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This Book is designed as per the Revised Syllabus of F.Y.B.Com.

prescribed by University
of Pune with effect from June, 2013

A Book Of

FINANCIAL
ACCOUNTING
F.Y.B.Com. Compulsory Paper
As Per New Revised Syllabus of Savitribai Phule Pune University

Dr. Mahesh Kulkarni Dr. Suhas Mahajan


M.Com., M. Phil., L.L.B., D.T.L., Ph.D. (Management) B.A., M.Com., Ph.D. (Finance)
Research Guide, Univeristy of Pune and YCMOU, Research Guide, Univeristy of Pune and YCMOU,
Nashik. Nashik.

Price ` 350.00

N1586
Financial Accounting (F.Y.B.Com.) ISBN 978-93-83073-31-3
Sixth Edition : May 2018
© : 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.

26th June, 2013 Dr. Mahesh Kulkarni


Sankasti Chaturthi, Dr. Suhas Mahajan
Pune 411021
University of Pune
F.Y.B.Com.
Compulsory Paper

Financial Accounting
Course Code 102

Syllabus …
TERM - I

1. Piecemeal Distribution of Cash : (12 L)


Meaning and Introduction, Surplus Capital Method and Maximum Loss Method
2. Amalgamation of Partnership Firms : (12 L)
Meaning and Introduction, Objectives, Methods of Accounting
3. Conversion of Partnership Firm into a Limited Company : (12 L)
Meaning and Introduction, Objectives, Effects, Methods of Calculation of
Purchase Consideration (Net Asset and Net Payment Method), Accounting
Procedure in the books of the Firm and Balance Sheet of New Company.
4. Computerised Accounting Environment : (12 L)
Meaning and Introduction, Application of Accounting Software Package,
Voucher Entry through Software Package.

(48 L)

TERM - II

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


Overview of Accounting Standards in India - Concept, Need, Scope and
Importance. Study of AS-1, AS-2, AS-4 and AS-9.
6. Royalty Accounts (Excluding Sub-lease] : (12 L)
Royalty, Minimum Rent, Shortworkings, Recoupment of Shortworkings, Lapse of Short
Working, Journal Entries and Ledger Accounts in the Books of Landlord and Lessee.
7. Hire Purchase and Instalment System [Excluding H.P. Trading] : (16 L)
Basic Concepts and Distinction, Calculation of Interest and Cash Price, Journal Entries
and Ledger Accounts in the Books of Purchaser and Seller.
8. Departmental Accounts : (10 L)
Meaning and Introduction, Methods and Techniques, Allocation of Expenses, Inter-
Departmental Transfers, Provision for Unrealised Profits.
(48 L)

Syllabus at a Glance …

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

1. Piecemeal Distribution of Cash 1.1 - 1.56

2. Amalgamation of Partnership Firms 2.1 - 2.42

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

4. Computerised Accounting Environment 4.1 - 4.46

TERM - II

5. Introduction and Relevance of Accounting Standards 5.1 - 5.32

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

7. Hire Purchase and Instalment System


[Excluding H.P. Trading] 7.1 - 7.66

8. Departmental Accounts 8.1 - 8.44

• Appendices
− Glossary G.1 − G.6
− Objective Questions :
i) True or False Statements T.1 − T.8
ii) Fill in the Blanks F.1 − F.8
− Formulae R.1 − R.2
− Bibliography B.1 − B.1

• Question Papers P.1 − P.19


,,,
List of Figures, Graphs and Charts …
1.1 : Classification of Liabilities 1.2
1.2 : Sub-classification of Liabilities 1.2
1.3 : Methods of Distribution of Cash among the Partners 1.6
2.1 : Methods of Accounting in Amalgamation of Partnership Firms 2.8
3.1 : Basic Objectives of Conversion 3.2
3.2 : Methods of Calculation of Purchase Consideration 3.3
4.1 : Coding of Accounts 4.14
4.2 : Integrated Accounting Modules 4.16
4.3 : Areas of Voucher Entry Screen 4.28
4.4 : Contra Voucher Entry 4.30
4.5 : Payment Voucher Entry 4.32
4.6 : Receipt Voucher Entry 4.33
4.7 : Purchase Voucher Entry 4.34
4.8 : Sales Voucher Entry 4.35
4.9 : Debit Note Voucher Entry 4.36
4.10 : Credit Note Voucher Entry 4.37
4.11 : Journal Voucher Entry 4.38
5.1 : Accounting Areas which have more than one method of Accounting 5.13
Treatment
5.2 : Fundamental Accounting Assumptions as per AS–1 5.14
5.3 : Selection of Accounting Policies 5.15
6.1 : Existence of Shortworkings 6.4
7.1 : Methods of Accounting for Hire Purchase Transactions 7.13
8.1 : Basis of Departmentation 8.2
8.2 : Methods of keeping Departmental Accounts 8.3
8.3 : Techniques of Departmental Accounts 8.4
8.4 : Classification of Expenses 8.6
8.5 : Classification of Incomes 8.8

,,,
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

Fig. 1.1 : Classification of Liabilities


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

External Internal Capital Accounts

Loan from Partners

Preferential Others

Govt. Employees Realisation


Dues Dues Expenses

Secured Unsecured

Fig. 1.2 : Sub-Classification of Liabilities


Financial Accounting 1.3 Piecemeal Distribution of Cash

Order of Payment :
The assumption of realisation of all the assets and the payments of all the liabilities as on the
date of dissolution is far away from practice. In actual practice, the assets are realised gradually
and the cash available is applied in the following order:
From the external liabilities, first pay the Preferential Liabilities in the order
i.e. i) Realisation Expenses, ii) Government Dues and iii) Employees’ Dues.
Then pay Other Liabilities. In case of other liabilities, secured liabilities will get a priority
over unsecured ones for payment out of the amount realised from sale of assets charged for
securing such liabilities. If any other asset realises, then the secured liability will stand at par with
the unsecured liabilities. e.g. a Bank Loan secured against plant will be paid off from the amount
realised by the sale of plant. If the amount realised is from any other asset, the loan will stand at
par with other liabilities. Another point to be noted here is that in case there are more than one
liabilities of the same category, then the payment should be made on pro-rata basis
i.e., proportionately e.g. bills payable and creditors are to be paid simultaneous in the ratio of the
amounts due.
After paying off all the external liabilities, payment should be made for discharging Internal
Liabilities, i.e., Loans from Partners. Here also if there is more than one such loan, the payment
should be made pro-rata.
When all the external as well as internal liabilities are settled, payment can be made to
partners on their Capital Accounts.
Process of payment out of Assets :
While making the payment i.e. distribution of available cash among various claimants the
following steps should be followed :
Step 1 : First, realisation expenses are paid or provided for.
Step 2 : Then, outside creditors are paid. The point to be noted here is that whenever an
asset charged (i.e., an asset provided by way of security to a creditor) is realised,
the payment is made first to the concerned creditor (i.e., to whom that asset has
been provided as security). Whenever ‘an asset not charged’ is realised, payment
is made to all the creditors (whether secured or unsecured) in proportion to their
respective claims.
Step 3 : After the payment of all outside liabilities, the partners’ loans are discharged in
proportion to their respective amounts.
Step 4 : After the payment of all partners’ loan but before the partners’ capitals are paid
off, as a prudent measure, an adequate provision should be made for a
contingent liability (if any) (e.g. discounted bills receivable the maturity of which
has not yet reached).
Step 5 : Finally, the partners’ capitals are paid off.
Provisions of Indian Partnership Act‚ 1932 :
Section 48 of the Indian Partnership Act, 1932 provides that in settling of accounts between
the partners after dissolution of partnership, the following rules shall, subject to any agreement,
be observed :
Financial Accounting 1.4 Piecemeal Distribution of Cash

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


profits, next out of capital, and lastly, if necessary, by the partners individully in the
proportion in which they were entitled to share profits.
ii) The assets of the firm, including the sums, contributed by the partners to make up losses
or deficiencies of capital shall be applied in the following manner and order:
• in paying outside creditors;
• in repaying advances made by partners (distinct from investment of capital);
• in repaying capital to partners; and
• the ultimate residue, if any, shall be divided among the partners in the proportions
in which profits are divisible.
So the Partnership Act provides for the adjustment of debit balances of capital or current
accounts first from the undistributed profits etc. before the disposal of business. Then on
realisation of assets, to pay off outside creditors first, then partners’ loans, thereafter the partners’
capital balances. There is no mention of the realisation expenses in the act. But the provision for
the same should be done first because without which the assets can not be disposed off. Suppose
an advertisement is required to be given in the newspapers for the disposal of assets, then
without incurring advertisement expenses, nobody would come to know about such disposal.
Distribution of Cash among the Partners :
As stated above, after settlement of external and internal liabilities, the cash available from
realisation of assets should be distributed among the partners to settle their capital balances. Here
again, we have to decide in what order and what proportion payment should be made to partners
on their capital accounts. Should the cash be distributed in the ratio of the capitals of partners.
The distribution should be made in such a manner that the unpaid amount after distribution of all
realisations is in profit sharing ratio. The balance left unpaid in capital accounts is loss on
realisation and this must be in profit sharing ratio.
The partners are sharing profits and losses in a particular ratio i.e. profit sharing ratio. The
amount of exact profit or loss on realisation will not be known till all the assets are disposed off.
The partners may not be having their capitals in the profit sharing ratio.
The problem arises when the capital balances of partners are not in the ratio in which they
share profits and losses. In such a case the available cash can not be distributed among the
partners in profit sharing ratio because if it is so done, the amount left unpaid i.e. loss, will not be
in profit sharing ratio. Refer to the example given below. The proceeds can not be distributed in
capital ratio also because if it is so done, then the balance left unpaid, i.e., loss, will also be in
capital ratio, whereas it should be in profit sharing ratio.
EXAMPLE 1
A, B and C are partners who share profits in the ratio of 3 : 2 : 1.
Capital Balances Realisation of Assets
(After payment of liabilities)
Capital Balances ` Realisation Amount `
A : 20,000 I : 24,000
B : 30,000 II : 36,000
C : 50,000
Financial Accounting 1.5 Piecemeal Distribution of Cash

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

Statement showing Distribution of Cash if


cash is distributed in profit sharing ratio i.e. 3 : 2 : 1.
Particulars Instalment Cash Total A3 B2 C1
` ` ` ` `
Balances Due 1,00,000 20,000 30,000 50,000
Realisation I 24,000
Less amount paid to 24,000 24,000 12,000 8,000 4,000
A, B, and C (3 : 2 : 1)
∴ Balances Due (−) – 76,000 8,000 22,000 46,000
Realisation II 36,000
Less amount paid
to A, B and C (3 : 2 : 1) 36,000 36,000 18,000 12,000 6,000
∴ Amount left unpaid (−) – 40,000 10,000 10,000 40,000
(Excess (Balance (Balance
Payment) Unpaid) Unpaid)
In the above statement, the amount left unpaid, i.e., loss on realisation of ` 40,000 has not
been shared by the three partners in profit sharing ratio. In fact, ‘A’ has been paid an excess
amount of ` 10,000 on his capital account.
Statement showing Distribution of Cash if cash is distributed in capital ratio i.e. 2 : 3 : 5.
Particulars Instalment Cash Total A2 B3 C5
` ` ` ` `
Balances Due 1,00,000 20,000 30,000 50,000
Realisation I 24,000
Less amount paid 24,000 24,000 4,800 7,200 12,000
to A, B and C (2 : 3 : 5) (−)
∴ Balances Due – 76,000 15,200 22,800 38,000
Realisation II 36,000
Less amount paid
to A, B and C (2 : 3 : 5) (−) 36,000 36,000 7,200 10,800 18,000
∴ Amount left unpaid – 40,000 8,000 12,000 20,000
In the above statement, the amount left unpaid, i.e., loss on realisation is not in profit sharing
ratio but it is in capital ratio. So whichever ratio is applied, it does not guarantee that the ultimate
profit or loss will be shared or borne by the partners in their profit sharing ratio. To solve this
problem of distribution of cash among the partners appropriately, the following methods are
followed as shown below in Figure 1.3.
Financial Accounting 1.6 Piecemeal Distribution of Cash

Proportionate Capital Method


OR Maximum Loss Method

Surplus Capital Method OR

OR Notional Loss Method


Excess Capital Method
OR
High Relative Capital Method
OR
Quotient Method

Methods of
Distribution of Cash
among the Partners

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

1.3 SURPLUS CAPITAL METHOD


This is a simple method of distribution of cash among the partners. As the name indicates,
under this method, the surplus capital of the partners is found out first. Such surplus capital once
paid off, will leave the remaining capital in the profit sharing ratio. Then it can be easily repaid.
The balance, if any, indicating the realisation loss, will be shared by the partners in the profit
sharing ratio automatically. If there is any realisation profit, the partners would get that much
amount more than their capital balances. Surplus Capital means capital that is more than the
required capital, according to the share of profit an individual partner is sharing.
This method is also known as “Excess Capital Method” or, “Highest Relative Capital
Method” or “Quotient Method”. Under this method, the excess capital contribution by the
partners, with reference to their profit sharing ratio is determined. It is already noted that the
proceeds of assets realised cannot be distributed in profit sharing ratio if the capital balances are
not in the profit sharing ratio. Thus, in order to bring the capitals in profit sharing ratio, the excess
capital contributed by a partner over and above his proportionate capital with reference to his
share of profit, is paid off first. To take an example, if A and B are two partners sharing profits
and losses in the ratio of 3 : 1 and having capitals of ` 45,000 and `25,000, respectively, B’s excess
capital is ` 10,000 for his share and this should be paid off first. Thus, the available cash should be
paid only to B till the time his capital becomes ` 15,000 thereby making it proportionate to his
share of profit. Capital to be considered for this purpose will be after adjustment of General
Reserve, Profit and Loss Account (Credit) balance or Profit and Loss Account (Debit) balance.
Here, the capital of a partner, who is having the least capital per share is taken as a base. This
is taken as a base because, the partnership is under dissolution and no partner would be ready to
contribute anything further to the firm. They would be interested in taking the money back from
the firm, instead of investing further. The partners capital is then revised according to the base
capital. The difference between the actual capital and the required capital is called surplus
Financial Accounting

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Author : Dr. Mahesh


Publisher : Nirali Prakashan ISBN : 9789383073313 Kulkarni, Dr. Suhas
Mahajan

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