Grade XII - Accountancy Notes

ACCOUNTING TREATMENT OF GOODWILL IN CASE OF RECONSTITUTION OF PARTNERSHIP

I.   Purchased Goodwill i.e. goodwill appearing in the books (it is written off)

Old Partners’ Capital A/c Dr. (Old PSR) 

             To Goodwill A/c

II.   Self-generated Goodwill (Adjustment Entry is to be passed)

1.  Change in PSR

Gaining Partners’ Capital A/c Dr.

             To Sacrificing Partners’ Capital A/c

2.  Admission of (a) partner(s)

A.  When the goodwill is paid privately by the incoming partner – No entry is passed

B.  When the incoming partner brings his share of goodwill in cash & it is retained in business

(i)       Cash A/c Dr.

          To Premium for Goodwill A/c

(ii)       Premium for Goodwill A/c Dr.

To Sacrificing Partners’ Capital A/c (Sacrificing ratio)

C.  When the incoming partner brings his share of goodwill in cash & it is withdrawn by partners

(i)       Cash A/c Dr.

          To Premium for Goodwill A/c

(ii)       Premium for Goodwill A/c Dr.

To Sacrificing Partners Capital A/c (Sacrificing ratio)

(iii)       Old Partners’ Capital A/c Dr.

To Bank A/c

D.  When the incoming partner brings his share of goodwill in consideration other than cash

(i)       Assets A/c Dr.

         To Premium for Goodwill A/c

(ii)       Premium for Goodwill A/c Dr.

To Sacrificing Partners’ Capital A/c (Sacrificing ratio)

E.  When the incoming partner fails to bring his share of goodwill in cash or kind

New Partners’ Current A/c Dr.

       To Sacrificing Partners’ Capital A/c (Sacrificing ratio)

3.  Retirement of (a) Partner(s)

Gaining Partners’ Capital A/c Dr. (Gaining Ratio)

             To Retiring Partners’ Capital A/c

4.  Death of (a) Partner(s)

Gaining Partners’ Capital A/c Dr. (Gaining Ratio)

             To Deceased Partners’ Capital A/c

ACCOUNTING TREATMENT OF RESERVES, ACCUMULATED PROFITS AND LOSSES IN CASE OF RECONSTITUTION OF PARTNERSHIP

A.   FREE RESERVES AND ACCUMULATED PROFITS

Free Reserves A/c Dr. (In Book Value)

Profit and Loss A/c (Cr. Balance)   Dr. (In Book Value) 

             To Partners' Capital/Current A/c (In Old PSR)

B.   ACCUMULATED LOSSES AND FICTITIOUS ASSETS

Partners’ Capital/Current A/c Dr. (In Old PSR)

             To Profit and Loss A/c (Dr. Balance) (In Book Value)

To Deferred Revenue Expenditure A/c (In Book Value)

To Advertisement Suspense A/c (In Book Value) 

C.   SPECIFIC RESERVE - WORKMEN COMPENSATION RESERVE (WCR)

       Case 1: When the question is silent or there is no claim

Workmen Compensation Reserve A/c Dr. (Total WCR)

             To Partners' Capital/Current A/c (In Old PSR)

       Case 2: When claim is less than WCR

Workmen Compensation Reserve A/c Dr. (Total WCR)

             To Workmen Compensation Claim A/c (Total Claim)

             To Partners' Capital/Current A/c (In Old PSR)

       Case 3: When claim is equal to WCR

Workmen Compensation Reserve A/c Dr. (Total WCR)

             To Workmen Compensation Claim A/c (Total Claim)

       Case 4: When claim is more than WCR

Workmen Compensation Reserve A/c Dr. (Total WCR)

Revaluation A/c Dr. (Claim in excess of WCR)

             To Workmen Compensation Claim A/c (Total Claim)

Partners’ Capital/Current A/c Dr. (In Old PSR)

             To Revaluation A/c     (Claim in excess of WCR)

D.   SPECIFIC RESERVE - INVESTMENT FLUCTUATION RESERVE (IFR)

       Case 1: When the Market Value of Investment(s) is greater than its Book Value

Investments A/c Dr. (Increase in Investments)

             To Revaluation A/c

Revaluation A/c Dr. (Gain on Revaluation)

             To Partners' Capital/Current A/c (In Old PSR)

Investment Fluctuation Reserve A/c Dr. (Total IFR)

             To Partners' Capital/Current A/c   (In Old PSR)

       Case 2: When the Market Value of Investment(s) is equal its Book Value

Investment Fluctuation Reserve A/c Dr. (Total IFR)

             To Partners' Capital/Current A/c (In Old PSR)

       Case 3: When the Market Value of Investment(s) is less than its Book Value

i. Fall in the value of investments is less than IFR 

Investment Fluctuation Reserve A/c Dr. (Total IFR)

    To Investments A/c     (Fall in Investments)

             To Partners' Capital/Current A/c (In Old PSR)

 ii. Fall in the value of investments is equal to IFR 

Investment Fluctuation Reserve A/c Dr. (Total IFR)

    To Investments A/c     (Fall in Investments)

iii. Fall in the value of investments is more than IFR 

Revaluation A/c Dr. (Excess of Fall in Investments over Total IFR)

Investment Fluctuation Reserve A/c Dr. (Total IFR)

    To Investments A/c     (Fall in Investments)

Partners’ Capital/Current A/c         Dr. (In Old PSR)

             To Revaluation A/c             (Loss on Revaluation written off )