IAS Commerce Study Material porforma baalance sheet

Proforma of Balance Sheet

Balance sheet is main part of financial statement. This is necessary to make it. Making of balance sheet is very easy but you must know the rule of making balance sheet. In Right side we will have to show all assets and in the left side we will have to show all liabilities.

Method of calculating goodwill

Correct calculation of goodwill is very difficult work. But with using correct formulae of specific method, you can easily calculate goodwill. There are four methods to calculate goodwill.

Ist Method: Average profit method

In this method, we calculate previous year's profits average and then we multiply it with number of purchase years.

2nd Method: Super profit method

In this method, we calculate normal profit with normal rate on investment. Then we calculate super profit with following formula.

Super profit = average profit/actual profit normal profit

Goodwill = super profit X No. Of purchase years

3rd Method: Capitalization method

In this method, we calculate capital employed with following formula

Capital employed = average profit or normal profit X 100/Rate

Goodwill = capital employed Net Assets

4th Method: Annuity Method

In this method we first of all calculate annuity. Annuity means annual value. These day, accountant are using different annuity tables for calculating annuity, after this they can easy calculate goodwill with following formula. Goodwill = Super profit X Annuity

Revaluation account

This account is very useful for calculating the profit or loss when partners decides to reconstruct their partnership firm. When a new partner comes in firm or exit from firm, making of this account is very necessary, I am giving the proforma of this account

Revaluation account

Dr. Side

  • To Asset decrease in the amount of certain asset
  • To Liabilities increase in the amount of any certain liabilities
  • To Liabilities if any liability have but not recorded in books
  • To transfer of profit to partner in old ratio if credit side is more than debit side

Cr. Side

  • By Asset increase in the amount of certain asset
  • By Liabilities Decrease in the amount of any certain liabilities
  • By Asset if any asset have but not recorded in books
  • By transfer of profit to partner in old ratio if debit side is more than credit side

Revaluation account

This account is very useful for calculating the profit or loss when partners decides to reconstruct their partnership firm. When a new partner comes in firm or exit from firm, making of this account is very necessary, I am giving the proforma of this account

Capital Adjustment

When two or more partner decides to change their capital according to their profit and loss ratio, then it is necessary to make capital adjustment in the form of cash.

For Example: Suppose one partner A who invested Rs. 100000 and other partner B invested Rs. 200000. If they decides to divide their capital in their profit sharing ratio and suppose their profit and loss sharing ratio is 1: 1 then we calculate total capital first that is Rs. 300000 and if we divide into ½ and ½ it will be 150000 and150000 to A and B so A will invest more 50000 Rupees and B will withdraw Rs. 50000 because his old capital excess Rs. 50000 from his new capital.

Then the journal entry will pass in the books of account

_________________________________________________________________

Cash account Debit

A partner's capital account Credit

___________________________________________________________________

B partner's capital account Debit

Cash Account Credit

How can You calculate new and sacrifice ratio at the time of admission of new partner

Calculation of new and sacrifice ratio at the time of admission of new partner is very easy. If you want to calculate new profit sharing ratio, you should only calculate the difference between old and sacrifice ratio. Sacrifice ratio means total sacrifice of old partner for new partner.

It is given by old partner to new partner so if you want to calculate new profit sharing ratio, you just deduct this from old profit sharing ratio. But in different situation, partner can make condition at the time of admission, and fix his surrender share for new partner from his share then we first calculate sacrifice ratio and then calculate new profit sharing ratio.

For example Ram and sham are the two partners with profit sharing ratio are 3: 2. Sita enters in this partner ship. Both after that sita will take ¼ as new share, If agree that Ram will give 20% of his share and balance will give by Sham then we will calculate both new and sacrifice profit sharing ratio as bellow way.

Solution:

Ram's sacrifice = 3/5X20% = 0.12

Sham's sacrifice = ⅕-0.12 = 0.08

New profit share of Ram = ⅗-0.12 = 0.48

New profit share of Sham = ⅖ 0.08 = 0.32

New profit share of Sita = ⅕ = 0.20

Accounting treatment of goodwill at the time of admission

When a new partner enters in partnership firm, the old partner sacrifices his share for him, so it is the duty of new partner to give goodwill in cash or in any other way to old partner. There are following method with this new partner give his share of goodwill to old partners.

  • 1st method: Private distribution of goodwill: Under this method, new partner gives his share of goodwill to old partners personally. So there is no need to record it to the books of firm. No journal entry will pass.
  • 2nd method: Goodwill is given in cash form by new partner: Under this method, old partner bring his share of goodwill in cash form in the firm and it is taken by old partner in their sacrifice ratio. For this following journal entry pass in the books of firm
  • Cash/Bank Account Debit xxxxxxxxx
  • To Goodwill/Premium Account xxxxxxxxxx
  • Goodwill account debit xxxxxxxx share of new partner's goodwill
  • To old partner's capital account xxxxxxx divide in sacrifice ratio
  • 3rd method: When new partner bring goodwill in cash in business and taken by old partner and then withdraw by old partner Above two entries will pass as same as in second method but third new entry will pass Old partner's capital account Debit xxxxxxxxxxx
  • To cash/bank account xxxxxxxx
  • 4th method: When new partner do not bring goodwill in cash form: If new partner do not bring goodwill in cash in firm, then following entry will pass for the adjustment of goodwill.
  • New partner's capital account debit xxxxxxxx share of goodwill
  • To old partner's capital account xxxxxxxxx division in sacrifice ratio
  • 5th method: If partial in cash form of goodwill
  • Part of cash goodwill
  • Cash account dr. Xxxxxx
  • To goodwill/premium account xxxxxxxx
  • Goodwill account debit cash goodwill xxxxxxxxx
  • New partner account debit not in cash goodwill xxxx
  • To old partner capital account in sacrifice ratio xxxxxxx
  • 6th method: If goodwill already exits in balance sheet of old partner, then it must be transfer to old partner's capital account in old ratio. Other method is same above from 1 to 5 method. Entry passed for transferring of old goodwill
  • Old partner's capital account debit xxxxxxx
  • To goodwill xxxxxxx
  • 7th method: If new partner brings other asset as goodwill of his share of goodwill. Then following entry will pass
  • Asset account debit xxxxxx
  • To goodwill account xxxxxxxx
  • Goodwill account debit xxxxxxxxx
  • To old partner's capital account in sacrifice ratio xxxxxxxxxx

Adjustment of capital at the time of admission of new partner

When a new partner in partnership firm, he and other partner can agree for the capital adjustment on the basis of new profit sharing ratio and new partner's capital as base. In such condition, we first calculate total capital on the basis of new partner's capital.

Suppose Vinod is new partner in the firm of vijay and rajesh with 3: 2 and their capital are Rs. 10000 and Rs. 30000 but Vinod will ¼ share. He brings Rs. 10000 as capital. If all the partner agree to adjust their capital according to new profit sharing ratio, then calculate who invest more capital in cash form or who withdraw his excess capital Total capital = 10000 X 4/1 = 40000

Vijay's new capital = 40000 X 9/20 = 18000

Rajesh's new capital = 40000 X 4/20 = 8000

Vijay brings his external capital in cash because now he needs = 18000 − 10000 = 8000

But Rajesh withdraw his

excess capital = 30000 − 8000 = 22000

Difference between memorandum revaluation account and revaluation account

In the partnership accounting, at the time of retirement or admission, we either make revaluation account or make memorandum revaluation account but we should know the main difference between both

  1. In memorandum revaluation account we make reciprocal entries in same account for covering double record system but in revaluation account we make only one side record.

  2. In memorandum revaluation system of accounting, we can not change the value of assets or liabilities outside because all the procedure of double record is completed in memorandum revaluation account.

  3. In memorandum revaluation account, first we divide profit or loss on revaluation is in old profit sharing ratio among all partners but after reciprocal entries recording we divide partner in new profit sharing ratio but in revaluation account we only divides in old profit sharing ratio

  4. Making of memorandum revaluation account is not necessary but making of revaluation account is very necessary.

Accounting treatment at the time of retirement

In any partnership firm when a partner retires from a firm it is the duty of remaining partner to give him his share because he has to spend his remaining life. So at this time accounting treatment is very necessary in the books of firm.

Tips for easy recording these transactions

  • Calculate new profit sharing ratio and calculate gaining ratio by deducting new profit sharing ratio from old ratio.

  • Calculate profit or loss on revaluation of assets and liabilities and transfer it to retiring partner's capital account.

  • Calculate the goodwill share of retiring partner and transfer to retiring partner's capital account credit side with his share

  • Calculate joint life policy share and transfer to retiring partner's capital account

  • Calculate General reserve share and transfer to retiring partner's capital account

  • In his debit side we will transfer his drawing and interest on his drawing after this we can give his capital after above adjustment in cash form or after this his amount will deemed as loan to firm. Firm will liable to give 6% interest to retiring partner. Make and retiring partner and calculate his total amount and give him. That is called accounting treatment of retirement of a partner.

Dead partner's executer account

This is very simple account and it is open when Firm has to pay deceased partner's executors. In this account first of all we calculate payable amount then we calculate per year installment of executors then include total interest in this amount every year.

I am trying to make you understand with an example suppose firm has to pay RS 100000 to the executor of dead partner B in four installment with 10% rate of interest. For this we divide Rs. 100000 by 4 and it will Rs. 25000 every year but first year we include

1st installment Rs. 25000 + interest of Rs. 100000 X 10% = 35000

2nd installment Rs. 25000 + interest of Rs. 75000 × 10% = 32500

and same procedure for 3rd and 4th year. This is the easy method of given amount to executor of deceased partner

Discussions & Questions