Net Profit 20,000, then closing capital will be:
(a) ₹ 60,000
(b) ₹ 50,000
(c) ₹ 80,000
(d) ₹ 20,000
Answer:
(a) ₹ 60,000

68. Find additional capital:
Opening Capital – ₹ 5,000
Net Profit – ₹ 3,000
Drawings – ₹ 500
Closing capital – ₹ 10, 000
(a) ₹ 2,000
(b) ₹ 2,500
(c) ₹ 3,000
(d) ₹ 3,500
Answer:
(b) ₹ 2,500

69. Calculate net profit:

	₹
Opening Stock	10,000
Sales	1,50,000
Office Exp.	10,000
Bad debts	1,000
Purchase	40,000
Wages	5,000
Disc. Received	3,000
Debtor	5,000

Bad debts
(a) ₹ 97,000
(b) ₹ 87,000
(c) ₹ 67,000
(d) ₹ 59,000
Answer:
(b) ₹ 87,000

70. Provision are considered as:
(a) Charge on profits
(b) Appropriation of Profits
(c) Both (a) and (b)
(d) None of these
Answer:
(a) Charge on profits

71. The bills receivables which are final accounts that are prepared are a:
(a) Liability
(b) Asset
(c) Provision
(d) None of these
Answer:
(d) None of these

72. Trading A/c is a:
(a) Personal account
(b) Real account
(c) Nominal account
(d) All of the above
Answer:
(c) Nominal account

73. Which of the following is NOT considered in calculating the cost of goods sold?
(a) Opening stock
(b) Purchases
(c) Carriage inwards
(d) Carriage outwards
Answer:
(d) Carriage outwards

74. The closing stock appears in:
(a) Trading A/c and P&LA/c
(b) Trading A/c and Balance sheet
(c) Trading A/c, P&LA/c and balance sheet
(d) None of the above
Answer:
(b) Trading A/c and Balance sheet

75. If insurance premium of ₹ 12,000 is paid on 1^st August, 2010 for the year ending March 2011, then calculate the amount of prepaid insurance.
(a) ₹ 4,000
(b) ₹ 8,000
(c) ₹ 6,000
(d) None of these
Answer:
(a) ₹ 4,000

76. If opening stock is ₹ 12,000, closing stock is ₹ 10,000, purchases are ₹ 50,000 and carriage inward is ₹ 2,000, then calculate the cost of goods sold:
(a) ₹ 44,000
(b) ₹ 46,000
(c) ₹ 54,000
(d) ₹ 66,000
Answer:
(c) ₹ 54,000

77. If the cost of goods sold is ₹ 1,50,000 and the gross profit is 20% of sale, then calculate the amount of sale:
(a) ₹ 2,00,000
(b) ₹ 2,50,000
(c) ₹ 1,87,500
(d) ₹ 1,80,000
Answer:
(c) ₹ 1,87,500

78. Sale of scrap of raw material appearing in the trial balance appears on the credit side of:
(a) Trading A/c
(b) P & L A/c
(c) Balance Sheet
(d) Manufacturing A/c
Answer:
(d) Manufacturing A/c

79. Bonus paid to employees is to be recorded in:
(a) P & LA/c
(b) Trading A/c
(c) Balance Sheet
(d) All of the above
Answer:
(a) P & LA/c

80. If the profit on cost is 33.33%, then what percentage of profit is on sales:
(a) 30%
(b) 40%
(c) 20%
(d) 25%
Answer:
(d) 25%

81. If the profit is 20% on sales, then find the percentage of profits on cost:
(a) 25%
(b) 16.67%
(c) 33%
(d) 42%
Answer:
(a) 25%

82. Given, opening capitals 10,000, loan from bank on behalf of the firm is ₹ 25,000 and the profit for the year is ₹ 2,000. Then, find out the closing capital:
(a) ₹ 13,000
(b) ₹ 12,000
(c) ₹ 37,000
(d) None of these
Answer:
(b) ₹ 12,000

83. The profit before adjustment is ₹ 10,000 and outstanding salary is ₹ 400 and prepaid insurance is ₹ 550, then the profit after adjustment is:
(a) ₹ 9,850
(b) ₹ 9,900
(c) ₹ 10,150
(d) None of these
Answer:
(c) ₹ 10,150

84. The gross profit of a business is ₹ 21,000. The expenses for the year are opening stock ₹ 2,000, direct expenses 2,000, carriage inwards are ₹ 500, carriage outwards ₹ 700 and salary payable ₹ 3,000. Calculate the Net profit:
(a) ₹ 17,300
(b) ₹ 16,800
(c) ₹ 14,800
(d) ₹ 12,800
Answer:
(a) ₹ 17,300

85. Salary paid in cash is ₹ 1,20,000. Salary payable for the year is ₹ 20,000 and salary paid in advance is ₹ 27,000. The salary paid in the current year also includes ₹ 10,000 which was the salary payable for the last year paid during the year. The amount of salary to be debited to the profit & loss A/c is:
(a) ₹ 1,09,000
(b) ₹ 1,03,000
(c) ₹ 1,13,000
(d) None of the above
Answer:
(b) ₹ 1,03,000

86. Provision for bad debt is made by crediting:
(a) Trading A/c
(b) P & L A/c
(c) Debtors A/c
(d) Provision for debtors
Answer:
(d) Provision for debtors

87. Discount on issue of shares is:
(a) Current asset
(b) Intangible asset
(c) Fictitious asset
(d) Fixed asset
Answer:
(c) Fictitious asset

88. The sundry debtors of ABC & Co. are ₹ 25,000. The bad debts are ₹ 3,000. The provision for doubtful debts amount to 2% and discount on debtors is to be provided @ 5%. Calculate the net debtors to be shown in the balance sheet:
(a) ₹ 21,560
(b) ₹ 25,000
(c) ₹ 21,780
(d) ₹ 20,482
Answer:
(d) ₹ 20,482

89. The opening balance of debtors is ₹ 20,000. Credit sales are ₹ 50,000 and cash sales are ₹ 72,000. Bills received during the year are ₹ 5,000 and cash received from debtors is ₹ 40,000. Then the closing balance of debtors is:
(a) ₹ 25,000
(b) ₹ 37,000
(c) ₹ 42,000
(d) None of the above
Answer:
(a) ₹ 25,000

90. The arrangement of assets and liabilities in a particular order is called:
(a) Arrangement
(b) Classification
(c) Recording
(d) Marshalling
Answer:
(d) Marshalling

91. Which of the following is False?
(a) Closing stock does not appear in trial balance
(b) Trial balance is prepared for external use
(c) Trial balance is prepared to test the arithmetical accuracy of book of accounts
(d) None of these
Answer:
(b) Trial balance is prepared for external use

92. Which of the following is NOT a limitation of financial statements?
(a) Financial statements are interim reports
(b) The assets are valued at replacement cost
(c) Managers resort to window dressing
(d) All of these
Answer:
(b) The assets are valued at replacement cost

93. Which of the following is NOT considered while preparing the manufacturing account?
(a) Wages
(b) Direct expenses
(c) Plant repairs
(d) Depreciation on office equipment
Answer:
(d) Depreciation on office equipment

94. Reserve fund is prepared by debiting:
(a) Cash A/c
(b) Sale A/c
(c) Trading A/c
(d) P&LA/c
Answer:
(d) P&LA/c

95. Income received in advance is a:
(a) Income
(b) Liability
(c) Both (a) & (b)
(d) None of these
Answer:
(b) Liability

96. Which of the following statement is true?
(a) Return Inwards and Return Outwards both appear in trading account
(b) Carriage Inwards and Carriage Outwards both appear in profit and loss account.
(c) Carriage Inwards and Carriage Outwards both appear in trading account.
(d) Neither Carriage Inwards nor Carriage Outwards appear in the trading account.
Answer:
(a) Return Inwards and Return Outwards both appear in trading account.
Return Inwards is also known as sales returns and it appear in the trading account on the credit side.
Return outwards is also known as purchase returns which appear on debit side of Trading A/c.
Carriage Inwards is a direct expenses which is shown on debit side of Trading Account.
Carriage outwards is a indirect expenses which is shown on debit side of profit & loss A/c.
On considering above points we found that option (a) is true.

97. Prakash sells goods at 20% on sales. His sales were ₹ 10,00,000. The amount of gross profit is:
(a) ₹ 1,70,000
(b) ₹ 2,50,000
(c) ₹ 2,40,000
(d) ₹ 2,00,000
Answer:
(d) ₹ 2,00,000
Sales = ₹ 10,00,000
Gross Profit = 20% of sales
Thus, Gross Profit = 10,00,000 x 20% = ₹ 2,00,000
Gross Profit amount is ₹ 2,00,000.

98. Given the following data:
Gross profit ₹ 6,700; Carriage Inwards ₹ 250; Rent received ₹ 575 and other expenses ₹ 3,600. The net profit of the firm would be:
(a) ₹ 3,275
(b) ₹ 3,025
(c) ₹ 3,425
(d) ₹ 3,675
Answer:
(d) ₹ 3,675

99. Ram has been running business from the year 2002. He has paid ₹ 1,650 as rent upto February, 2012 (for financial year 2011-12). Total rent to be debited to profit and loss A/c of financial year 2011 – 12 will be:
(a) ₹ 1,650
(b) ₹ 1,800
(c) ₹ 2,000
(d) ₹ 1,400
Answer:
(b) ₹ 1,800
Rent paid of 11 months (April to February 2012)
= ₹ 1,650
So, one month rent will be = \(\frac{1,650}{11}\) = ₹ 150
For financial year 2011 – 12 rent of March month ₹ 150 will be debited to P/L A/c as outstanding Rent.
Thus, total amount of rent debited to P/L A/c will be (1,650 + 150) = ₹ 1,800.

100. Income tax paid by the sole- proprietor from the business bank account is debited to:
(a) Income tax account
(b) Bank account
(c) Capital account
(d) Provision for taxation account
Answer:
(a) Income tax account
On paying Income Tax from Bank A/c, the following entry will be passed:
Income Tax A/c Dr.
To Bank A/c
(Being Income Tax Paid)
Therefore, income tax paid, is debited to Income Tax Account.

101. Debtors as appearing in Trial Balance are ₹ 25,000. Provision for doubtful debts is to be provided @ 5% and 2% of amount is to be provided for discount. What is the amount of debtors to be shown in balance sheet?
(a) ₹ 23,750
(b) ₹ 23,250
(c) ₹ 23,275
(d) ₹ 1,750
Answer:
(c) ₹ 23,275

102. The net profit of a sole proprietorship firm is ₹ 1,320 (before commission). The manager of the firm gets 10% commission on the net profit after charging such commission. Manager’s commission would be:
(a) ₹ 120
(b) ₹ 132
(c) ₹ 1,188
(d) ₹ 1,200
Answer:
(a) ₹ 120
Commission on net profit after charging such commission

Manager’s commission would be ₹ 120.

103. Which of the following is correct about trade discount?
(a) It is synonymous with cash discount
(b) It is shown by way of deduction in invoice itself
(c) It is calculated on account paid or received
(d) It is allowed to engage the prompt payment
Answer:
(b) It is shown by way of deduction in invoice itself.
Trade discount is allowed by the seller to a buyer who deals in the same goods as that of the seller. Trade discount is not recorded in the books of account because it is shown by way of deduction in invoice itself.

104. Which of the following items would fall under the category of a liability?
(a) Cash
(b) Debtors
(c) Capital
(d) Land
Answer:
(b) Debtors
Trade discount is allowed by the seller to a buyer who deals in the same goods as that of the seller. Trade discount is not recorded in the books of account because it is shown by way of deduction In Invoice itself.

105. If a piece of furniture’s list price is ₹ 28,000 and it is sold at 10% trade discount and 2% cash discount. The cash sale price of furniture would be:
(a) ₹ 25,200
(b) ₹ 24,640
(c) ₹ 24,696
(d) None of the above
Answer:
(c) ₹ 24,696

Cash Sale Price would be ₹ 24,696.

106. What is shown in a balance sheet?
(a) Only those assets which are expressed in monetary terms
(b) Only those liabilities which are expressed in monetary terms
(c) Assets and liabilities expressed in non- monetary terms
(d) Assets and liabilities expressed in monetary terms
Answer:
(d) Assets and liabilities expressed in monetary terms
According to money measurement concept those items which can be interpreted in terms of money are recorded and shown in financial books. In other words, it can be said that those assets and liabilities which expressed in monetary terms is shown in a Balance Sheet.

107. The correct sequence of the following in the preparation of periodical final statements would be:
1. Preparation of Balance Sheet
2. Preparation of Cash Flow Statement
3. Preparation of Trial Balance
4. Preparation of Profit / Loss Statement
The correct option is:
(a) 4, 2, 1,3
(b) 3, 4, 1,2
(c) 2, 4, 3, 1
(d) 1,3, 2, 4.
Answer:
(b) 3, 4, 1,2
The correct sequence of preparation is as follows: Trial Balance, Profit/Loss statement, Balance Sheet and Cash Flow Statement. (3, 4, 1,2)

108. Match list I with list II and select the correct answer using the codes given below the list:

List I	List II
X. Discount on Debentures Y. Forfeited Capital Z. Income tax payable W. Debtors acceptance	1. Current Liability 2. Non-Current Assets 3. Current Assets 4. Non Current Liability

The correct option is:

	X	Y	Z	W
(a)	2	4	1	3
(b)	4	2	3	1
(c)	2	4	3	1
(d)	4	2	1	3

Answer:
(a) 2 4 1 3

• Discount on debentures : Non-current assets
• Forfeited capital: Non-current liability
• Income tax payable : Current liability
• Debtor’s acceptance : Current Assets

109. A company sends cars to dealers on ‘sale or return’ basis. All such transactions are however treated like actual sales and are passed through the sales day book. Just before the end of the financial year, two cars which had costed ₹ 55,000 each have been sent on ‘sale or return’ basis and have been debited to customers at ₹ 75,000 each. Cost of goods lying with the customers would be:
(a) ₹ 1,10,000
(b) ₹ 1,50,000
(c) ₹ 75,000
(d) ₹ 55,000
Answer:
(a) ₹ 1,10,000
The two cars still lying with the customer’s unapproved are costing ₹ 55,000 each.
∴ Stock with the customer at cost is ₹ 1,10,000.
The journal entries at the end of year will be:
(a) Sales a/c Dr. 1,50,000
To Debtor’s a/c 1,50,000
(75,000 x 2)

(b) Stock with Customer’s a/c Dr. 1,10,000
To Trading a/c 1,10,000
(55,000 x 2)

110. The total cost of goods available for sale with a company during the current year is ₹ 12,00,000 and the total sales during the period are ₹ 13,00,000. Gross profit margin of the company is 33 113% on cost. The closing inventory for the current year would be:
(a) ₹ 4,00,000
(b) ₹ 3,00,000
(c) ₹ 2,25,000
(d) ₹ 2,60,000.
Answer:
(c) ₹ 2,25,000
Sales is ₹ 13,00,000
G.P. Margin cost is 1/3 and on sales it will be 1/4
Cost of goods sold = 13,00,000 x 3/4
= 9,75,000
Closing Stock = Total goods available for sale – Cost of goods sold
= 12,00,000 – 9,75,000 = ₹ 2,25,000

111. How does an overcasting of purchases day book affect the cost of sales and profit?
(a) Cost of sales is decreased while profit is increased
(b) Cost of sales is increased while profit is decreased
(c) Both cost of sales and profit are increased
(d) Cost of sales is increased; gross profit is decreased but net profit remains unaffected.
Answer:
(b) Cost of sales is increased while profit is decreased
Cost of Sales = Opening stock + Purchases – Closing stock
On the basis of above it may be observed that if purchase is over cost the cost of sales will increase.
If cost of sales will increase the profit will decrease.
Sales – Cost of sales = profit
Therefore, cost of sales is increased while profit is decreased.

112. If outstanding wages appear in the trial balance, while preparing the final accounts, it will be shown in:
(a) Asset side of the balance sheet
(b) Liability side of the balance sheet
(c) Profit and Loss A/c and asset side of the balance sheet
(d) Profit and Loss A/c and Liability side of balance sheet.
Answer:
(b) Liability side of the balance sheet
Outstanding wages appearing in the trial balance cash will be shown on liability side of balance sheet
Wages a/c Dr.
To outstanding wages a/c
It will not be shown in profit and loss account as it has already been adjusted with wages.

113. E Ltd., a dealer in second-hand machinery has the following five machines of different models and makes in their stock at the end of the financial year 2012-13:

The value of stock included in the Balance Sheet of the company as on 31^st March, 2013 was:
(a) ₹ 7,62,500
(b) ₹ 7,70,000
(c) ₹ 7,90,000
(d) ₹ 8,70,000.
Answer:
(b) ₹ 7,70,000
Stock is valued at lower of cost or market price (Net Realizable value) (LCM) Accordingly the value of stock to be included in Balance sheet of the company as on 31st March 2013 will be:

Total value = 7.7 Lakh i.e. ₹ 7,70,000

114. Fire Insurance premium paid on 1^st October, 2011 for the year ended on 30^th September, 2012 was ₹ 2,400 and Fire Insurance premium paid on 1st October, 2012 for the year ending on 30th September, 2013 was ₹ 3,200. Fire Insurance premium paid as shown in the profit and loss account for the accounting year ended 31st December, 2012 would be:
(a) ₹ 2,600
(b) ₹ 3,200
(c) ₹ 2,800
(d) ₹ 3,000
Answer:
(a) ₹ 2,600
Fire Insurance paid for

115. Income earned which is yet to be collected results in:
(a) Increase in capital and increase in liability
(b) Decrease in liability and increase in capital
(c) Increase in asset and increase in liability
(d) Increase in capital and increase in asset.
Answer:
(d) Increase in capital and increase in asset.
Income earned which is yet to be collected:
Accrued Income a/c Dr.
To Income a/c
This results in increase in income and thereby an increase in capital and also an increase in corresponding asset in the name of accrued income.

116. X Limited is in the business of trading. It is to receive ₹ 7,000 from Vinod and to pay ₹ 8,000 to Vinod. Similarly, it is to pay ₹ 8,000 to Sudhir and to receive ₹ 9,000 from Sudhir. Except above but after all the adjustment, the books of X Limited show the debtors balance at ₹ 72,000 (Dr.) and creditors balance at ₹ 39,000 (Cr.). The correct value of debtors and creditors to be shown in balance sheet would be _________.
(a) Debtors (₹ 72,000), Creditors (₹ 39,000)
(b) Debtors (₹ 88,000), Creditors (₹ 55,000)
(c) Debtors (₹ 80,000), Creditors (₹ 47,000)
(d) Debtors (₹ 79,000), Creditors (₹ 46,000)
Answer:
(b) Debtors (₹ 88,000), Creditors (₹ 55,000)

117. If the insurance premium paid is ₹ 1,000 and prepaid insurance is ₹ 300, the amount of insurance premium shown in profit and loss account will be _________.
(a) ₹ 1,300
(b) ₹ 700
(c) ₹ 1,000
(d) ₹ 300
Answer:
(b) ₹ 700
Prepaid insurance premium is not an expense of be not shown in P/L A/c. this year, so it will
Therefore, insurance premium shown in profit and loss A/c will be (1,000 300) = ₹ 700 only.

118. The expired cost of a deferred revenue expense is known as _________.
(a) Asset
(b) Expense
(c) Liability
(d) Provision.
Answer:
(b) Expense
Deferred revenue expenditure is that expenditure for which payment has been made for a liability but which is carried forward on a presumption that it will be of benefit over subsequent period or periods and expired cost of as such expenditure is known as expenses and shown in Profit & Loss A/c.

119. If prepaid rent appears in the trial balance, while preparing the final accounts it will be shown in _________.
(a) Assets side of the balance sheet
(b) Liabilities side of the balance sheet
(c) Profit and Loss A/c and asset side of the balance sheet
(d) Profit and Loss A/c and liabilities side of balance sheet.
Answer:
(a) Assets side of the balance sheet
If prepaid rent appears in the trail balance, on preparation of final accounts it will be shown on assets side of balance sheet only.

120. Gauri paid ₹ 1,000 towards a debt of ₹ 1,050, which was written-off as bad debt in the previous year. Which of the following account will be credited for this amount _________.
(a) Gauri’s personal account
(b) Bad debts account
(c) Bad debts recovered account
(d) None of the above.
Answer:
(c) Bad debts recovered account
When a bad debt is recovered which was written off in the previous year, Bad Debts Recovered A/c will be credited.
Cash A/c Dr. 1,000
To Bad Debts Recovered A/c 1,000

121. While finalising the current year’s profit, the company realised that there was an error in the valuation of closing stock of the previous year. In the previous year, closing stock was valued more by ₹ 50,000. As a result _________.
(a) Previous year’s profit was overstated and current year’s profit is also overstated
(b) Previous year’s profit was understated and current year’s profit is overstated
(c) Previous year’s profit was understated and current year’s profit is also understated
(d) Previous year’s profit was overstated and current year’s profit is understated
Answer:
(d) Previous year’s profit was overstated and current year’s profit is understated
When closing stock is overstated, it will result in net profit for the period to be overstated and COGS to be understated and net profit of preceding year is understated and COGS to be overstated.
Thus option (d) is right.

122. If Capital = ₹ 70,000; Liability = ₹ 40,000. Find Assets –
(a) ₹ 30,000
(b) ₹ 1,10,000
(c) ₹ 40,000
(d) ₹ 70,000
Answer:
(b) ₹ 1,10,000
Assets = Capital + Liability
= 70,000 + 40,000 = 1,10,000

123. If opening stock is 10,000, Purchases 20,000, Direct expenses 10,000, Indirect expenses 30,000. Find value of cost of goods sold:
(a) ₹ 10,000
(b) ₹ 20,000
(c) ₹ 30,000
(d) ₹ 40,000.
Answer:
(d) ₹ 40,000.
Cost of goods sold = Opening Stock + Direct Material + Direct
Expenses
= 10,000 + 10,000 + 20,000
= 40,000

124. P/L A/c balance (before commission) is ₹ 1,320; manager’s commission is 10%. Find the amount of manager’s commission.
(a) 120
(b) 0
(c) 132
(d) 110.
Answer:
(c) 132
P/L a/c balance (before charging commission) = 1,320
Manager’s commission = 10%
Amount of manager’s commission = 1,320 x \(\frac { 10 }{ 100 }\) = 132.

125. Adjusted closing entry affects:
(a) Trading A/c
(b) P/LA/c
(c) Balance Sheet
(d) All of the above
Answer:
(c) Balance Sheet
Adjusted closing entry reflects the entry which are required to be made & not made during the year. These entries require adjustment which affects two financial statements mainly Balance Sheet being one. Hence, adjusting closing entry affects Balance Sheet.

126. The purpose of making trading account:
(a) To know the financial position of business
(b) To ascertain the gross profit / loss
(c) To ascertain the net profit / loss
(d) None of the above.
Answer:
(b) To ascertain the gross profit / loss
Trading A/c is the first part of income statement which is prepared to ascertain the gross profit or gross loss for a given period.
Hence, option (b) is correct.

127. Prepaid Rent is shown as:
(a) Current Asset
(b) Current Liability
(c) Intangible Asset
(d) Fictitious Asset
Answer:
(a) Current Asset
Current assets are those assets having life of more than 1 year. Prepaid rent is the rent paid in advance i.e. benefit has not yet received.
Hence, prepaid rent is treated as current asset.

128. Trial balance of a trader shows the following balances:
Opening Stock ₹ 9,600, Purchases ₹ 11,850, Wages and Salaries ₹ 3,200, Carriage on Purchases ₹ 200, Carriage Outwards ₹ 300, Sales ₹ 24,900, Closing Stock ₹ 3,500 Gross Profit will be:
(a) ₹ 3,550
(b) ₹ 6,750
(c) ₹ 6,500
(d) ₹ 6,550
Answer:
Trading A/c for the year ended ………..

So, Gross profit will be ₹ 3,550.

129. Assets that a company expects to convert to cash to use up within one year are called:
(a) Property plant and equipment
(b) Intangible assets
(c) Long term investments
(d) Current assets
Answer:
(d) Current assets
Current assets are those assets that a company expects to convert to cash within one year. Property, plant and equipment, long-term investments are Capital assets.

130. Closing Stock of a Company, if given in adjustment, appears in:
(a) Balance Sheet only
(b) Trading Account only
(c) Profit and loss account only
(d) Trading account and balance sheet
Answer:
(d) Trading account and balance sheet
Closing stock of a company, if given in adjustment, appears at two places:

• Credit side of the Trading A/c
• Closing stock in the Current Assets on the assets side of the Balance Sheet.

Thus, option (d) is the correct answer.

131. Financial data of an entity is given below:
Gross Profit ₹ 6,700, Carriage outwards ₹ 250, Rent received ₹ 575 and Other expenses ₹ 3,600. The net profit would be:
(a) ₹ 3,025
(b) ₹ 2,850
(c) ₹ 3,425
(d) ₹ 3,275
Answer:
(c) ₹ 3,425
Profit & Loss A/c for the year ended

Particulars	Amt. ₹	Particulars	Amt. ₹
To Carriage Outwards To Other Expenses To Net Profit c/d	250 3,600 3,425	By Gross Profit c/d By Rent Received	6,700 575
	7,275		7,25

132. Liability in respect of a pending suit is an example of:
(a) Current liability
(b) Long term liability
(c) Contingent liability
(d) Current asset
Answer:
(c) Contingent liability
Contingent liabilities are not actual liabilities but their becoming actual liability depends on the happening of certain events. Pending suit is a contingent liability because it is only if and when suit is lost that the liability will be incurred.

133. Which of the following item appears in trading account of a business?
(a) Wages and Salaries
(b) Depreciation on buildings
(c) Freight outward
(d) Salaries.
Answer:
(a) Wages and Salaries
Wages and salaries appear in trading A/c whereas Depreciation, Freight outward and Salaries appear in Profit & Loss A/c.

134. Which of the following statements is correct about trial balance?
(a) A Trial balance is a list of all entries made in the books of account
(b) A Trial balance is a list of balances in all assets accounts
(c) A Trial balance is another ledger account
(d) A Trial balance is a list of balances in the cash account and all ledger accounts.
Answer:
(d) A Trial balance is a list of balances in the cash account and all ledger accounts.
Balances of Cash A/c and Ledger A/c are recorded in trial balance, thus it can be said it is list of balances.

135. Generally, in a balance sheet, fixed assets are shown at:
(a) Realisable value
(b) Market value
(c) Written down value
(d) Cost price.
Answer:
(a) Realisable value
Fixed assets in balance sheet are all shown at Realisable Value.

136. In order to prepare the final accounts all accounts are transferred to Trading and Profit and Loss Account:
(a) Personal
(b) Nominal and Real
(c) Nominal
(d) Real.
Answer:
(c) Nominal
In order to prepare the final accounts, all the nominal accounts are transferred to trading and profit and loss account.
Only nominal accounts impact the profits of the business.

137. Sales return is recorded where in trial balance:
(a) Dr. of Trial Balance
(b) Cr. of Trial Balance
(c) Both (a) & (b)
(d) None the above
Answer:
(a) Dr. of Trial Balance
Trial Balance is the list of Dr. and Cr. balances extracted from various accounts in the ledger including cash and bank balances from cash book. Sales return book have Dr. balance. Thus, it will be shown in the Dr. side of trial balance.

138. Cost of floating a company is an example of:
(a) Wasting assets
(b) Intangible assets
(c) Fictitious assets
(d) Liquid assets
Answer:
(c) Fictitious assets
Fictitious Assets are valueless assets but shown as assets in the financial statement (such as useless trade marks) or expenses treated as assets (such as expenses incurred to establish a company). These are not having real value. Cost of floating a company is a fictitious assets, this is not having any real value.

139. If salaries paid appearing in the trial balance for the year ending 2015 is ₹ 7,500 and it is given in the adjustment that the salary unpaid for the year ending 2015 is ₹ 2,500. The total amount to be debited to the profit and loss account under the head salaries will be:
(a) ₹ 7,500
(b) ₹ 2,500
(c) ₹ 5,000
(d) ₹ 10,000
Answer:
(d) ₹ 10,000

Amount to be debited to P&L 10,000

Note : As per accrual concept an amount should be treated as an expenses in the period in which obligation to pay has a reason, whether cash has been actually paid or not.

140. Which of the following transactions would have no impact on owner’s capital?
(a) Withdrawal of profit
(b) Investment of cash by owner
(c) Net loss
(d) Purchase of land from the proceeds of a bank loan.
Answer:
(d) Purchase of land from the proceeds of a bank loan.
(i) Bank A/c Dr.
To Bank Loan A/c

(ii) Land A/c Dr.
To Bank A/c
This transaction would have no impact on owners capital as no Nominal A/c is involved.

141. A Trader is able to get a margin of about 20% on sales. During the previous year he purchased goods worth ₹ 1,00,000 and sales were ₹ 80,000. The value of closing stock for the previous year will be:
(a) ₹ 20,000
(b) ₹ 40,000
(c) ₹ 36,000
(d) ₹ 50,000
Answer:
(c) ₹ 36,000
Cost of goods sold = 80,000 – 20%
= 64,000
Total Goods Available for Sales – Cost of Goods Sold = Closing Stock
1,00,000 – 64,000 = 36,000

142. If total assets increased by ₹ 20,000 during a period and total liabilities increased by ₹ 12,000 during the same period, the amount increases or decreases in owner’s capital for that period in:
(a) ₹ 8,000 increase
(b) ₹ 32,000 increase
(c) ₹ 20,000 increase
(d) ₹ 12,000 decrease.
Answer:
(a) ₹ 8,000 increase
Assets = Capital + Liabilities
20,000 = Capital + 12,000
Capital = 8,000

143. The closing entry for transfer of commission received, appearing in the trial balance will be:
(a) Debit Commission Received A/c,
Credit P&L A/c
(b) Debit Trading A/c,
Credit Commission Received A/c
(c) Debit P&L A/c,
Credit Commission Received A/c
(d) Debit Commission Received A/c
Credit Trading A/c
Answer:
(a) Debit Commission Received A/c,
Credit P&L A/c
The closing entry for the transfer of commission received A/c to Profit and Loss Account is Commission Received A/c Dr. xxx
To Profit & Loss A/c

144. Which of the following statement is correct in respect to adjusting entries?
(a) Adjusting entries will effect only trading account
(b) Adjusting entries will effect only balance sheet
(c) Adjusting entries may effect Balance Sheet, Trading A/c or Profit & Loss A/c
(d) Adjusting entries will effect only Profit & Loss A/c
Answer:
(c) Adjusting entries may effect Balance Sheet, Trading A/c or Profit & Loss A/c
Adjustment eateries are passed at the end of the year for outstanding, prepaid, Accrual and Unaccrual income/expense Adjusting entries involves Trading, P & L, Balance Sheet. Therefore, it may affect Trading, P & L and Balance Sheet.

145. The purchase as shown in books of accounts of a firm is ₹ 28,000. It includes the goods lost by fire for ₹ 2,800. The insurance claim received on account of this is ₹ 2,500. The amount of net purchases to be shown in Trading A/c will be:
(a) ₹ 28,000
(b) ₹ 30,500
(c) ₹ 27,700
(d) ₹ 25,200
Answer:
(d) ₹ 25,200
The net purchase is amount of goods that is purchased by the firm during the year for the purpose of sales less purchase return and loss of goods via theft or fire.
Net Purchase = Purchase – Purchase Return – Loss of Goods = 28,000 – 2,800 Net Purchase = 25,200

146. The net profit of a sole proprietorship firm is ₹ 1,320 (Before Commission). The manager of the firm gets 10% commission on net profit after charging such commission. Managers commission would be:
(a) ₹ 120
(b) ₹ 132
(c) ₹ 11,880
(d) Nil
Answer:
(a) ₹ 120
Net profit before commission = 1,320
Commission = ₹ 1,320 x \(\frac{10}{100+10}\)
= \(\frac{₹ 1,320 \times 10}{110}\)
= ₹ 120
Manager’s Commission = ₹ 120.

147. Which of the following transactions would have no impact on owners capital:
(a) Purchase of land from the proceeds of a Bank Loan
(b) Net loss
(c) Withdrawal of profit
(d) Investments of cash by owner
Answer:
(a) Purchase of land from the proceeds of a Bank Loan
Purchase of land from the proceeds of a bank loan will have no effect on owner’s equity.
Purchase of land will lead to increment in total Asset and Bank Loan will lead to increase in outside liability.
Thus, from this transaction owner’s equity will remain unaffected.

148. Goods worth ₹ 16,000 were lost by fire. The Insurance company admitted the claim for ₹ 7,500. The Insurance claim as admitted by the company would be:
(a) Added in Sales
(b) Added in Purchases
(c) Shown in liabilities side of Balance Sheet
(d) Shown in assets side of Balance Sheet
Answer:
(d) Shown in assets side of Balance Sheet
In case of loss by fire or theft if the goods are unsecured then the amount of claim admitted by the insurance company will be treated as an asset and is shown in asset side of Balance Sheet.

149. The adjusting entry for accrued expense effect _________.
(a) Expenses and liability
(b) Assets and expenses
(c) Liability and revenue
(d) Assets and revenue
Answer:
(a) Expenses and liability
Expenses which have been incurred during the year and whose benefit has been derived during the year but payment in respect of which has not been made are called outstanding or accrued expenses. At the end of the year, all such expenses must be brought into books, otherwise, the profit will be overstated and liability will be understated. The following journal entry is passed:
Expense Account Dr.
To Outstanding/Accrued Expense Account
Hence option A is correct

150. Gross profit ₹ 6700,carriage inward ₹ 250, rent received ₹ 515 & other expenses ₹ 3,600. Net profit of the firm would be _________.
(a) ₹ 3,275
(b) ₹ 3,025
(c) ₹ 3,425
(d) ₹ 3,675
Answer:
(c) ₹ 3,425

151. The difference between cost of goods sold and selling price is known as _________.
(a) Deficit
(b) Deferred revenue
(c) Loss
(d) Revenue
Answer:
(c) Loss
Gross Loss = Cost of the Goods Sold – Sales.
Hence the difference between the cost of goods sold and selling price is the gross loss.

152. What is surrender value?
(a) Amount receivable to a person when surrenders life insurance policy
(b) Amount payable to a person who surrenders a life insurance policy
(c) Premium policy
(d) Surrender of goodwill
Answer:
(b) Amount payable to a person who surrenders a life insurance policy
Surrender value is the amount that a policy holder receives from the insurer in case he plans to terminate the policy before its maturity. From this amount the insurer deducts the surrender charge and the remaining is transferred to the policyholder. Thus it is the amount payable to a person who surrenders a life insurance policy.

153. Balance sheet is prepared from _________.
(a) Real A/c
(b) Saving A/c
(c) Personal A/c
(d) Both (a) & (c)
Answer:
(d) Both (a) & (c)
Balance Sheet is a Statement showing financial position of the business on a particular date. It has two side one source of funds i.e Liabilities, the left side of the balance sheet and application of funds i.e assets, the right side of the balance sheet. It is prepared after preparing trading and profit and loss account and has balances of real and personal accounts grouped and arranged in a proper way as assets and liabilities. It is prepared to know the exact financial position of the business on the last date of the financial year. Thus it includes real and personal account.

154. Which is an unearned income _________.
(a) Insurance premium received by insurance company
(b) Rent received
(c) Depreciation
(d) Both (a) & (b).
Answer:
(d) Both (a) & (b).
That portion of the revenue which remains received in advance (unearned) at the end of the accounting period is known as unearned income or income received in advance. For example, subscription received in advance by a club, insurance premiums received in advance by an insurance company, rent received in advance, etc. Any income in advance is not actually earned and it rather creates an obligation. Hence, option D is correct.

155. Every day office expenses are charged to _________.
(a) Selling expenses
(b) Administrative expenses
(c) Marketing expenses
(d) Financial expenses.
Answer:
(b) Administrative expenses
Administrative expenses are the expenses that an organization incurs not directly tied to a specific function such as manufacturing, production or sales. These expenses are related to the organization as a whole as opposed to an individual department. Administrative expenses are typically fixed in nature as they incurred to be the foundation of business operations. Thus, option (b) is correct.

156. The net assets of a firm at a beginning of 2007 were ₹ 1,07,700.what were the net assets in the year 2007 if the profit earned by the business _________ in 2007 was ₹ 72,500 and owner withdrew goods for his own private use that had cost ₹ 2,500?
(a) 1,77,200
(b) 1,07,700
(c) 1,77,700
(d) 1,76,700.
Answer:
(c) 1,77,700

157. When closing stock is given in trial balance there, it will effect _________.
(a) Trading A/c only
(b) Balance sheet only
(c) Owner equity only
(d) Both trading A/c &balance sheet.
Answer:
(b) Balance sheet only
All those accounts which appear in Ledger are taken in the Trial Balance. So if closing stock account is to be shown in trial balance, we must have closing stock account in ledger. Closing stock account will come in ledger only if we pass the following journal entry for recording closing stock.
Closing stock A/c Dr.
To Purchase A/c
If Closing stock account appears on the debit side of Trial Balance, (it can never appear on credit side, stock being a debit balance), then you must remember while preparing Trading A/c and Balance Sheet that It will be shown only in the Balance sheet. It will neither be shown on the credit side of Trading A/c nor it will be shown as a deduction from Purchase A/c in Trading A/c because it will amount to double recording of closing stock.

158. If opening stock is ₹ 8,500 purchases ₹30,₹00 Direct Expenses ₹ 4,800, Indirect Expenses ₹ 5,200, closing stock ₹ 9,000 then calculate the cost of goods sold.
(a) ₹ 30,000
(b) ₹ 40,000
(c) ₹ 32,000
(d) ₹ 35,000
Answer:
(d) ₹ 35,000
COGS = Opening Stock + Purchase – Closing Stock + Direct Exp.
= 8,500 + 30,₹00 – 9,000 + 4,800
= 39,200 – 9,000 + 4,800
= 30,200 + 4,800
= 35,000

159. Some balances are given for an entity. Opening debtors ₹ 60,000, Total sales ₹ 2,70,000, Cash sales ₹ 60,000, Cash received from debtors ₹ 60,000, Bad debts ₹ 9,000, Return inwards ₹ 3,000 and Bills receivables received from customers ₹ 30,000. The amount of debtors at the end of the accounting year will be:
(a) ₹ 1,80,000
(b) ₹ 1,68,000
(c) ₹ 1,95,000
(d) ₹ 2,10,000
Answer:
(b) ₹ 1,68,000

Opening Debtor	60,000
Add: Credit Sale	2,10,000
Less: Cash Received from Debtor	(60,000)
Less: Bad Debt	(9,000)
Less: Ret. Inwards	(3,000)
Less: Bill Received	(30,000)
	1,68,000

160. The closing entry for transfer of Net profit ₹ 6,300 will be:
(a) Debit P&L A/c ₹ 6,300; Credit Capital A/c ₹ 6,300
(b) Debit Trading A/c ₹ 6,300; Credit P&L A/c ₹ 6,300
(c) Debit Capital A/c ₹ 6,300; Credit P&L A/c ₹ 6,300
(d) Debit Capital A/c ₹ 6,300; Credit Trading A/c ₹ 6,300
Answer:
(a) Debit P&L A/c ₹ 6,300; Credit Capital A/c ₹ 6,300
Closing Entry
Profit & Loss A/c Dr. 6,300
To Capital A/c 6,300

161. Assume following items in an accounting equation, cash is ₹ 1,000, Inventories ₹ 4,000, debtors ₹ 5,000, creditors ₹ 4,000 and capital is ₹ 25,000, if there are no other assets than fixed assets then the amount of fixed assets will be:
(a) ₹ 29,000
(b) ₹ 15,000
(c) ₹ 25,000
(d) ₹ 19,000
Answer:
(d) ₹ 19,000
Inventory + Cash + Debtor + Fixed Asset = Creditor + Capital
4.0 + 1,000 + 5,000 + Fixed Asset = 4,000 + 25,000
10,000 + Fixed Asset = 29,000
Fixed Asset = 29,000 – 10,000
Fixed Assets = ₹ 19,000

162. Which term is generally used to express the amount that describes excess of expenses over revenues earned by the business?
(a) Retained earnings
(b) Net loss
(c) Reserve
(d) Net profit
Answer:
(d) Net profit
An Excess of Revenue over Expense can be described as Net Profit.

163. Which of the following statements describes a fixed asset?
(a) It can be converted into cash quickly without any loss in value
(b) It is purchased specifically for resale.
(c) It is likely to be used within the business in the year of purchase itself.
(d) It is likely to be used for more than one accounting period.
Answer:
(d) It is likely to be used for more than one accounting period.
Fixed Asset is an asset which is likely to be used for more than one accounting period.

164. A company sends cars to dealers on sale or return basis. All such transaction are now ever treated like actual sales and are passed through the sales day book. Just before the end of the financial year, two cars which had costed ₹ 55,000 each have been sent on sale or return basis and have been debited to customers at ₹ 75,000 each. Cost of goods lying with the customers would be:
(a) ₹ 1,10,000
(b) ₹ 1,50,000
(c) ₹ 5,000
(d) ₹ 55,000
Answer:
(a) ₹ 1,10,000
At the end of the year, two cars costing ₹ 55,000 each remains with customer and debited with customers at ₹ ₹5,000 each in sales day book. Cost of goods lying with customer would be ₹ 55,000 x 2 = ₹ 1,10,000.

165. If outstanding wages appear in the trial balance while preparing the final accounts, it will be shown in:
(a) Assets side of the balance sheet
(b) Liability side of the balance sheet
(c) Profit and Loss A/c and Assets side of the balance sheet
(d) Profit and Loss A/c and Liability side of balance sheet
Answer:
(b) Liability side of the balance sheet
Outstanding means to be paid in future so it is considered as business liability.
If outstanding wages appear in trial balance and at the preparing final accounts, it will be shown in liability side of Balance Sheet only.

166. Contingent liability is shown in _________.
(a) Balance Sheet
(b) Profit & Loss
(c) Footnotes
(d) None of the above.
Answer:
(c) Footnotes
Contingent Liability: These are not actual liabilities but they become actual liabilities on happening of certain events. Such liabilities are not shown in balance sheet; but to a ‘foot note’ is appended at the balance sheet for such liabilities. Hence, option (c) is correct.

167. Prepaid expense is shown in _________.
(a) Balance Sheet
(b) Income & Expenditure
(c) Both (a) and (b)
(d) None of the above.
Answer:
(a) Balance Sheet
Prepaid Expenses are shown in debit side of Profit and Loss account as well as in Balance Sheet as an Asset. Hence, option (a) is correct.

168. Outstanding expenses are shown in _________.
(a) Balance Sheet
(b) Trial Balance
(c) Profit & Loss A/c
(d) None of the above.
But in both Profit & Loss Account as well as In Balance Sheet.
Answer:
(c) Profit & Loss A/c
Outstanding Expenses are shown in debit side of P/L Account added to related expenses and shown as a liability in Balance Sheet. Thus, option (d) is correct.

169. Gauri paid ₹ 1,000 towards a debt of ₹ 1,050. Which was written off as bad debt in the previous year. Which of the following account will be credited for this amount:
(a) Gauri’s personal account
(b) Bad debts account
(c) Bad debts recovered account
(d) None of the above
Answer:
(c) Bad debts recovered account
Journal entry for recovery of bad debt is:
Cash/ Bank a/c …….. Dr.
To Bad debts recovered a/c

170. X Limited is in the business of trading. It is to receive ₹ 7,000 from Vinod and to pay ₹ 8,000 to Vinod. Similarly, it is to pay ₹ 8,000 to Sudhir and to receive ₹ 9,000 from Sudhir. Except above but after all the adjustment, the books, of X Limited show the debtors balance at ₹ 72,0 (Dr.) and creditors balance at ₹ 39,000 (Cr.). The correct value of debtors and creditors to be shown in balance sheet would be:
(a) Debtors (₹ 72,000), Creditors (₹ 39,000)
(b) Debtors (₹ 88,000), Creditors (₹ 55,000)
(c) Debtors (₹ 80,000), Creditors (₹ 47,000)
(d) Debtors (₹ 79,000), Creditors (₹ 46,000)
Answer:
(b) Debtors (₹ 88,000), Creditors (₹ 55,000)

171. If the insurance premium paid is ₹ 1,000 and prepaid insurance is ₹ 300, the of insurance premium shown in profit and loss account will be:
(a) ₹ 1,300
(b) ₹ 700
(c) ₹ 1,000
(d) ₹ 300
Answer:
(b) ₹ 700
Prepaid Insurance premium is not an expense of the current year, hence will be carried over to next year.
∴ Expense of current year will be 1,000 – 300 = ₹ 700

172. If prepaid rent appears in the trial balance, while preparing the final accounts it will be shown in:
(a) Assets side of the balance sheet
(b) Liabilities side of the balance sheet
(c) Profit and Loss A/c and asset side of the balance sheet
(d) Profit and Loss A/c and liabilities side of balance sheet
Answer:
(a) Assets side of the balance sheet
If prepaid rent appears in trial balance, it means that it has already been journalised and now its balance will be shown on the asset side of the Balance Sheet as an asset.