AccountingQA Latest Questions

Simerpreet
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  2. Kajal

    A Realisation account is prepared at the time of dissolution of the Partnership firm to ascertain profit or loss from the sale of assets and payment of liabilities of the firm. All assets that can be converted into cash (i.e. from which any value can be realised) and all external liabilities to be pRead more

    A Realisation account is prepared at the time of dissolution of the Partnership firm to ascertain profit or loss from the sale of assets and payment of liabilities of the firm. All assets that can be converted into cash (i.e. from which any value can be realised) and all external liabilities to be paid are transferred to the Realisation A/c.

    So, Cash and Bank (already in liquid form), fictitious assets (doesn’t have any value to be realised), Partner’s Loan (internal liability) and Undistributed profits (not something that can be realised) are not included in the Realisation account.

     

    DISSOLUTION OF PARTNERSHIP FIRM

    It means the firm closes down its business and comes to an end. Simply, it means the firm will cease to exist in the future. As the firm is closing down, its assets are sold, liabilities are paid off, and the remaining amount (if any) is distributed among the partners.

     

    REALISATION ACCOUNT

    This account is prepared only once, at the time of dissolution of the Partnership firm. It is opened to dispose of all the assets of the firm and make payments to all the external creditors of the firm.

    It ascertains the profit earned or loss incurred on the realisation of assets and payment of liabilities.

     

    Items not included in Realisation A/c

     

    1. ASSETS

    CASH AND BANK BALANCES are not included in the Realisation account as the purpose of the Realisation account is to sell assets to realise cash, but cash and bank are already in liquid form and thus, not included.

    These are directly used for the payment of liabilities and if there is any remaining amount, then that amount is distributed among the partners.

     

    FICTITIOUS ASSETS are huge expenses or losses that are written off over the years by writing off a portion of it every year for the next few years like accumulated losses, balance of Advertisement expenses, Preliminary expenses, Loss on the issue of Debentures, etc. They don’t have any physical existence or realisable value.

    Since nothing can be realised from these assets they are not included in the Realisation account. These are transferred to the Partner’s Capital A/c.

     

    2. LIABILITIES

     

    PARTNER’S LOAN refers to the loan given to the firm by any partner of the firm. 

    Suppose, there are three Partners A, B and C. ‘C’ gave the firm a loan of $5,000. This $5,000 will be recorded as a Partner’s Loan and not just as a normal loan taken from an external party.

    Since, Partner’s Loans are the internal obligation of the firm, they are not included in the realisation account instead a separate account is prepared to settle Partner’s Loan after all external liabilities are settled.

    So, we can say in the Realisation account only external liabilities are included and paid.

     

    UNDISTRIBUTED PROFITS  are the  Profits that are not distributed among the Partners like General Reserve, Reserve Fund, and Credit balance of P&L A/c.

    They are not included in the realisation account as they can’t be sold as an asset neither they are any liabilities that should be paid. Undistributed profits belong to the Partners of the firm and thus, are transferred to Partner’s capital A/c.

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Anushka Lalwani
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  2. Radhika
    This answer was edited.

    Unrecorded Assets are the assets that are completely written off but still physically available in the company or assets that are not shown in the books of the company. Unrecorded assets are generally recorded or recognized at the event of admission, retirement, death of a partner when all the assetRead more

    Unrecorded Assets are the assets that are completely written off but still physically available in the company or assets that are not shown in the books of the company.

    Unrecorded assets are generally recorded or recognized at the event of admission, retirement, death of a partner when all the assets and liabilities are revalued or dissolution of the firm.

    Since Accounting Standards require firms to record all the assets and liabilities in their books, it is therefore mandatory to record such unrecorded assets.

    There can be two cases for treatment of such unrecorded assets:

    • Unrecorded Asset entered into the business and recorded in books
    Unrecorded Asset A/c (Dr.) Amt
     To Revaluation A/c Amt

    The unrecorded asset is now debited since it has to be recorded in the books now and Revaluation Account is credited since it is again for the business which will eventually be transferred to Partners’ Capital Account.

    • Unrecorded Asset taken over by a partner and paid cash   
    Cash A/c (Dr.) Amt
     To Partners’ Capital A/c Amt

    If a partner decides to take over an unrecorded asset then his account is credited with that amount and since cash paid by the partner comes into business Cash Account is debited.

    • Unrecorded Asset discovered during Dissolution
    Cash/ A/c (Dr) Amt
     To Realization A/c Amt

    When an unrecorded asset is discovered during the dissolution of the firm, such an asset is sold directly to the outsider and as a result, cash A/c is debited since the cash is entering the business. The entry is made through the Revaluation A/c and it is hence credited.

    Example:

    At the time of revaluation, firms find a typewriter that has not been recorded in the books and is valued at Rs 10,000.  The journal entry to record that typewriter will be:

    Typewriter A/c (Dr.) 10,000
      To Revaluation A/c 10,000

     

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Simerpreet
SimerpreetHelpful
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  2. Kajal
    This answer was edited.

    The Realisation account is prepared at the time of dissolution of the Partnership firm to ascertain profit or loss from the sale of assets and payment of liabilities of the firm. All assets that can be converted into cash (i.e. from which any value can be realised) and all external liabilities thatRead more

    The Realisation account is prepared at the time of dissolution of the Partnership firm to ascertain profit or loss from the sale of assets and payment of liabilities of the firm. All assets that can be converted into cash (i.e. from which any value can be realised) and all external liabilities that are to be paid are recorded in the Realisation A/c.

     

    DISSOLUTION OF PARTNERSHIP FIRM

    It means the firm closes down its business and comes to an end. Simply, it means the firm will cease to exist in the future. As the firm is closing down, it will sell all its assets to realise all the value blocked in the assets, it is liable to pay off all of its liabilities whether due now or on some future date, and the remaining amount (if any) is distributed among the partners.

     

    REALISATION ACCOUNT

    This account is prepared only once, at the time of dissolution of the Partnership firm. It is opened to dispose of all the assets of the firm and make payments to all the external creditors of the firm.

    It ascertains the profit earned or loss incurred on the realisation of assets and payment of liabilities.

    The Realisation account is a NOMINAL ACCOUNT (Debit all expenses and losses, Credit all incomes and gains)

     

    ITEMS RECORDED IN THE REALISATION ACCOUNT

    DEBIT SIDE OF REALISATION ACCOUNT

    1. TRANSFER OF ASSETS

    Assets are any property or the possession of the business enterprise that allows it to get cash or any other benefit in the future.

    Since all assets are sold at the time of the dissolution, all assets that can be converted into cash are transferred to the  Debit side of the Realisation A/c at their book values.

    Such as Plant & Machinery, Building, Debtors, etc.

    EXCEPTIONS

    • Cash and Bank balances (as already in the most liquid form)
    • Fictitious assets ( Don’t have any realisable value)

     

    NOTE – If there is any provision against any asset, such as ‘Provisions for Bad debts’ or ‘Provision for Depreciation, then such assets are transferred to the Debit side of the Realisation A/c at its gross value and the Provision is transferred to the Credit side of the Realisation A/c.

    For example – Suppose there are Debtors of $50,000 and the Provision for Doubtful Debts is $2,000.

    Then, Debtors will be recorded on the Debit side with a value of $50,000 and the Provision for Doubtful Debt on the Credit side with the amount of $2,000.

     

    2. PAYMENT OF LIABILITIES

    All liabilities are either paid in cash or the Partner agrees to pay for some liabilities. Since they are expenses, they are recorded on the debit side of the Realisation A/c as “Debit all expenses and Losses”

     

    3. PROFIT ON REALISATION

    There is profit when Cr. side > Dr. side, as it means incomes are more than the payments made. This profit is distributed among the partners.

     

    CREDIT SIDE OF THE REALISATION ACCOUNT

     

    1. TRANSFER OF LIABILITIES

    Liabilities refer to the amount owed by the firm to outsiders. All liabilities must be paid off before accounts are closed. So, all external liabilities are transferred to the Credit side of the Realisation account, to make their payment.

    Such as creditors, bills payable, loans, outstanding expenses, partner’s wife’s loan, etc.

    EXCEPTION (not included)

    • Partner’s loan (internal liability and a separate account is created for it)
    • Undistributed Profits (like General reserve, Credit balance of P&L A/c, etc. because they belong to partners and are distributed among them. Also, they can’t be sold)

     

    2. SALE OF ASSETS

    Assets can be sold for cash or taken by the Partner. The amount received from the sale of assets is recorded on the credit side of the Realisation account as “Credit all incomes and gains”.

    Also, if any asset is given to the creditors in part or full payment of his dues, then the agreed amount is deducted from the creditor’s claim and no other entry is passed.

     

    3. LOSS ON REALISATION:

    There is a loss, if the Dr. side> Cr. side, which means Expenses > Incomes. This loss is also distributed among the Partners.

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A_Team
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  2. AishwaryaMunot
    This answer was edited.

    Meaning New profit-sharing ratio is the profit-sharing ratio after the new partner is admitted in the partnership. At the time of such admission there is change in old/existing partners’ ratio too. The share of new partner’s profit is acquired from old/existing partners’ share of profit. Thus, New pRead more

    Meaning

    New profit-sharing ratio is the profit-sharing ratio after the new partner is admitted in the partnership. At the time of such admission there is change in old/existing partners’ ratio too. The share of new partner’s profit is acquired from old/existing partners’ share of profit.

    Thus, New profit-sharing ratio can be stated as ratio in which all the partners, Old and New will share profits and losses of the partnership in future. The new profit-sharing ratio can be calculated as follows.

     

    Formula

    Sacrifice ratio is the ratio in which old/existing partners agrees to give away their share in profits for the new partner.

    For better understanding let’s see how calculation of New profit-sharing ratio can be done:

    Example : There are two partners in a partnership firm, Mr. Anil & Mr. Mukesh. Their profit-sharing ratio is 2:3. They wants to admit Mr. Nikhil as their third partner for 1/3rd share.

    In such case, Calculation of New profit-sharing ratio would be as follows:

    Total profit = 1

    Mr. Nikhil’s Share = 1/3

    Remaining Profit = 1 – 1/3 = 2/3

    So, this remaining share of 2/3 is shared among the old partners in their old ratio of 2:3.

    Mr. Anil’s Share = 2/3 x 2/5 = 4/15

    Mr. Mukesh’s Share = 2/3 x 3/5 = 6/15

    Mr. Nikhil’s Share = 1/3 x 5/5 =5/15

    So, New ratio would be 4/15: 6/15: 5/15 i.e., 6:4:5

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Simerpreet
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  2. Karishma

    Realisation account  A realisation account is a nominal account prepared at the time of dissolution of a business.  All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissoluRead more

    Realisation account 

    A realisation account is a nominal account prepared at the time of dissolution of a business.  All the assets and liabilities except cash and bank balance are transferred to the realisation account. A realisation account is prepared to calculate the profit or loss on the dissolution or closing of the firm.

    All the assets are transferred to the debit of the realisation account and all the liabilities are transferred to the credit of the realisation account. When assets are sold, Cash A/c is debited and Reliastion A/c is credited and when liabilities are paid off, Cash A/c is credited and Realisation A/c is credited.

    If the credit side exceeds the debit side of the realisation account, it results in profit. In contrast, if the debit side exceeds the credit side of the realisation account, it results in a loss. in case of profit, the Capital account is credited and in case of loss, the Capital account is debited.

    The debit side of the realisation account

    All the assets including Land and building, Plant and machinery, furniture, stock, debtor and investment are transferred to the debit of the realisation account and payment of outside liabilities is also recorded on the debit side of the realisation account. Payment made for dissolution expenses is also recorded on the debit side of the realisation account.

    • Assets: All the assets including Land and building, Plant and machinery, Furniture, Stock,  sundry debtors, and investments are transferred to the debit side of the realisation account. The debit balance of profit and loss balance is not transferred.
      • Accounting entry for this is as follows:

    Realisation A/c Dr…..

    To Assets A/c …..

    (All the assets transferred to the realisation account)

    • Cash and bank A/c: Payment for the liabilities including sundry creditors, outstanding expenses, bills payable, loans and advances, bank overdrafts and cash credit is transferred to the debit side of the realisation account.
      • Accounting entry for this is as follows:

    Realisation A/c Dr…..

    To Cash A/c …..

    (Payment made for liabilities)

    • Profit on realisation: If the credit side of the realisation account exceeds the debit side, it results in a profit then the capital account is credited.
      • Accounting entry for this is as follows:

    Realisation A/c Dr…..

    To Capital A/c …..

    (Being profit transferred to the capital account)

    Credit side of realisation account:

    All the liabilities and provisions are transferred to the credit side of the realisation account. Capital account of partners, profit and loss balance and loans from partners are not transferred. Sale proceeds of all the assets including Land and building, Plant and machinery, furniture, stock, debtor and investment are transferred to the credit side of the Realisation account.

    Format for realisation Account is as under:

    Realisation A/c
    Particulars Amount Particulars Amount
    To Land & Building By Provision for Doubtful Debts A/c
    To Plant & Machinery By Sundry Creditors A/c
    To Furniture By Bills Payable A/c
    To Debtors By Outstanding Expenses A/c
    To Goodwill A/c By Bank Loan, Overdraft, Cash Credit A/c
    To Investment A/c By Bank/ Cash A/c (Assets realized):
    To Bank/ Cash A/c (Liabilities Paid): Land and Building
    Sundry Creditors Plant and Machinery
    Bill Payable Furniture
    Outstanding Expenses Stock
    Bank Loan, Debtors
    Overdraft, Bad Debts recovered
    Cash Credit Investment
    To Bank/ Cash A/c By  Capital A/cs
    (Realisation Expenses) (assets taken over)
    To Capital A/c By Capital A/cs
    (Realisation Expenses) (Loss on Realisation)
    To Capital A/cs
    (Profit on Realisation)
    Total Total
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Jasmeet_Sethi
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  2. GautamSaxena Curious .
    This answer was edited.

    Fluctuating Capital Fluctuating capital is a capital that is unstable and keeps changing frequently. In the fluctuating capital, the capital of each partner changes from time to time. In partnership firms, each partner will have a separate capital account. Any additional capital introduced during thRead more

    Fluctuating Capital

    Fluctuating capital is a capital that is unstable and keeps changing frequently. In the fluctuating capital, the capital of each partner changes from time to time. In partnership firms, each partner will have a separate capital account. Any additional capital introduced during the year will also be credited to their capital account. In the fluctuating capital method, only one capital a/c is maintained i.e no current accounts like in the fixed capital a/c method. Therefore, all the adjustments like interest on capital, drawings, etc. are completed in the capital a/c itself.

    It is most commonly seen in partnership firms and it is not essential to mention the Fluctuating Account Method in the partnership deed.

    • All the adjustments resulting in a decrease in the capital will be debited to the partner’s capital, such as drawings made by each partner, interest on drawings, and share of loss.
    • Similarly, the activities or adjustments that lead to an increase in the capital are credited to the partner’s capital account, such as interest on capital, salary, the share of profit, and so on.

    Fluctuating Capital Account Format

     

     

     

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Anushka Lalwani
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  2. AbhishekBatabyal Helpful Pursuing CA, BCOM (HONS)

    Meaning of Workmen's Compensation Reserve Workmen compensation reserve is a reserve created to compensate the labourers and employees of a firm in case of an uncertain future event in the line with their work. For example, if a labourer or group of labourers get injured seriously while working on thRead more

    Meaning of Workmen’s Compensation Reserve

    Workmen compensation reserve is a reserve created to compensate the labourers and employees of a firm in case of an uncertain future event in the line with their work. For example, if a labourer or group of labourers get injured seriously while working on the premises of the firm, then they will be compensated from the money kept aside in the workmen’s compensation reserve.

    Workmen’s compensation reserve is created using the profits of a business. The journal entry for the creation of workmen compensation reserve is as follows:

    When a claim arises, the claim amount is transferred to Provision for workmen compensation claim A/c

    Treatment of workmen compensation reserve in revaluation account

    At the time of admission, retirement or death of partner or change in profit sharing ratio, the reserve is distributed among the old or existing partners or kept intact.

    Workmen’s compensation reserve is also distributed among the old or existing partners subject to the claim arising on the reserve.

    Here are the three situations:

     

    The revaluation account comes into the picture only when the claim is more than the amount available in the reserve. For example, the claim is Rs. 20,000 but the amount in the reserve is only Rs. 15,000.

    In such a case, the excess claim will be met by debiting the revaluation account.

    The journal will as  given below:

    Since the revaluation account is debited, it is a loss and this loss will be written from old or existing partners’ capital in the old profit sharing ratio. The journal entry is given below:

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Bonnie
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  2. Naina@123 (B.COM and CMA-Final)
    This answer was edited.

    To proceed with how to make a partnership deed, let me explain to you in short what is partnership deed? A partnership deed is the written agreement between the partners who have agreed to share profits of a business carried on by them. This basically contains terms and conditions to be followed betRead more

    To proceed with how to make a partnership deed, let me explain to you in short what is partnership deed?

    A partnership deed is the written agreement between the partners who have agreed to share profits of a business carried on by them. This basically contains terms and conditions to be followed between the partners.

    Few contents of the partnership deed are as follows:

    • Name, address, and type of business of the partnership firm.
    • Name & address of all the partners
    • Profit-sharing ratio.
    • Rights, duties, and liabilities of all partners.
    • Date of commencement of the partnership
    • Method of settlement of dispute among the partners.
    • Treatment of loss in case of insolvency of one or more partners.

     

    Generally, a partnership deed contains all those matters which can affect the relationship between the partners. However, if there is no such agreement the partnership should follow the provisions mentioned under The Partnership Act, 1932.

    Now coming to the main question how to make a partnership deed? See the process is not so complicated. The partnership deed may be oral or written, but as the oral agreement has no value for obtaining tax benefits, a partnership firm always prefers a written agreement.

    To prepare the same the partnership deed must be prepared on a stamp paper and signed by all the partners as per Indian Stamp Act and copies of the same should be with all the partners and also must be filed by the registrar of the firm.

    A deed may vary depending on the nature of the partnership they are engaged in. Generally, partnerships are of three types

    • General partnership
    • Limited partnership
    • Limited liability partnership

    the process of making deed is same for all but, the content of deed may vary depending on the liability of partners in the partnership.

    Further to know more about the registration process of partnership firm you can refer the following link https://www.mca.gov.in/Ministry/actsbills/pdf/Partnership_Act_1932.pdf

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Simerpreet
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  2. Ayushi Curious Pursuing CA
    This answer was edited.

    Introduction The term 'gain ratio' is related to partnership accounting. Gain ratio refers to the ratio in which existing partners of a partnership firm, divide among themselves, the share of profit and loss of the outgoing partners. There is a method of calculating this gain ratio. The method alongRead more

    Introduction

    The term ‘gain ratio’ is related to partnership accounting. Gain ratio refers to the ratio in which existing partners of a partnership firm, divide among themselves, the share of profit and loss of the outgoing partners.

    There is a method of calculating this gain ratio. The method along with the concept behind gain ration is discussed below.

    Concept behind gain ratio

    A partnership firm is a form of business organisation which is conducted and carried on by members known as partners. It requires at least two partners to start a firm and the maximum limit is 50.

    The partners share the profit and loss of a business in a ratio known as Profit and loss sharing ratio.

    For example, Amanda, Bill and Chang are partners, having a P/L sharing ratio of 3:2:1 i.e. Amanda is getting 3/6, Bill is getting  2/6 of the same and Chang is getting ⅓ of the profit and loss

    If the profit is $6,000 , then Amanda will get $3,000 (3/6 of $6,000) and Bill will get $2,000 (2/6 of $6,000) and Chang will get $1,000 (1/6 of $6,000).

     

    Now if Amanda retires from the firm, then naturally, Bill and Chang’s share of profit will increase.

    The profit and loss sharing ratio will now be 2:1 (earlier it was 3:2:1) and the share of profit of Bill will be $4,000 and of Chang will be $2,000.

     

     

    Calculation of gain ratio

    The formula for calculating gain ratio = New ratio – Old Ratio

    As per the  above case:

    • Gain ratio of Bill = 2/3 – 2/6 = 2/6
    • Gain ratio of Chang = 1/3 – 1/6 = 1/6

     

    Therefore the gain ratio in which Bill and Chang gained the share of profit of Amanda is 2/6 : 1/6 or simply 2:1

    This is how we can calculate the gain ratio. But one thing to notice is that the gain ratio is equal to the P/L sharing ratio of the partnership between Bill and Chang.

    Hence, whenever a partner retires and the existing partner keep the P/L sharing ratio unchanged among themselves then, the gain ratio will be equal to their P/L sharing ratio. In that case, there is no need to calculate the gain ratio from the formula given above.

    But, when the remaining partners change the P/L sharing ratio among themselves after a partner retires, then the gain ratio is to be calculated using the formula given above.

    Suppose, upon retirement of Amanda, Bill and Chang change the P/L sharing between them to from 2:1 to 3:2

     In that case,

    • The gain ratio of Bill = 3/5 – 2/6 = 8/30
    • The gain ratio of Chang = 2/5 – 1/6 = 7/30

     

     Therefore the gain ratio in which Bill and Chang will gain the share of profit of Amanda is 8/30 : 7/30 or simply 8:7

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A_Team
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  2. Ayushi Curious Pursuing CA

    The partnership act 1932 does not mention the types of partners specifically. It does have mentions of ‘partner who is minor’ in section 30 and ‘partner by holding out in section 28. But we do come across many types of partners in partnership firms. Following is the list of the types of partners weRead more

    The partnership act 1932 does not mention the types of partners specifically. It does have mentions of ‘partner who is minor’ in section 30 and ‘partner by holding out in section 28.

    But we do come across many types of partners in partnership firms. Following is the list of the types of partners we generally see:-

    1. Active partner: – It is the partner who provides the capital and is also actively involved in the management and daily activities of the firm. Such a type of partner is of utmost importance to the firm. Apart from a share in profit and loss, he is also eligible to draw remuneration from the firm.

     

    1. Sleeping/ Dormant partner: – This type of partner does not participate in the daily workings of the firm nor actively participates in the management of the firm. Such a type of partner has a large sum of capital invested in the firm and shares the profits as well as losses of the firm.

     

    1. Partner by holding out:- If any partner, who by his words or by his conduct, represents himself as a partner of a firm, then he is called a partner by holding out. Such a partner is actually not a partner of the firm and doesn’t receive any share of profit as he has contributed no capital.

    As per section 28, such a partner is liable to any person who has given credit to the firm on             the belief that he is a partner of the firm.

     

    1. Minor partner: – If any person who is less than 18 years of age is admitted into the firm, such partner is known as a minor partner. Such a partner is entitled to the profits of the firm based on his capital but is immune from losses suffered by the firm.

     

    1. Secret partner: – It is a partner of a firm whose membership is kept hidden from the outsiders such as creditors and other third parties. But he is equally liable as other partners for the outside liabilities.

     

    1. Outgoing partner: – A partner who voluntarily leaves the partnership without dissolving the firm is called an outgoing partner or retiring partner. Such a partner is liable to all liabilities incurred before his retirement. But he can be held liable to outside liabilities if he fails to give public notice of his retirement.

     

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