Learning Materials For Accounting, Management , Finance And Economics.

Tuesday, November 29, 2011

Impact Of Admission Of New Partner In The Revaluation Of Assets And Liabilities

Entries to record the revaluation of assets and liabilities:
1. For profit items

*Increase in the value of assets:
Assets A/C...............Dr.(increase in value)
To Revaluation A/c

*Decrease in the value of liabilities:
Liabilities A/C...........Dr.(Decrease in value)
To Revaluation A/C

*Unrecorded assets brought into account:
Assets A/c............Dr.(unrecorded value)
To Revaluation A/C

2. For Loss Items

*Decrease in the value of assets:
Revaluation A/c..............Dr.(Decrease in value)
To assets A/C

*Increase in the value of liabilities:
Revaluation A/C............Dr.(Increase in value)
To liabilities A/C

*Unrecorded liability brought into account:
Revaluation A/C.........Dr.(unrecorded value)
To liability A/C

3. For transferring profit/loss on revaluation

Profit:
Revaluation A/C...........Dr.
To old partners' capital/current A/c

Loss:
Old partners' capital.current A/c..........Dr.
To Revaluation A/c


Specimen Of Revaluation Account

Particulars........................................Amt.........Particulars...............................Amt.
To Assets(decrease in value).........XXX........By Assets(increase in value)......XXX
To liabilities(increase in value.........XXX........By liabilities(decrease in value)..XXX
To provision for depreciation..........XXX.......By provision for depreciation.......XXX
To provision for doubtful debt.........XXX.......By provision for doubtful debt......XXX
To unrecorded liabilities recorded...XXX.......By unrecorded assets records.....XXX
To profit transfer..............................XXX.......By loss transfer............................XXX

Note:
* Profit and loss adjustment A/C may also be written
* profit/loss are transferred to capital/current accounts in old profit sharing ratio.

When Revised Values Are Not Be Shown In The Balance Sheet:

All the partners including new one may also agree to show the original values, not the revised values of assets and liabilities in the new balance sheet. In such case, all entries passed through revaluation account are reversed. That is , if revaluation A/C was debited and plant A/C credited earlier. How the plant A/C would be debited and revaluation A/C be credited. Subsequently, a new revaluation A/C comes into existence. This new revaluation A/C is closed by transferring the balance to all the partners including new one is new profit sharing ratio. Thus the revaluation account under such circumstances termed as memorandum revaluation A/C, which is divided into two parts. When such memorandum revaluation A/C is prepared, entries that change the values of assets/liabilities are not passed. The only entry made relate to the transfer of profit or loss from first part to old partners' capital A/Cs in old profit sharing ratio and then, the transfer of loss or profit from the second part to all partners' capital A/Cs including new one in new profit sharing ratio. If the first part shares profit, the second part will show loss and vice versa. But it should be noted that, in new balance sheet, assets and liabilities except cash will appear at the original values.

Sunday, November 27, 2011

Impact Of Admission Of New Partner In The Profit Sharing Ratio Of The Firm

Whenever an entrance is permitted to new partner it ultimately provides a right to the newcomer to share the profits of the firm in the future. Because of the share given to the newly admitted partner the old profit sharing ratio of the firm definitely changed. The ascertainment of new profit sharing ratio will depend on the agreement between the old partners and the new partner. The new partner may get her/his share of future profit either from one partner or from all the partners. In effect the combined shares of old partners will be reduced.

The following are the cases which may arise while calculating new profit sharing ratio:

1. When the share of the new partner is, simply given and nothing is stated about the sacrifice of the old partners.

2. When the new partner purchases the share from old partners in their old profit sharing ratio

3.When the new partner acquires the share in some agreed or sacrificed proportioned from the old partners

4. When the new partner buys the share equally from old partners

5. When the new partner purchases the share as a whole from one of the old partners

6. When all the partners including the new one decide to share future profit/loss in completely new ratio

The aforesaid cases are of relating to the admission of new partner. But, even if, admission, retirement or death, nothing happens, the disagreement between the old partners due to some other causes may take place and they may decide to their future profit sharing ratio. Some of the cases may occur are as follows:

i. One of the old/existing partner acquires the share in some agreed proportion from one or all other partners.
ii. All the existing partners decide to share future profit totally in new ratio
iii. All the existing partners decide to change one or more than one's share in future

Concept And Meaning Of Admission Of New Partner

Partnership by its name meant that it is an association of partners to endeavor a venture for getting reward in the form of profit in the days to come. During the ordinary course of business the partnership business may need additional capital, special skill, a namely attachment to enhance the goodwill from other party to smoothly run in the competitive business environment. When because of the same reasons, or for some other importances if a partnership welcomes outsiders as a partner in the business it is called as admission of a partner. Before giving admittance to new partner there should be a clear-cut consent between or among the partner for the same otherwise it may cause a reason of dissolution of partnership.

During the time of admittance of new partner, a partnership firm will have a due exercise on the following important aspects:

1. Impact of admittance in the profit sharing ratio of the firm

2. Impact of admittance in the revaluation of assets and liabilities of the firm

3. Impact of admittance in the value of goodwill of the firm

4. Rearrangement of reserves and surplus and accumulated losses of the firm

5. Adjustment of life insurance policy of partners

6. Re-adjustment of partners capital giving due influence of new admittance

7. Guarantee of minimum profit to a partner

8. Reservation of old profits to the old partners

9. Admission of a partner during an accounting year.

Sunday, November 20, 2011

Methods Of Recording Transactions Under Installment System

There are two methods of recording transactions under Installment System. These are:


i. With Opening Interest Suspense Account
ii. Without Opening Interest Suspense Account


Journal entries under these two methods are as under:

Journal entries in the books of purchaser

1. For purchasing goods under installment system:
First Method
Assets A/C(total cash value)..............Dr.
Interest suspense A/C(total interest).........Dr.
To vendor A/C

Second Method
Assets A/C (total cash value)............Dr.
To vendor A/c

2. For payment of cash down value (both method)
Vendor A/C..................Dr.
To Bank A/C

3. For interest due
First Method
Interest A/C..............Dr.
To Interest suspense A/C
Second method
Interest A/C...............Dr.
To vendor A/C

4. For payment of installment (both methods)
Vendor A/c.............Dr.
To bank A/C

5. For depreciation charges (both methods)
Depreciation A/C.............Dr.
To Asset A/C

6. For transferring interest and depreciation
First method
Profit and loss A/C ..................Dr.
To interest A/C
To depreciation A/C

Second method
Profit and loss A/C................Dr.
To interest A/C

Journal Entries In The Books Of Vendor

1. For selling goods on installment system
First method
Buyer A/C..................Dr.
To sales A/C(total cash value)
To interest suspense A/C

Second method
Buyer A/C...........Dr.
To Sales A/C

2. For receiving cash down value (both methods)
Bank A/C..........Dr.
To Buyer A/C

3. For interest due
First method
Interest suspense A/C...........Dr.
To interest A/C

Second method
Buyer A/C.................Dr.
To Interest A/C

4. For receiving installment (both methods)
Bank A/C...................Dr.
To Buyer A/C

5. For transferring interest (both methods)
Interest A/C............Dr.
To profit and loss A/C

6. For transferring sales to trading account (both methods)
Sales A/C ...............Dr.
To trading A/C