Sample 21888
Sample 21888
Sample 21888
prescribed by University
of Pune with effect from June, 2013
A Book Of
FINANCIAL
ACCOUNTING
F.Y.B.Com. Compulsory Paper
As Per New Revised Syllabus of Savitribai Phule Pune University
Price ` 350.00
N1586
Financial Accounting (F.Y.B.Com.) ISBN 978-93-83073-31-3
Sixth Edition : May 2018
© : Authors
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Preface …
There are a number of books on the subject of Financial Accounting available in the
learners market but they do not meet the basic requirements of First Year Commerce
students of University of Pune. This book is written as per the revised syllabus prescribed for
F.Y.B.Com. students by the University of Pune from June, 2013. We do hope that this book
will definitely help to meet the growing requirements of the students of accountancy from
the Faculty of Commerce and Management. This book adopts a modern and novel approach
towards the study of Financial Accounting in view of the specific requirements of the readers
and practitioners of this subject.
All the topics included in the syllabus are explained in simple but apt language. Equal
stress is also given for necessary accounting theories and a wide variety of practical
problems. We have taken appropriate care to incorporate basic accounting concepts,
accounting standards and, tabular and graphical representation of classified financial
statements. Proper emphasis is also given on charts and graphs to simplify the complicated
accounting theories and practices. This book has been designed to serve as a self sufficient
text for F.Y.B.Com. students. It will definitely add to our satisfaction if this book would be
more useful as a guide and reference for practicing accountants, professional managers,
dynamic entrepreneurs and enthusiastic teachers of the subject.
We sincerely thank the senior faculty members from various Colleges, Management
Institutes and Accounting Associations for guiding and constantly encouraging us in our
enterprise and the ever challenging student community who inspired us to write this book
as per their requirement.
We are grateful to Shri. Dineshbhai Furia and Shri. Jigneshbhai Furia and the entire staff
of Nirali Prakashan, Pune for their earnest help in bringing out this book with vigour and
accuracy. We have taken maximum efforts to make the text error free. Nevertheless, we do
not rule out the possibility of certain shortcomings or misprints still remaining, we will be
grateful to the reader if such errors are being pointed out from time to time. We must
concede that this book would never have been written without the support, encouragement
and inspiration of our beloved family members. Many, many thanks to them !
Any criticism or valuable suggestions for further improvement of this book will be
gratefully acknowledged and highly appreciated.
Financial Accounting
Course Code 102
Syllabus …
TERM - I
(48 L)
TERM - II
F
P I E C E M E A L D I S T R I B U T I O N O F C A S H
N
A
A M A L G A M A T I O N O F F I R M
C
C O N V E R S I ON O F F I R M I N T O A C O M P A N Y
A
L
C O M P U T E R I S E D A C C O U N T I N G
C
A C CO U N T I N G S T A N D A R D S
O
R O Y A L T Y A C C O U N T S
H I R E P U R C H A S E A N D I N S T A L M E N T S Y S T E M
I
D E P A R T M E N T A L A C C O U N T S
G
Contents …
TERM - I
TERM - II
• Appendices
− Glossary G.1 − G.6
− Objective Questions :
i) True or False Statements T.1 − T.8
ii) Fill in the Blanks F.1 − F.8
− Formulae R.1 − R.2
− Bibliography B.1 − B.1
,,,
TERM - I
Chapter 1…
Piecemeal Distribution of Cash
Synopsis …
1.1 Introduction
1.2 Meaning
1.3 Surplus Capital Method
1.4 Maximum Loss Method
1.5 Illustrations
• Questions for Self Study
1.1 INTRODUCTION
The term “Dissolution” stands for discontinuation. Under the Partnership Act 1932, the
dissolution may be either of a partnership or of a firm. The dissolution of partnership amongst all
the partners of a firm is called “dissolution of the firm”. It should be noted that there is a
distinction between dissolution of partnership and dissolution of firm, Dissolution of Firm
means complete breakdown of the relation of partnership amongst all partners. It is the complete
discontinuance of the relationship amongst all the partners of a firm. However, if this breakdown
is relating to a few partners and not all the partners and the partnership business is continued, it
is known as Dissolution of Partnership. Dissolution of partnership, is thus, a mere reconstitution
of partnership. It involves a change in the relation between or amongst the partners. Admission,
retirement or death of a partner or amalgamation also cause changes in relations of partners.
When partnership business comes to an end, the partnership firm is required to be dissolved. The
assets are realised and the liabilities are paid off. Since assets are realised in pieces, the liabilities
as well as partners capital balances are also paid in pieces. This method of distribution is called as
‘Piecemeal Distribution of Cash’.
1.2 MEANING
On dissolution of firm, the assets are sold and the cash thus made available is used to pay off
firm’s liabilities. In practice the realisation or sale of assets is not an easy job. It may take time,
even months, to sell all of the assets of the firm. Thus, the realisation of assets is done part by part
- it is gradual - it is piecemeal. The creditors of the firm will not sit quiet till all the assets are
realised and they will demand their dues as and when the firm has sufficient funds. Thus
creditors are paid part by part - the distribution of available funds is gradual - it is piecemeal.
Now the question arises as to in what order the liabilities of the firm should be paid off or in
other words how should the assets of the firm be applied. In all the examples which we have seen
in the simple dissolution, we have assumed that the realisation of assets and settlement of debts
and partners’ accounts took place on the same day, i.e. the day the firm was dissolved. This
assumption is, however, impractical.
(1.1)
Financial Accounting 1.2 Piecemeal Distribution of Cash
Classification of Liabilities
The liabilities including the amounts due to partners, may be classified in the three major
categories viz. External Liabilities, i.e., dues to outsiders. Internal Liabilities, i.e., partners loans;
and Capital Accounts of partners. The Figure 1.1 shows the Classification of Liabilities.
External Liabilities
Internal Liabilities
ii)
i) Classification
of Liabilities
iii)
Capital Accounts of
Partners
Preferential Others
Secured Unsecured
Order of Payment :
The assumption of realisation of all the assets and the payments of all the liabilities as on the
date of dissolution is far away from practice. In actual practice, the assets are realised gradually
and the cash available is applied in the following order:
From the external liabilities, first pay the Preferential Liabilities in the order
i.e. i) Realisation Expenses, ii) Government Dues and iii) Employees’ Dues.
Then pay Other Liabilities. In case of other liabilities, secured liabilities will get a priority
over unsecured ones for payment out of the amount realised from sale of assets charged for
securing such liabilities. If any other asset realises, then the secured liability will stand at par with
the unsecured liabilities. e.g. a Bank Loan secured against plant will be paid off from the amount
realised by the sale of plant. If the amount realised is from any other asset, the loan will stand at
par with other liabilities. Another point to be noted here is that in case there are more than one
liabilities of the same category, then the payment should be made on pro-rata basis
i.e., proportionately e.g. bills payable and creditors are to be paid simultaneous in the ratio of the
amounts due.
After paying off all the external liabilities, payment should be made for discharging Internal
Liabilities, i.e., Loans from Partners. Here also if there is more than one such loan, the payment
should be made pro-rata.
When all the external as well as internal liabilities are settled, payment can be made to
partners on their Capital Accounts.
Process of payment out of Assets :
While making the payment i.e. distribution of available cash among various claimants the
following steps should be followed :
Step 1 : First, realisation expenses are paid or provided for.
Step 2 : Then, outside creditors are paid. The point to be noted here is that whenever an
asset charged (i.e., an asset provided by way of security to a creditor) is realised,
the payment is made first to the concerned creditor (i.e., to whom that asset has
been provided as security). Whenever ‘an asset not charged’ is realised, payment
is made to all the creditors (whether secured or unsecured) in proportion to their
respective claims.
Step 3 : After the payment of all outside liabilities, the partners’ loans are discharged in
proportion to their respective amounts.
Step 4 : After the payment of all partners’ loan but before the partners’ capitals are paid
off, as a prudent measure, an adequate provision should be made for a
contingent liability (if any) (e.g. discounted bills receivable the maturity of which
has not yet reached).
Step 5 : Finally, the partners’ capitals are paid off.
Provisions of Indian Partnership Act‚ 1932 :
Section 48 of the Indian Partnership Act, 1932 provides that in settling of accounts between
the partners after dissolution of partnership, the following rules shall, subject to any agreement,
be observed :
Financial Accounting 1.4 Piecemeal Distribution of Cash
Show distribution of cash if i) Cash is distributed in profit sharing ratio and ii) cash is
distributed in capital ratio.
SOLUTION
Methods of
Distribution of Cash
among the Partners
60%
OFF