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Accountancy Class XII

Partnership · Company Accounts · Financial Statements · CBSE Board 2025-26

📚 2 Parts · 10 Topics
💼 CBSE Board 2025-26
🎯 80 Marks Theory
⏱️ 3 Hours Duration
📋 Marks Distribution: Part A (~60M): NPO (10M), Partnership — Goodwill (10M), Admission (15M), Retirement & Death (10M), Dissolution (10M), Company Shares & Debentures (15M). Part B (~20M): Financial Statements Analysis — Ratio Analysis (12M), Cash Flow Statement (8M).
60
Part A Marks
20
Part B Marks
20
Internal Assess.
3h
Duration

📖 Topics

🤝
NPO Accounts
Receipts & Payments, Income & Expenditure
✨
Goodwill
Valuation methods
➕
Admission
New ratio, Goodwill, Revaluation
🔚
Retirement & Death
Gain ratio, Executor's account
🔓
Dissolution
Realisation account, Garner vs Murray
📈
Company: Shares
Issue, Forfeiture, Reissue
📜
Debentures
Issue, Redemption
📊
Ratio Analysis
Liquidity, Solvency, Profitability
💧
Cash Flow Statement
Operating, Investing, Financing

🏆 Badges

🚀 Quick Start
🤝 Partnership — Fundamentals
Partnership Deed · Capital Accounts · Profit Sharing · Goodwill

📖 Core Theory

Partnership
Business carried on by two or more persons called partners, governed by Partnership Act 1932. Features: agreement, lawful business, profit motive, mutual agency. Max 50 partners (Companies Act 2013).
Partnership Deed
Written agreement specifying: profit-sharing ratio, interest on capital/drawings/loans, salary/commission to partners, rules on admission/retirement/dissolution. In absence of deed: no interest on capital, no salary, equal profit sharing, 6% interest on loans.
Goodwill
Excess earning capacity. Valued on: Average Profit Method (AP × years), Super Profit Method (SP × years), Capitalisation Method. Super Profit = Actual Profit - Normal Profit. Normal Profit = Capital employed × Normal Rate/100.
Capital Accounts
Fixed: capital remains constant; all adjustments through Current Account. Fluctuating: single account for capital + all adjustments (interest, salary, drawings, share of profit).

🔑 Key Formulae — Partnership Basics

Average Profit = Total Profits (adjusted) / Number of Years
Goodwill (AP Method) = Average Profit × Years of Purchase
Super Profit = Average Profit - Normal Profit
Normal Profit = Capital Employed × Normal Rate of Return / 100
Goodwill (SP Method) = Super Profit × Years of Purchase
Goodwill (Capitalisation) = Super Profit × (100 / Normal Rate)

✏️ Worked Examples

Example — Goodwill Calculation (Board 2023, 4M)

Q: Average profits = Rs 60,000. Capital employed = Rs 3,00,000. Normal rate = 10%. Find goodwill at 3 years purchase by super profit method.

1
Normal Profit = 3,00,000 × 10/100 = Rs 30,000
2
Super Profit = 60,000 - 30,000 = Rs 30,000
3
Goodwill = 30,000 × 3 = Rs 90,000
✅ Goodwill = Rs 90,000

📝 Practice Questions — Partnership Fundamentals

MCQ 1 In absence of a partnership deed, interest on capital is:
(A) 6% p.a. (B) 12% p.a. (C) Nil (D) 5% p.a.
Ans: (C) Nil
MCQ 2 Maximum number of partners allowed in a partnership firm:
(A) 10 (B) 20 (C) 50 (D) Unlimited
Ans: (C) 50 (as per Companies Act 2013)
MCQ 3 Goodwill by Capitalisation of Super Profit = Super Profit × (100 / Normal Rate). If SP = Rs 20,000 and NR = 10%, goodwill is:
(A) Rs 2,00,000 (B) Rs 2,000 (C) Rs 20,000 (D) Rs 1,00,000
Ans: (A) Rs 2,00,000
A-R A: In absence of a partnership deed, interest on loan from a partner is 6% p.a.
R: The Indian Partnership Act 1932 prescribes 6% p.a. as the default interest rate on partner's loan to the firm.
Ans: (A) Both correct; R correctly explains A.

Case: A, B and C are partners sharing profits in the ratio 2:2:1. Their average profits are Rs 75,000 and normal profits for similar businesses are Rs 45,000. The total capital of the firm is Rs 3,00,000 and the normal rate of return is 15%. They agree to value goodwill at 3 years' purchase of super profit.

Q1 (1M) Normal Profit = ? Ans: Rs 3,00,000 × 15/100 = Rs 45,000.
Q2 (1M) Super Profit = ? Ans: Rs 75,000 − Rs 45,000 = Rs 30,000.
Q3 (2M) Goodwill = ? How is it shared? Ans: Goodwill = Rs 30,000 × 3 = Rs 90,000. A gets Rs 36,000; B Rs 36,000; C Rs 18,000 — in PSR 2:2:1.
SA (3M) Distinguish between Fixed and Fluctuating Capital Accounts.
Ans: Under the Fixed Capital method, each partner has two accounts — Capital Account (remains constant) and Current Account (records salary, interest on capital, drawings, share of profit). The capital account changes only when a fresh introduction or permanent withdrawal of capital is made. Under the Fluctuating Capital method, there is only one account per partner. All adjustments (IOC, salary, commission, drawings, share of profit/loss) are made directly to the capital account, causing it to fluctuate every year. The Partnership Deed specifies which method to follow.
LA (6M) Explain the three methods of valuing goodwill with one numerical example each.
Ans: 1. Average Profit Method: Goodwill = Average Profit × Years of Purchase. If average profits = Rs 50,000 and YOP = 3, Goodwill = Rs 1,50,000. 2. Super Profit Method: Super Profit = Average Profit − Normal Profit. Goodwill = SP × YOP. If AP = Rs 60,000, NP = Rs 40,000, YOP = 3: SP = Rs 20,000; Goodwill = Rs 60,000. 3. Capitalisation of Super Profit: Goodwill = SP × (100/Normal Rate). If SP = Rs 20,000, NR = 10%: Goodwill = Rs 2,00,000. This method capitalises the stream of super profits at the normal rate, treating them as if they were perpetual annuity.
➕ Partnership — Admission of Partner
New Ratio · Sacrificing Ratio · Goodwill Treatment · Revaluation · Capital Adjustment

📖 Core Theory

Sacrificing Ratio
Old ratio - New ratio. The share sacrificed by old partners to give to the new partner. Compensated by goodwill brought in by new partner.
Goodwill Treatment (Admission)
Premium method: new partner brings cash for goodwill; old partners credited in sacrificing ratio. Hidden goodwill: when new partner's share of total capital differs from amount brought in → calculate total capital → goodwill = excess capital - total capital brought in.
Revaluation Account
Profit/Loss on revaluation of assets and liabilities at time of admission. Credited to old partners in old ratio before new partner joins. Gain = credit side > debit side.

🔑 Admission Formulae

Sacrificing Ratio = Old Ratio - New Ratio
Goodwill credit = New Partner's share of goodwill; distributed to old partners in SR
New Ratio = Old Ratio - Sacrifice (if sacrifice is equal to new share of each)
Hidden Goodwill = Total Firm Capital (from new partner's capital) - Actual Capital

✏️ Worked Examples

Example — Sacrificing Ratio (Board 2022, 4M)

Q: A:B share profits 3:2. C admitted for 1/4 share; A and B sacrifice equally. Find new ratio.

1
C's share = 1/4. Remaining = 3/4 for A and B. A and B sacrifice equally: each gives 1/8 to C.
2
A new = 3/5 - 1/8 = 24/40 - 5/40 = 19/40. B new = 2/5 - 1/8 = 16/40 - 5/40 = 11/40.
3
New ratio A:B:C = 19:11:10. Sacrificing ratio A:B = 1:1.
✅ New ratio = 19:11:10; Sacrificing ratio = 1:1.

📝 Practice Questions — Admission of Partner

MCQ 1 On admission, goodwill brought by the new partner in cash is credited to:
(A) New partner's capital (B) Old partners' capitals in sacrificing ratio (C) General reserve (D) P&L account
Ans: (B) Old partners' capitals in sacrificing ratio
MCQ 2 X:Y = 3:2. Z admitted for 1/5 share. If X and Y sacrifice in ratio 2:1, X's new share is:
(A) 3/5 (B) 7/15 (C) 13/30 (D) 2/5
Ans: (C) Z's share = 1/5. Sacrifice by X = 2/3×1/5 = 2/15; by Y = 1/15. X new = 3/5 − 2/15 = 9/15 − 2/15 = 7/15. (Correct: 7/15 — option B)
MCQ 3 Revaluation profit on admission is credited to:
(A) New partner in new ratio (B) Old partners in old ratio (C) All partners equally (D) Firm's reserve
Ans: (B) Old partners in old ratio
A-R A: On admission, the existing partners' capital accounts are credited with their share of the revaluation profit before the new partner joins.
R: The revaluation profit/loss arises from changes in asset/liability values that occurred during the old partnership period, so it belongs to old partners only.
Ans: (A)

Case: P and Q are partners sharing profits 3:2. R is admitted for 1/4 share. Goodwill of the firm is valued at Rs 80,000. R brings Rs 20,000 for goodwill in cash. The firm's assets are revalued: Land increases by Rs 10,000; Debtors decrease by Rs 2,000.

Q1 (1M) R's goodwill = ? Ans: 1/4 × Rs 80,000 = Rs 20,000 ✓ (matches amount brought).
Q2 (1M) Sacrificing ratio P:Q = ? Ans: If equal sacrifice: P:Q = 1:1 (each gives 1/8 to R). Actual old ratio 3:2, so SR = 3:2 unless specified otherwise.
Q3 (2M) Net Revaluation profit and its distribution? Ans: Net revaluation = Rs 10,000 − Rs 2,000 = Rs 8,000 profit. P gets 3/5 × 8,000 = Rs 4,800; Q gets 2/5 × 8,000 = Rs 3,200. Credited to P's and Q's capital accounts.
SA (3M) What is the significance of Revaluation Account at the time of admission?
Ans: The Revaluation Account is a temporary account opened at the time of admission (or retirement/dissolution) to record any increase or decrease in the value of assets and liabilities. It ensures that the profit or loss arising from changes in the fair value of assets (e.g., land appreciation, bad debts provision) is credited or charged to old partners in the old profit-sharing ratio — because these changes occurred during their tenure. The new partner should not benefit from or bear changes that arose before joining. After recording, the account is closed and its balance is transferred to the old partners' capital accounts.
🚪 Partnership — Retirement & Death
Gaining Ratio · Goodwill · Revaluation · Settlement of Outgoing Partner's Account

📖 Core Theory

Gaining Ratio
New ratio - Old ratio. The extra share gained by continuing partners from retiring partner. Used to determine how goodwill is debited from continuing partners.
Retirement Treatment
Goodwill: debited to continuing partners in gaining ratio, credited to retiring partner's account. Revaluation: profit/loss distributed in old ratio. Capital: settled by loan account if not paid immediately.

🔑 Retirement Formulae

Gaining Ratio = New Ratio - Old Ratio
Goodwill due to retiring partner = Retiring partner's share in firm's goodwill
Debit continuing partners in gaining ratio; credit retiring partner
On death: interest on capital for period = Capital × Rate × Months/12 × 1/100

✏️ Worked Examples

Example — Gaining Ratio (Board 2023, 3M)

Q: A:B:C = 2:2:1. C retires. A and B take C's share equally. Find new and gaining ratio.

1
C's share = 1/5. A and B take equally: each gets 1/10.
2
A new = 2/5 + 1/10 = 4/10 + 1/10 = 5/10 = 1/2. B new = 2/5 + 1/10 = 5/10 = 1/2.
3
Gaining ratio = New - Old = A: 1/2 - 2/5 = 1/10; B: 1/2 - 2/5 = 1/10. Gaining ratio A:B = 1:1.
✅ New ratio A:B = 1:1. Gaining ratio = 1:1.

📝 Practice Questions — Retirement & Death

MCQ 1 Gaining Ratio = :
(A) Old Ratio − New Ratio (B) New Ratio − Old Ratio (C) Sacrifice + New Ratio (D) Old Ratio + New Ratio
Ans: (B) New Ratio − Old Ratio
MCQ 2 On retirement, goodwill of the retiring partner is debited to:
(A) All partners in old ratio (B) Continuing partners in gaining ratio (C) Retiring partner's account (D) General reserve
Ans: (B) Continuing partners in gaining ratio
A-R A: On death of a partner, profit up to the date of death is credited to the deceased partner's capital account.
R: The deceased partner's executor is entitled to a share of profits earned during the period the partner was alive.
Ans: (A)

Case: A, B, C share profits 4:3:2. B retires. A and C agree to take B's share in the ratio 2:1. Firm's goodwill = Rs 45,000. B's capital after revaluation = Rs 1,20,000.

Q1 (1M) B's share of goodwill = ? Ans: 3/9 × Rs 45,000 = Rs 15,000.
Q2 (1M) Gaining ratio A:C = ? Ans: A gains 2/3 of B's 3/9 = 2/9; C gains 1/3 of 3/9 = 1/9. Gaining ratio = 2:1.
Q3 (2M) Journal entry for goodwill on B's retirement. Ans: A's Capital A/c Dr 10,000; C's Capital A/c Dr 5,000; B's Capital A/c Cr 15,000. (In gaining ratio 2:1)
SA (3M) Distinguish between Sacrificing Ratio and Gaining Ratio.
Ans: Sacrificing Ratio is calculated when a new partner is admitted. It is the share given up by old partners in favour of the new partner (Old Ratio − New Ratio). Goodwill brought by the new partner is distributed to old partners in the sacrificing ratio. Gaining Ratio is calculated when a partner retires or dies. It represents the additional share gained by continuing partners from the retiring partner (New Ratio − Old Ratio). The continuing partners compensate the retiring partner for goodwill in the gaining ratio by debiting their capital accounts. In both cases, ratios determine how goodwill is allocated to reflect the economic reality of who benefits or sacrifices share.
💥 Partnership — Dissolution
Realisation Account · Piecemeal Distribution · Court Dissolution · Garner vs Murray

📖 Core Theory

Realisation Account
Temporary account opened at dissolution. All assets (except cash/bank, fictitious assets) transferred at book value; all liabilities (except partners' loan, capital) transferred. Assets realised: Dr Buyers/Cash, Cr Realisation. Settlement: profit/loss to partners in P&L ratio.
Settlement Order
Priority: External liabilities first → partners' loans → partners' capital. Partners share profit/loss from Realisation in profit-sharing ratio.

🔑 Dissolution Journal Entries

All assets (Dr Realisation; Cr Assets) — transferred to realisation
All liabilities (Dr Liabilities; Cr Realisation) — transferred to realisation
Asset realised (Dr Cash; Cr Realisation) — actual sale proceeds
Liabilities paid (Dr Realisation; Cr Cash) — settlement at agreed amounts
Realisation profit → credit partners; loss → debit partners in P&L ratio

✏️ Worked Examples

Example — Realisation Account (Board 2022, 6M)

Q: Assets: Machinery 50,000 (sold for 45,000); Debtors 20,000 (realised 18,000). Liabilities: Creditors 15,000 (settled for 14,000). P&L ratio 3:2. Find realisation profit/loss.

1
Realisation Dr: Machinery 50,000 + Debtors 20,000 = 70,000 (assets). Creditors settled 14,000.
2
Realisation Cr: Creditors transferred 15,000; Cash from assets 45,000 + 18,000 = 63,000. Total Cr = 78,000.
3
Realisation total Dr = 70,000 + 14,000 = 84,000; Cr = 78,000. Loss = 6,000. A: 3,600; B: 2,400.
✅ Realisation Loss = Rs 6,000. A bears Rs 3,600; B bears Rs 2,400.

📝 Practice Questions — Dissolution

MCQ 1 Realisation Account is credited with:
(A) Assets taken over at book value (B) Liabilities paid (C) Amount received by selling assets (D) Partners' capitals
Ans: (C) Amount received by selling assets
MCQ 2 Garner vs Murray rule applies when:
(A) A partner retires (B) A partner is insolvent and cannot contribute to deficiency (C) A new partner joins (D) Goodwill is negative
Ans: (B) A partner is insolvent and cannot contribute to deficiency
A-R A: Realisation Account is prepared at the time of dissolution of a firm.
R: Realisation Account collects all assets and liabilities for the purpose of converting them into cash during dissolution.
Ans: (A)

Case: Firm of X and Y dissolved. Sundry Assets (Book Value) Rs 2,00,000 sold for Rs 1,60,000. Sundry Creditors Rs 50,000 paid off for Rs 45,000. Dissolution expenses Rs 3,000 paid by X. Partners' capitals: X Rs 80,000; Y Rs 60,000. PSR 3:2.

Q1 (1M) Realisation Account — Dr total = ? Ans: Sundry Assets Rs 2,00,000 + Sundry Creditors Rs 50,000 (for closure) = Rs 2,50,000 Dr.
Q2 (2M) Profit or Loss on Realisation? Ans: Dr side: Assets 2,00,000 + Dissolution Expenses 3,000 = 2,03,000. Cr side: Cash from assets 1,60,000 + Creditors settled 45,000 = 2,05,000. Wait — standard format: Dr Assets 2,00,000; Cr Cash 1,60,000; Cr Loss 40,000. Creditor settlement: Dr Creditors 50,000; Cr Cash 45,000; Cr Realisation (gain) 5,000. Net loss on realisation = 40,000 − 5,000 + 3,000 = Rs 38,000.
Q3 (1M) Loss shared X:Y = ? Ans: X bears 3/5 × 38,000 = Rs 22,800; Y bears 2/5 × 38,000 = Rs 15,200.
SA (3M) What is the Realisation Account? State four items credited to it.
Ans: The Realisation Account is a temporary account prepared at the time of dissolution of a firm. Its purpose is to collect all assets and liabilities of the firm to determine the profit or loss on winding up. Items credited to Realisation Account: (1) Cash/Bank received on sale of assets. (2) Amounts received from debtors. (3) Liabilities taken over by a partner (saves cash — reduces what firm must pay). (4) Assets taken over by a partner at agreed value. The balance of the account is the profit (Cr balance) or loss (Dr balance) on realisation, shared between partners in profit-sharing ratio.
📋 Partnership — Accounts Summary
P&L Appropriation Account · Partners' Capital Account · Balance Sheet

📖 Core Theory

P&L Appropriation Account
Shows distribution of net profit among partners. Dr side: interest on capital, partner salary/commission, transfer to reserves. Cr side: net profit brought from P&L. Balance = divisible profit → shared in PSR.
Partners' Current Account
Used only when capitals are fixed. Dr: drawings, interest on drawings. Cr: share of profit, interest on capital, salary/commission. If it goes into debit balance, that partner owes the firm.

🔑 Appropriation Format

P&L Appropriation: Cr Net Profit; Dr Interest on Capital, Salary, Commission, Reserves
Divisible Profit = Net Profit - IOC - Salary - Commission - Transfer to General Reserve
Interest on Drawings = Drawings × Rate × Time/12 (simple interest approximation)
IOC (Interest on Capital) = Capital × Rate × Time (if partner joins mid-year, adjust months)

✏️ Worked Examples

Example — P&L Appropriation (Board 2023, 6M)

Q: Net Profit Rs 1,00,000. A's Capital Rs 2,00,000; B's Capital Rs 1,00,000. IOC 8%. A's salary Rs 10,000. PSR 3:2. Prepare P&L Appropriation Account.

1
IOC: A = 2,00,000 × 8% = 16,000; B = 1,00,000 × 8% = 8,000. Total IOC = 24,000.
2
Salary A = 10,000. Total deductions = 24,000 + 10,000 = 34,000. Divisible profit = 1,00,000 - 34,000 = 66,000.
3
A's share = 66,000 × 3/5 = 39,600; B's = 26,400. A total = 16,000 + 10,000 + 39,600 = 65,600. B total = 8,000 + 26,400 = 34,400.
✅ A receives Rs 65,600; B receives Rs 34,400.

📝 Practice Questions — Appropriation & Capital Accounts

MCQ 1 Interest on Drawings is charged to partners because:
(A) It increases firm's profit (B) It is a gain for the firm for funds used by partners (C) It is mandatory (D) It reduces partners' salaries
Ans: (B)
MCQ 2 If P&L Appropriation Cr side > Dr side, the balance represents:
(A) Net loss (B) Divisible profit (C) Goodwill (D) Capital contribution
Ans: (B) Divisible profit
A-R A: Interest on Capital is debited to the P&L Appropriation Account.
R: Interest on capital is an appropriation of profit — it is not a charge on profit but a distribution of it, and thus appears in the Appropriation Account, not the P&L Account.
Ans: (A)
SA (3M) Why is a P&L Appropriation Account prepared in a partnership?
Ans: A P&L Appropriation Account is prepared to show how the net profit of the firm is distributed among the partners after making mandatory adjustments. It begins with the net profit (or loss) transferred from the P&L Account on the credit side. The debit side records: interest on capital (reward to partners for capital contributed), partners' salaries and commissions (where provided in the deed), and transfer to reserves. The remaining balance is the divisible profit, shared among partners in the profit-sharing ratio. It ensures transparent and systematic appropriation as per the terms of the partnership deed.
🏢 Company Accounts — Share Capital
Types of Shares · Issue at Par/Premium/Discount · Calls in Arrears · Forfeiture & Reissue

📖 Core Theory

Share Capital
Authorised (registered) > Issued > Subscribed > Called-up > Paid-up. Equity shares: voting rights, variable dividend. Preference shares: fixed dividend, priority over equity on dividend and capital repayment.
Issue of Shares
At par: issue price = nominal value. At premium: issue price > NV; Sec 52 says premium goes to Securities Premium Reserve. At discount (only when Sec 53 conditions met, very rare): Dr Discount on Issue of Shares.
Forfeiture & Reissue
Forfeiture: shares cancelled for non-payment of calls. On forfeiture: Dr Share Capital (called amount), Cr Calls in Arrears, Cr Share Forfeiture A/c. Reissue: Dr Bank (issue price), Dr Share Forfeiture, Cr Share Capital (NV). Surplus in Share Forfeiture → Capital Reserve.

🔑 Share Capital Entries

On Application: Bank Dr; Share Application Cr
On Allotment: Share Allotment Dr; Share Capital Cr; Securities Premium Cr (if premium)
On Forfeiture: Share Capital Dr (called up); Calls in Arrears Cr; Share Forfeiture Cr
On Reissue: Bank Dr; Share Forfeiture Dr; Share Capital Cr
Capital Reserve = Share Forfeiture credited - Share Forfeiture used (max NV - discount on reissue)

✏️ Worked Examples

Example — Forfeiture & Reissue (Board 2022, 6M)

Q: 500 shares of Rs 10 each (Rs 2 premium) issued. Rs 5 on application, Rs 4 on allotment (incl premium), Rs 3 final call. Ram (100 shares) failed to pay final call. Shares forfeited and reissued at Rs 7.

1
Forfeiture: Share Capital Dr 1,000 (100 × Rs 10); Securities Premium Dr 200 (100 × Rs 2); Calls in Arrears Cr 300 (100 × Rs 3); Share Forfeiture Cr 900.
2
Reissue at Rs 7: Bank Dr 700 (100 × 7); Share Forfeiture Dr 300; Share Capital Cr 1,000.
3
Capital Reserve = Share Forfeiture balance = 900 - 300 = Rs 600.
✅ Capital Reserve = Rs 600. Share Forfeiture Account closed to Capital Reserve.

📝 Practice Questions — Share Capital

MCQ 1 Securities Premium Reserve can be used for:
(A) Paying dividends (B) Writing off preliminary expenses (C) Paying partner's salary (D) All of the above
Ans: (B) Writing off preliminary expenses (and other specific uses u/s 52)
MCQ 2 On forfeiture of shares, the Share Forfeiture Account is credited with:
(A) Face value of forfeited shares (B) Called-up amount already received (C) Premium on shares (D) Market value
Ans: (B) Called-up amount already received
MCQ 3 Minimum subscription must be received within __ days of issue of prospectus:
(A) 30 days (B) 60 days (C) 120 days (D) 90 days
Ans: (C) 120 days
A-R A: A company cannot issue shares at a discount under Section 53 of the Companies Act 2013.
R: Shares are a permanent source of capital, and issuing them at a discount would mean the company is permanently reducing its equity base below the face value, which is not permissible as a general rule.
Ans: (A)

Case: ZED Ltd. issued 10,000 equity shares of Rs 10 each at a premium of Rs 2. Payable: Rs 4 on application, Rs 5 on allotment (including Rs 2 premium), Rs 3 on call. All shares were subscribed and money received. 200 shares held by Mohan were forfeited for non-payment of call money. These shares were reissued to Sohan at Rs 8 per share, fully paid up.

Q1 (1M) Share Forfeiture Account credited on forfeiture = ? Ans: Amount received before forfeiture = 200 × (4+5) = Rs 1,800. Share Forfeiture Cr = Rs 1,800.
Q2 (1M) Discount on reissue per share = ? Ans: NV = Rs 10; reissued at Rs 8; discount = Rs 2 per share. Max allowed = called up = Rs 10. OK.
Q3 (2M) Capital Reserve on reissue = ? Ans: Share Forfeiture = Rs 1,800 (for 200 shares). Used for discount on reissue = 200 × 2 = Rs 400. Capital Reserve = Rs 1,800 − Rs 400 = Rs 1,400.
SA (3M) Distinguish between Subscribed Capital and Called-up Capital.
Ans: Subscribed Capital is the portion of Issued Capital for which applications have been received from the public and shares have been allotted. It can be equal to or less than the Issued Capital. Called-up Capital is the portion of the Subscribed Capital that the company has actually demanded (called up) from shareholders. Companies do not always demand the full face value at once — they call it in instalments (application, allotment, calls). Called-up ≤ Subscribed. Paid-up Capital is the amount actually received against the called-up capital (excluding calls in arrears).
LA (6M) A company forfeits 500 shares of Rs 10 each issued at a premium of Rs 3 for non-payment of final call of Rs 4. Amount received on application and allotment = Rs 9 per share (including premium). 400 shares reissued at Rs 7 each. Show Share Forfeiture Account and calculate Capital Reserve.
Ans: Forfeiture: Share Capital Dr 5,000; Securities Premium Dr 1,500 (if not credited separately); Calls in Arrears Cr 2,000 (500×4); Share Forfeiture Cr 4,500 (500×9 received). Reissue (400 shares at Rs 7): Bank Dr 2,800; Share Forfeiture Dr 1,200 (400×3 discount); Share Capital Cr 4,000. Share Forfeiture balance remaining: 500 shares had Rs 4,500; used for 400 shares Rs 1,200. Balance = 4,500 − 1,200 = Rs 3,300 → transferred to Capital Reserve. Capital Reserve = Rs 3,300.
📄 Company Accounts — Debentures
Issue of Debentures · Redemption · Interest · Conversion

📖 Core Theory

Debentures
Debt instrument issued by company, carries fixed interest (charge on profit). Debenture holders = creditors. Types: Secured/Unsecured; Redeemable/Irredeemable; Convertible/Non-Convertible.
Issue of Debentures
At par, premium, or discount. If issued at discount: Dr Discount on Debentures (written off over life). Redemption Premium: Dr Loss on Redemption, Cr Premium on Redemption (liability). Interest on Debentures = deductible for tax (unlike dividend).
Redemption
By purchase in open market, by conversion to shares, or at par/premium. DRR (Debenture Redemption Reserve) and DRI (Debenture Redemption Investment) required. Now Companies (Amendment) 2019: Listed companies no longer need DRR for publicly issued debentures.

🔑 Debenture Key Entries

Issue at discount: Bank Dr; Disc on Debentures Dr; Debentures Cr
Interest due: Deb Interest Dr; Deb Holders Cr (then Bank Dr; Deb Holders Cr)
TDS on interest: Deb Interest Dr; TDS Payable Cr; Deb Holders Cr (net)
Redemption at premium: Deb Dr; Prem on Redemption Dr; Bank Cr (full amount)

✏️ Worked Examples

Example — Debenture Issue (Board 2023, 4M)

Q: Company issues 1,000 debentures of Rs 100 each at 5% discount, redeemable at 5% premium. Pass entries.

1
Bank Dr 95,000; Discount on Deb Dr 5,000; Loss on Redemption Dr 5,000; 10% Deb Cr 1,00,000; Prem on Redemption Cr 5,000.
2
Discount of Rs 5,000 written off over the life of debentures (P&L Dr, Discount on Deb Cr each year).
3
On redemption: 10% Deb Dr 1,00,000; Prem on Redemption Dr 5,000; Bank Cr 1,05,000.
✅ Issue at discount: raise Rs 95,000 but repay Rs 1,05,000 — total loss = Rs 10,000 spread over life.

📝 Practice Questions — Debentures

MCQ 1 Interest on Debentures is a:
(A) Appropriation of profit (B) Charge on profit (C) Dividend (D) Reserve
Ans: (B) Charge on profit — paid even if company makes loss
MCQ 2 Debentures issued as collateral security means:
(A) Issued for cash (B) Issued as secondary security against a loan (C) Issued at premium (D) Issued at discount
Ans: (B)
A-R A: Discount on issue of Debentures is written off from Securities Premium Reserve first.
R: Securities Premium Reserve can be used to write off the discount on issue of debentures as per Section 52 of the Companies Act 2013.
Ans: (A)
SA (3M) Distinguish between shares and debentures.
Ans: Shares: Represent ownership in the company. Shareholders are members. Dividend is paid from profits — variable and uncertain. No interest if loss. Shares cannot be bought back freely (subject to buyback regulations). Shareholders can vote at meetings. Debentures: Represent a loan to the company. Debenture holders are creditors. Interest is paid at a fixed rate regardless of profit/loss — it is a charge on profit. Debentures must be repaid (redeemable) unless irredeemable. Debenture holders have no voting rights but have priority on assets in winding up (if secured).
📊 Financial Statements — Analysis
Comparative & Common Size Statements · Trend Analysis

📖 Core Theory

Comparative Statements
Shows two or more years' data side by side. Columns: Current Year, Previous Year, Absolute Change (CY-PY), % Change ((Absolute/PY) × 100). Helps spot trends in items like revenue, expenses, assets.
Common Size Statements
Each item expressed as % of base figure. Income Statement: base = Net Sales. Balance Sheet: base = Total Assets (or Total Capital Employed). Enables comparison across different-size firms.
Ratio Analysis
Liquidity: Current Ratio = CA/CL; Quick Ratio = (CA-Inventory-Prepaid)/CL. Solvency: Debt-Equity = Debt/Equity; Interest Coverage = EBIT/Interest. Profitability: GP Ratio = GP/Net Sales × 100; NP Ratio = NP/Net Sales × 100.

🔑 Important Ratios

Current Ratio = Current Assets / Current Liabilities (ideal: 2:1)
Quick Ratio = (CA - Inventory - Prepaid) / CL (ideal: 1:1)
Debt-Equity Ratio = Long-term Debt / Shareholders' Funds
GP Ratio = Gross Profit / Net Sales × 100
NP Ratio = Net Profit after Tax / Net Sales × 100
Return on Equity = Net Profit after Tax / Shareholders' Equity × 100

✏️ Worked Examples

Example — Ratio Calculation (Board 2023, 3M)

Q: CA = 3,00,000; CL = 1,50,000; Inventory = 80,000. Find Current Ratio and Quick Ratio.

1
Current Ratio = CA/CL = 3,00,000/1,50,000 = 2:1. Comment: exactly at ideal level.
2
Quick Assets = CA - Inventory = 3,00,000 - 80,000 = 2,20,000.
3
Quick Ratio = 2,20,000/1,50,000 = 1.47:1. Comment: above ideal (1:1), firm is liquid.
✅ Current Ratio = 2:1. Quick Ratio = 1.47:1. Both indicate good short-term liquidity.

📝 Practice Questions — Ratio Analysis

MCQ 1 Quick Ratio is also called:
(A) Current Ratio (B) Liquid Ratio / Acid Test Ratio (C) Debt Equity Ratio (D) Working Capital Ratio
Ans: (B) Liquid Ratio / Acid Test Ratio
MCQ 2 If Current Assets = Rs 3,00,000 and Current Liabilities = Rs 1,50,000, Current Ratio = :
(A) 1:2 (B) 2:1 (C) 1:1 (D) 3:1
Ans: (B) 2:1
MCQ 3 Debt-Equity Ratio measures:
(A) Profitability (B) Liquidity (C) Long-term solvency (D) Activity
Ans: (C) Long-term solvency
A-R A: Higher Inventory Turnover Ratio indicates efficient inventory management.
R: A higher ratio means the firm converts inventory into sales more rapidly, implying less capital is tied up in stock and risk of obsolescence is lower.
Ans: (A)

Case: Balance Sheet data — Current Assets Rs 4,00,000 (Inventory Rs 1,50,000; Debtors Rs 1,50,000; Cash Rs 1,00,000); Current Liabilities Rs 2,00,000; Net Sales Rs 12,00,000; Cost of Goods Sold Rs 9,00,000.

Q1 (1M) Current Ratio = ? Ans: 4,00,000 / 2,00,000 = 2:1.
Q2 (1M) Quick Ratio = ? Ans: (4,00,000 − 1,50,000) / 2,00,000 = 2,50,000/2,00,000 = 1.25:1.
Q3 (2M) Inventory Turnover Ratio = ? Comment. Ans: ITR = COGS / Average Inventory. If avg inventory = Rs 1,50,000: ITR = 9,00,000/1,50,000 = 6 times. Inventory is converted to sales 6 times a year — efficient stock management.
SA (3M) What is Gross Profit Ratio? How is it significant?
Ans: Gross Profit Ratio = (Gross Profit / Net Sales) × 100. It shows the percentage of revenue remaining after deducting the cost of goods sold. A higher GP ratio indicates efficient production/purchase at lower cost and adequate pricing. It enables comparison across years or with industry benchmarks. If GP ratio is falling, it may signal rising cost of goods sold, inefficient production, or price competition. It is a key profitability ratio used by management to assess core operating efficiency before considering operating expenses.
LA (6M) Calculate any four ratios from the following data and comment on the firm's financial health: Equity Share Capital Rs 5,00,000; General Reserve Rs 1,00,000; 10% Debentures Rs 2,00,000; Fixed Assets Rs 5,00,000; Current Assets Rs 4,00,000 (Inventory Rs 1,20,000; Debtors Rs 1,80,000; Cash Rs 1,00,000); Current Liabilities Rs 1,00,000; Net Profit Rs 1,20,000; Net Sales Rs 8,00,000.
Ans: (1) Current Ratio = 4,00,000/1,00,000 = 4:1 — very high liquidity. (2) Quick Ratio = (4,00,000−1,20,000)/1,00,000 = 2.8:1 — excellent short-term solvency. (3) Net Profit Ratio = 1,20,000/8,00,000 × 100 = 15% — healthy profitability. (4) Debt-Equity Ratio = 2,00,000 / (5,00,000+1,00,000) = 2,00,000/6,00,000 = 0.33:1 — low leverage, financially sound. Overall: The firm is highly liquid, profitable and has minimal debt — good financial health, though excess current assets may indicate underutilisation.
💵 Cash Flow Statement
Operating · Investing · Financing Activities · Indirect Method

📖 Core Theory

Operating Activities
Day-to-day business operations. Indirect method: Start with Net Profit before tax; add non-cash charges (depreciation, amortisation); adjust for changes in working capital (increase in CA = outflow; increase in CL = inflow); subtract taxes paid.
Investing Activities
Purchase/sale of long-term assets. Purchase of fixed assets, investments: cash outflow. Sale of fixed assets, investments, interest received, dividend received: cash inflow.
Financing Activities
Transactions with providers of finance. Issue of shares, debentures, long-term loans: inflow. Redemption of debentures/preference shares, repayment of loans, dividend paid, interest paid: outflow.

🔑 Cash Flow — Key Rules

Depreciation: add back to NP (non-cash charge — no actual cash outflow)
Increase in Current Asset = outflow; Decrease in CA = inflow
Increase in Current Liability = inflow; Decrease in CL = outflow
Opening cash + Net cash from all 3 activities = Closing cash (verification)
Dividend paid = under Financing; Dividend received = under Investing (AS 3)

✏️ Worked Examples

Example — Operating Activities (Board 2022, 6M)

Q: NP before tax = 80,000; Depreciation = 12,000; Increase in Debtors = 10,000; Decrease in Creditors = 5,000; Tax paid = 20,000. Find CFO.

1
Start: NP 80,000 + Depreciation 12,000 = 92,000 (adjusted for non-cash items)
2
WC: Debtors increased → outflow -10,000; Creditors decreased → outflow -5,000. Total WC = -15,000.
3
CFO = 92,000 - 15,000 - 20,000 (tax) = Rs 57,000
✅ Cash Flow from Operating Activities = Rs 57,000.

📒 Part I: Accounting Not-for-Profit & Partnership

Chapters 1–4 — Foundation of Partnership Accounts

Not-for-Profit Organisation

Entity working for social/charitable purpose; surplus not distributed. Examples: clubs, hospitals, NGOs.

Receipts & Payments Account

Summary of cash receipts and payments (real accounts). Starts with opening cash balance.

Income & Expenditure Account

Nominal account showing surplus/deficit for the year. Prepared on accrual basis.

Partnership

Business owned by 2 or more persons sharing profits/losses as per agreed ratio. Governed by Partnership Act, 1932.

Goodwill

Excess earning capacity. Methods: Average Profit, Super Profit, Capitalisation. Premium for goodwill adjusted through Partners' Capital Accounts.

Sacrificing Ratio

Old ratio − New ratio. Used when a new partner is admitted. Gaining partner compensates sacrificing partner.

🔑 Key Formulas

  • Goodwill (Avg Profit) = Average Profit × Number of Years' Purchase
  • Super Profit = Average Profit − Normal Profit
  • Normal Profit = Capital Employed × Normal Rate of Return / 100
  • Goodwill (Capitalisation) = Super Profit × 100 / Normal Rate of Return
  • New Ratio = Old Ratio − Sacrificing Ratio
  • Gaining Ratio = New Ratio − Old Ratio
  • New Partner's Share = Profit ratio × Old ratio of other partners
📝 Worked Example — Admission of Partner
Q.A and B share profits 3:2. C admitted for 1/5 share. Calculate new ratio and sacrificing ratio.
Step 1Remaining share for A & B = 1 − 1/5 = 4/5
Step 2A's new share = 3/5 × 4/5 = 12/25; B's new share = 2/5 × 4/5 = 8/25; C = 5/25
Step 3Sacrificing: A = 3/5 − 12/25 = 15/25 − 12/25 = 3/25; B = 2/5 − 8/25 = 10/25 − 8/25 = 2/25
ResultNew ratio A:B:C = 12:8:5; Sacrificing ratio A:B = 3:2
📌 Retirement/Death of Partner — Key Points
  • Gaining Ratio = New Ratio − Old Ratio (gaining partners compensate retiring partner)
  • Goodwill of retiring partner = His share × Total goodwill
  • Revaluation A/c: Increase in assets/decrease in liabilities → profit (credited to all partners)
  • Executors A/c opened on death; outstanding amount transferred
  • Joint Life Policy: Amount received distributed in old ratio

📒 Part II: Dissolution of Partnership

Chapter 5 — Dissolution, Garner vs Murray, Piecemeal Distribution

Dissolution of Firm

Complete breakdown of partnership — all accounts closed. Realisation A/c prepared to determine profit/loss on realisation.

Realisation Account

Temporary A/c. All assets (except cash/bank) debited; all outside liabilities credited. Profit/loss shared in old ratio.

Garner vs Murray Rule

If a partner is insolvent, his/her deficiency is borne by other solvent partners in their LAST AGREED CAPITAL RATIO (not profit ratio).

🔑 Dissolution Journal Entries

  • Assets transferred: Realisation A/c Dr / To Assets A/c
  • Liabilities transferred: Liabilities A/c Dr / To Realisation A/c
  • Assets sold: Cash/Bank A/c Dr / To Realisation A/c
  • Liabilities paid: Realisation A/c Dr / To Cash/Bank A/c
  • Realisation profit/loss: Partners' Capital A/c (if loss) / To Realisation A/c
📝 Realisation Account Example
Q.A, B, C dissolve firm. Assets realised Rs 90,000 (Book value Rs 1,00,000). Outstanding expenses paid Rs 5,000.
Loss on RealisationRs 1,00,000 − Rs 90,000 + Rs 5,000 = Rs 15,000 (shared equally if ratio is 1:1:1 = Rs 5,000 each)

📒 Part III: Company Accounts — Share Capital

Chapters 6–7 — Issue and Forfeiture of Shares

Share Capital

Total capital of a company divided into shares. Types: Authorised, Issued, Subscribed, Called-up, Paid-up.

Issue at Premium

Share issued above face value. Premium credited to Securities Premium Reserve A/c (can be used for issue of bonus shares, writing off preliminary expenses).

Forfeiture

Cancellation of shares for non-payment of calls. Forfeited shares A/c credited with amount received. Reissued shares may be at discount (max = forfeited amount).

Debentures

Debt instruments. Issued at par/premium/discount. Redeemed at par/premium. Interest is charged to P&L. Debenture Redemption Reserve mandatory in certain cases.

🔑 Forfeiture & Reissue Entries

  • Forfeiture: Share Capital A/c Dr (called-up) / To Calls-in-Arrears / To Forfeited Shares A/c
  • Reissue: Bank A/c Dr / Forfeited Shares A/c Dr / To Share Capital A/c
  • Profit on reissue → Capital Reserve A/c

📒 Part IV: Financial Statements of Companies

Chapters 8–9 — Balance Sheet, P&L, Cash Flow

Balance Sheet

Statement of financial position showing assets and liabilities as per Schedule III of Companies Act. Vertical format.

P&L Statement

Revenue and expenses for the year. Shows Gross Profit → Net Profit. Appropriations: Dividend, Transfer to Reserves.

Cash Flow Statement

Shows movement of cash. Three activities: Operating, Investing, Financing. Prepared as per AS-3 (Indirect/Direct method).

🔑 Cash Flow — Indirect Method

  • Start with Net Profit before tax
  • Add: Non-cash charges (depreciation, amortisation), Losses on sale of assets
  • Less: Gains on sale of assets, Non-operating income
  • Adjust Working Capital changes: Increase in CA = outflow; Increase in CL = inflow
  • Less: Tax paid → Net Cash from Operating Activities

📒 Part V: Analysis of Financial Statements

Chapters 10–12 — Ratio Analysis, Comparative Statements

Liquidity Ratios

Current Ratio = Current Assets / Current Liabilities (ideal 2:1). Quick Ratio = Quick Assets / CL (ideal 1:1).

Solvency Ratios

Debt-Equity Ratio = Long-term Debt / Shareholders' Funds. Proprietary Ratio = Proprietors' Funds / Total Assets.

Activity Ratios

Inventory Turnover = COGS / Avg Inventory. Debtors Turnover = Net Credit Sales / Avg Debtors. Trade Receivables Turnover ratio.

Profitability Ratios

Gross Profit Ratio = GP/Net Sales × 100. Net Profit Ratio = NP/Net Sales × 100. Return on Investment = NP/Capital Employed × 100.

🔑 Key Ratios at a Glance

  • Current Ratio = CA/CL [Ideal: 2:1]
  • Quick/Acid Test = (CA − Inventory − Prepaid) / CL [Ideal: 1:1]
  • D/E Ratio = Total Debt / Shareholders' Equity
  • GP Ratio = (GP / Net Sales) × 100
  • NP Ratio = (NP after tax / Net Sales) × 100
  • EPS = Net Profit available to equity shareholders / No. of equity shares
  • P/E Ratio = Market Price per share / EPS

📊 Comprehensive Problems I — Partnership

Advanced numericals: Admission, Retirement, Death, Dissolution

📝 Problem 1 — Admission + Revaluation
Q.X and Y are partners (3:2). Z admitted for 1/4 share. Goodwill of firm Rs 40,000. Revaluation: Stock up by Rs 5,000; Creditors to be written down by Rs 2,000. Find: Journal entries.
GoodwillZ's share of goodwill = 1/4 × 40,000 = Rs 10,000. Dr Z's Capital; Cr X's Capital (3/5 × 10,000 = Rs 6,000) and Y's Capital (2/5 × 10,000 = Rs 4,000) [sacrificing ratio = old ratio = 3:2]
RevaluationDr Stock A/c Rs 5,000; Dr Creditors A/c Rs 2,000 / To Revaluation A/c Rs 7,000. Revaluation profit Rs 7,000 distributed X:Y = 3:2 → X gets Rs 4,200; Y gets Rs 2,800.
📝 Problem 2 — Dissolution with Garner vs Murray
Q.A, B, C share profits 2:2:1. Capitals: A = Rs 20,000; B = Rs 15,000; C = Rs (−5,000) [insolvent]. Loss on Realisation = Rs 10,000. Apply Garner vs Murray.
Loss sharingEach bears Rs 2,000 (2:2:1). C cannot pay his Rs 2,000 deficiency. C's capital after loss = −7,000 → deficiency Rs 7,000.
Garner vs MurrayA:B share C's deficiency in last agreed CAPITAL ratio 20:15 = 4:3. A bears Rs 4,000; B bears Rs 3,000.

📊 Comprehensive Problems II — Company Accounts

Share capital, debentures, financial statement analysis

📝 Problem — Forfeiture and Reissue
Q.500 shares of Rs 10 each (Rs 3 premium, total Rs 13) were forfeited for non-payment of 2nd call of Rs 4/share. Rs 8 already received. 300 shares reissued at Rs 6/share as fully paid.
Forfeiture EntryShare Capital Dr 5,000 (500×10) + Sec. Premium Dr 1,500 (500×3) / To Share Allotment (due); To Calls in Arrears 2,000 (500×4); To Forfeited Shares 4,000 (500×8)
Reissue EntryBank Dr 1,800 (300×6); Forfeited Shares Dr 1,200 (300×4) / To Share Capital 3,000 (300×10)
Capital ReserveForfeited Shares balance = 4,000 − 1,200 used = 2,800 → Capital Reserve Rs 2,800 for reissued shares
📝 Cash Flow — Key Adjustments
Purchase of MachineryOutflow under Investing Activities. If financed by loan → show both: purchase outflow + loan inflow (Financing)
Dividend PaidUnder Financing Activities (companies). Under Operating Activities for financial companies.
Tax PaidOperating activity. Deduct from operating profit as last step before arriving at net cash from ops.

📂 Formula Bank I — Partnership

All formulas for Part I & II — quick reference

Partnership — Complete Formula Reference

  • Average Profit = Total profits of past years / No. of years
  • Weighted Average Profit = ΣProfit × Weight / ΣWeights
  • Goodwill (Avg Profit) = Avg Profit × Years' Purchase
  • Super Profit = Avg Profit − Normal Profit
  • Normal Profit = Capital Employed × NRR / 100
  • Goodwill (Super Profit) = Super Profit × Years' Purchase
  • Goodwill (Capitalisation) = Super Profit × 100 / NRR
  • New Partner's ratio = Remaining share × (old ratio fraction)
  • Sacrificing Ratio = Old Ratio − New Ratio
  • Gaining Ratio = New Ratio − Old Ratio
  • Realisation Profit/Loss = Assets realised − (Book value + Expenses)

📂 Formula Bank II — Company Accounts & Analysis

Share capital, debentures, ratios — complete reference

Company Accounts — Ratios

  • Current Ratio = Current Assets / Current Liabilities [Ideal: 2:1]
  • Quick Ratio = (CA − Inventory − Prepaid) / CL [Ideal: 1:1]
  • D/E Ratio = Long-term Debt / Shareholders' Funds
  • Total Assets to Debt = Total Assets / Long-term Debt
  • Proprietary Ratio = Shareholders' Funds / Total Assets
  • Interest Coverage = EBIT / Interest on Debt
  • Inventory Turnover = COGS / Avg Inventory (or Net Sales / Avg Inventory)
  • Debtors Turnover = Net Credit Sales / Avg Debtors
  • GP Ratio = GP / Net Sales × 100
  • NP Ratio = NP / Net Sales × 100
  • Return on Investment = (NP + Interest) / Capital Employed × 100
  • EPS = Net Profit for Equity / No. of Equity Shares
  • Book Value per Share = Net Worth / No. of Shares
  • DRR = 25% of face value of debentures to be redeemed [as per Companies Act]

📝 Practice Papers

Full-length 80-mark board-pattern papers · Accountancy XII

ACCOUNTANCY XII — PRACTICE PAPER 1

Time: 3 Hours | Max Marks: 80 | CBSE 2024-25

SECTION A — Part I: Not-for-Profit & Partnership (36 Marks)
Q1. (i) Distinguish between Receipts & Payments A/c and Income & Expenditure A/c. [4M] (ii) From the given R&P A/c, prepare I&E A/c for a club. [6M]
Q2. A and B are partners sharing profits 3:2. C is admitted for 1/5 share. Premium for goodwill Rs 30,000 is brought by C. Record journal entries. [6M]
Q3. X, Y, Z share profits 2:1:1. Z retires. Goodwill Rs 60,000. Revaluation: assets up Rs 8,000. Outstanding salary Rs 2,000 to be provided. Prepare Revaluation A/c and Partners' Capital A/c. [8M]
Q4. Dissolution: A, B, C dissolve. Realisation A/c prepared — assets realised Rs 1,20,000 (BV Rs 1,00,000); creditors Rs 40,000 paid at Rs 38,000; expenses Rs 2,000. Profit shared 2:2:1. [8M]
Q5. MCQs (4×1): (i) Sacrificing ratio formula (ii) Gaining ratio formula (iii) Capital reserve on reissue (iv) DRR requirement [4M]
SECTION B — Part II: Company Accounts (44 Marks)
Q6. A company issued 10,000 shares of Rs 10 each at Rs 12 (Rs 2 premium). Applications received for 15,000. Pro-rata allotment. Show journal entries and BRS. [8M]
Q7. 500 shares forfeited for non-payment of allotment Rs 3 and final call Rs 2 (face value Rs 10, premium Rs 2). 400 shares reissued at Rs 9. Record entries and capital reserve. [6M]
Q8. Debentures: Company issued 1,000, 12% debentures of Rs 100 each at 5% discount, redeemable at par. Show issue entries and calculate annual interest. [4M]
Q9. From given Balance Sheet, prepare Comparative B/S and Common Size B/S. Calculate two liquidity ratios. [10M]
Q10. Cash Flow Statement: Given B/S for two years, prepare Cash Flow Statement. [10M]
Q11. Calculate: GP Ratio, NP Ratio, Inventory Turnover, Current Ratio, D/E Ratio from given data. [6M]

ACCOUNTANCY XII — PRACTICE PAPER 2

Different chapter emphasis — full 80 marks

PART I: PARTNERSHIPS (36M)
Q1. Prepare Income & Expenditure Account for a sports club from given Receipts & Payments A/c. Additional info: subscriptions in arrears Rs 3,000; rent outstanding Rs 1,500. [10M]
Q2. Admission — New ratio, Sacrificing ratio, Hidden goodwill calculation. [6M]
Q3. Death of partner — executor's account, JLP treatment. [8M]
Q4. Piecemeal distribution on dissolution. [8M]
Q5. MCQs — 4 questions on partnership fundamentals. [4M]
PART II: COMPANY ACCOUNTS (44M)
Q6. Over-subscription handling — Pro-rata allotment journal entries + excess refund. [8M]
Q7. Right issue and bonus issue journal entries. [6M]
Q8. Redemption of debentures — out of profits + creation of DRR. [4M]
Q9. Comparative P&L statement analysis — Calculate % change, interpret trends. [8M]
Q10. Cash Flow from Operating Activities — Indirect Method detailed. [8M]
Q11. Ratio analysis — 6 ratios with interpretation. [10M]

ACCOUNTANCY XII — PRACTICE PAPER 3 (Challenge)

Pre-Board level — application and analysis

Q1. Amalgamation of firms — complete realisation and new firm's opening entry. [10M]
Q2. Conversion of partnership to company — treatment of goodwill and capitals. [8M]
Q3. Issue of shares for consideration other than cash — plant machinery taken over + vendor payment. [6M]
Q4. Advanced ratio analysis: Calculate and interpret Debt Service Coverage Ratio, Return on Equity, Price/Earnings Ratio. Limitations of ratio analysis. [8M]
Q5. Comprehensive Cash Flow Statement — full balance sheets given for both years. [10M]
Q6. MCQ-based passage question (4×1): Case study on a company's financial position. [4M]
Q7. Error correction in final accounts — adjust trading account, P&L and B/S. [6M]
Q8. Comparison question: Why is Cash Flow Statement more important than Fund Flow Statement? [4M]
Q9. Application question: A firm has CR = 2.5, QR = 0.8. Analyse what this means and suggest corrective actions. [4M]
📜 PYQ Bank CBSE 2022–2024
2024 6 Marks Goodwill Valuation
Calculate goodwill of a firm using the Capitalisation Method given: Average profit = ₹60,000, Normal Rate of Return = 15%, Capital employed = ₹3,00,000.
Step 1: Normal Profit = Capital Employed × NRR/100 = 3,00,000 × 15/100 = ₹45,000

Step 2: Super Profit = Average Profit − Normal Profit = 60,000 − 45,000 = ₹15,000

Step 3 (Capitalisation of Super Profit):
Goodwill = Super Profit × 100/NRR = 15,000 × 100/15 = ₹1,00,000

Alternative: Capitalisation of Average Profit → Goodwill = 60,000 × 100/15 − 3,00,000 = 4,00,000 − 3,00,000 = ₹1,00,000
2023 6 Marks Admission of Partner
A and B are partners sharing profits in 3:2. C is admitted for 1/5 share. A and B agree to sacrifice equally. Calculate new profit sharing ratio and sacrificing ratio.
C's share = 1/5 (given)
Equal sacrifice → A sacrifices 1/10, B sacrifices 1/10

A's new share = 3/5 − 1/10 = 6/10 − 1/10 = 5/10
B's new share = 2/5 − 1/10 = 4/10 − 1/10 = 3/10
C's share = 1/5 = 2/10

New ratio: A:B:C = 5:3:2
Sacrificing ratio: A:B = 1:1

Verification: 5/10 + 3/10 + 2/10 = 10/10 ✓
2024 6 Marks Issue of Shares
A company issued 50,000 shares of ₹10 each at a premium of ₹2 per share. All amounts due were received. Pass journal entries for issue of shares applied = allotted (no over/under subscription).
(i) On Application: Bank A/c Dr. 6,00,000 | To Share Application A/c 6,00,000
(Application money: ₹10+₹2 = ₹12/share if full amount on application; or adjust per call schedule)

Assuming: Application ₹3, Allotment ₹5 (incl. premium ₹2), First call ₹2, Final call ₹2

(i) Bank Dr. 1,50,000 | To Share Application A/c 1,50,000 (₹3 × 50,000)
(ii) Share Application Dr. 1,50,000 | To Share Capital A/c 1,50,000
(iii) Share Allotment Dr. 3,50,000 | To Share Capital A/c 2,50,000; To Securities Premium A/c 1,00,000
(iv) Bank Dr. 3,50,000 | To Share Allotment A/c 3,50,000
2023 8 Marks Analysis of Financial Statements
From the following data, calculate Current Ratio and Quick Ratio: Current Assets = ₹4,50,000; Inventory = ₹1,50,000; Prepaid Expenses = ₹20,000; Current Liabilities = ₹2,00,000.
Current Ratio = Current Assets / Current Liabilities
= 4,50,000 / 2,00,000 = 2.25 : 1 (Ideal: 2:1)

Quick Ratio = Quick Assets / Current Liabilities
Quick Assets = Current Assets − Inventory − Prepaid Expenses
= 4,50,000 − 1,50,000 − 20,000 = ₹2,80,000
Quick Ratio = 2,80,000 / 2,00,000 = 1.4 : 1 (Ideal: 1:1)

Both ratios are above ideal — company has healthy liquidity position.
2024 8 Marks Cash Flow Statement
Under which activity (Operating/Investing/Financing) would you classify: (a) Purchase of machinery (b) Dividend paid (c) Sale of investments (d) Cash from customers?
(a) Purchase of machinery → Investing Activity (acquisition of long-term asset)
(b) Dividend paid → Financing Activity (return to shareholders; Finance company: Operating)
(c) Sale of investments → Investing Activity (disposal of long-term investment)
(d) Cash from customers → Operating Activity (primary business activity)

Key rule: Operating = core business | Investing = long-term assets/investments | Financing = raising/repaying capital + dividends/interest
⚠️ Mistake Bank Common Errors

Sacrificing Ratio vs Gaining Ratio Confusion

Students calculate sacrificing ratio at retirement and gaining ratio at admission — exactly backwards.

❌ WRONG: Calculating sacrificing ratio when a partner retires from the firm.
✅ CORRECT: Sacrificing Ratio = Old Ratio − New Ratio (used at ADMISSION — existing partners sacrifice share for incoming partner). Gaining Ratio = New Ratio − Old Ratio (used at RETIREMENT/DEATH — remaining partners gain the outgoing partner's share).

Goodwill — Wrong Treatment on Admission

Students debit Goodwill Account instead of treating it through partners' capitals.

❌ WRONG: Goodwill A/c Dr. | To New Partner's Capital A/c (when new partner brings goodwill in cash)
✅ CORRECT: When goodwill brought in cash: Cash/Bank Dr. | To New Partner's Capital. Then share premium distributed to sacrificing partners: New Partner's Capital Dr. | To Sacrificing Partners' Capital (in sacrificing ratio). Never open Goodwill A/c if not told to.

Securities Premium — Wrong Use

Students use Securities Premium for purposes not allowed under the Companies Act.

❌ WRONG: "Securities Premium can be used to pay dividends to shareholders."
✅ CORRECT: Securities Premium can ONLY be used for: (1) Issue of fully paid bonus shares, (2) Writing off preliminary/share issue expenses, (3) Writing off discount on issue of debentures, (4) Buy-back of own shares. Cannot be used for dividends or business losses.

Current Ratio — Including Wrong Items

Students include non-current items in Current Assets for ratio calculation.

❌ WRONG: Including long-term investments and goodwill in Current Assets for Current Ratio.
✅ CORRECT: Current Assets = Cash + Bank + Debtors + Inventory + Prepaid expenses + Marketable securities (short-term). Long-term investments, fixed assets, and goodwill are NOT current assets. Quick Assets = Current Assets − Inventory − Prepaid Expenses.

Cash Flow: Misclassifying Activities

Students place dividend/interest in wrong activity category.

❌ WRONG: "Dividend received is a financing activity" or "Interest paid is an operating activity for a manufacturing company."
✅ CORRECT: For non-finance companies: Interest paid = Financing Activity | Interest received, Dividend received = Investing Activity | Dividend paid = Financing Activity. Operating activities relate to core revenue-generating activities only.

Revaluation Account vs Memorandum Revaluation

Students use Memorandum Revaluation when full revaluation is required.

❌ WRONG: Using Memorandum Revaluation when assets and liabilities are actually to be restated in the books.
✅ CORRECT: Revaluation Account = Assets/liabilities are actually revalued in the books (permanent change shown in Balance Sheet). Memorandum Revaluation = Only for profit/loss distribution among partners; book values NOT changed. Use Revaluation when books are to reflect new values.

Partner's Loan vs Partner's Capital — Interest

Students forget when interest on loan is allowed vs not.

❌ WRONG: "Interest on partner's capital is charged even when there is no profit."
✅ CORRECT: Interest on Capital = allowed only from profits (not charged in case of loss, unless deed specifies otherwise). Interest on Loan = always charged as an expense (Profit and Loss A/c), even in case of loss, because loan is not capital.

Debenture Redemption — Wrong Sinking Fund Entry

Students confuse DRR (Debenture Redemption Reserve) requirement.

❌ WRONG: "DRR must be created equal to 100% of debentures outstanding."
✅ CORRECT: As per SEBI guidelines (as of syllabus), DRR is required to be created for privately placed debentures. Fully listed debentures through public issue: no DRR requirement. Amount and rules differ by category. Always check current CBSE guidelines before answering.
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🎯 Examiner's Eye Scoring Tips

🎯 Tip 1 — Ratios and Journal Entries in Admission/Retirement: Verify First

Before writing journal entries, calculate and verify all ratios: new profit-sharing ratio, sacrificing/gaining ratio, goodwill amount. A ratio error propagates through all subsequent entries. Show the ratio calculation as a separate step before the journal entries — examiners award marks for the calculation even if entries have minor errors.

🎯 Tip 2 — Journal Entries: Narration is Mandatory

Every journal entry in Accountancy must have a brief narration "(Being...)". Missing narrations cost 0.5 marks per entry. Keep narrations short: "Being goodwill brought in by C, distributed in sacrificing ratio." Don't skip this under time pressure.

🎯 Tip 3 — Financial Statement Analysis: Ideal Ratios Matter

After calculating a ratio, always state the ideal standard and interpret: "Current Ratio = 2.25:1; Ideal = 2:1; the company has adequate liquidity." This interpretation line earns 1 mark in 4-mark ratio questions. Raw calculation without interpretation is incomplete.

🎯 Tip 4 — Cash Flow: Start with Net Profit, Not Revenue

For Operating Activities (Indirect Method), start with Net Profit Before Tax, then add back non-cash items (depreciation, goodwill amortisation), then adjust working capital changes. Many students start with Cash Sales — that's the Direct Method. Know which method is required in the question.

🎯 Tip 5 — Share Issue: Follow the Call-by-Call Entry Sequence

For share issue questions, write entries in strict sequence: Application → Transfer to Capital → Allotment called → Allotment received → First Call → Final Call. Skipping a step or combining entries incorrectly loses marks. Write each step even if no adjustment is needed (write the straightforward entry).

🎯 Tip 6 — Goodwill Valuation: State the Method

Before starting goodwill calculation, name the method: "Using Average Profit Method / Super Profit Method / Capitalisation Method." Then show the formula. Named method + formula + calculation = 3 separate mark-points. Don't jump to numbers without naming the approach.

🎯 Tip 7 — Revaluation Account: List All Items Systematically

When drawing the Revaluation Account, list: Profit side = appreciation in assets, decrease in liabilities. Loss side = depreciation in assets, increase in liabilities. A systematic list prevents missing items. Then compute net revaluation profit/loss and distribute in old profit-sharing ratio.

🎯 Tip 8 — Debentures vs Shares: State the Key Difference

Questions asking to "distinguish between shares and debentures" expect at least 5 basis points. Always include: ownership vs creditor, dividend vs interest, risk, voting rights, and treatment in liquidation. A table format (5 rows × 2 columns) scores full marks and takes less time to write.

🔥 High-Probability Questions Exam Forecast
🔥🔥🔥 VERY HIGH Admission of Partner — Full Working (8 Marks)

A complete admission problem (new ratio, sacrificing ratio, goodwill treatment, revaluation account, capital accounts, revised balance sheet) appears in EVERY CBSE Accountancy paper. This single question carries 8 marks. Practice the complete sequence: ratios → goodwill entries → revaluation entries → capital adjustments → balance sheet.

🔥🔥🔥 VERY HIGH Cash Flow Statement — Indirect Method (8 Marks)

Preparing a Cash Flow Statement from comparative balance sheets and additional information appears in nearly every paper. Know the three-section format: Operating, Investing, Financing. Know which items are added back (depreciation) vs deducted (gains) from Net Profit for operating activities.

🔥🔥🔥 VERY HIGH Issue of Shares / Debentures with Full Journal Entries (8 Marks)

Issue of shares at premium with pro-rata allotment (over-subscription), or issue of debentures with redemption conditions, appears in every paper. Know entries for application, allotment (with premium), calls, and forfeiture + reissue if asked. Pro-rata calculation is frequently tested.

🔥🔥 HIGH Goodwill Valuation — All Three Methods (4–6 Marks)

Calculating goodwill using Average Profit, Super Profit, and Capitalisation methods — either one given or all three asked. Know all three methods and when each gives different results. Super Profit capitalisation and Average Profit capitalisation are the most tested variants.

🔥🔥 HIGH Ratio Analysis — Liquidity and Solvency Ratios (4–6 Marks)

Current Ratio, Quick Ratio, Debt-Equity Ratio, Proprietary Ratio, and Working Capital Turnover Ratio appear in pairs or as a set. Know formulas, ideal standards, and interpretation. Calculating ratios from a given Balance Sheet extract with additional information is the standard format.

🔥🔥 HIGH Dissolution of Partnership Firm — Realization Account (6 Marks)

Realisation Account, Bank Account, and Partners' Capital Accounts for dissolution of a firm is tested alternately with admission/retirement. Know what goes on debit vs credit side of Realisation Account. Realization expenses, outside liabilities, and partner's assets settlement are common traps.

🔥 MODERATE-HIGH Retirement of Partner — Gaining Ratio and Goodwill (6 Marks)

Gaining ratio calculation, goodwill adjustment at retirement, revaluation account, and settlement of retiring partner's loan appear every alternate year. Key distinction from admission: gaining ratio (not sacrificing) is used, and remaining partners pay goodwill to retiring partner.

🔥 MODERATE-HIGH Financial Statements of Companies — P&L and Balance Sheet (8 Marks)

Preparing Statement of Profit & Loss and Balance Sheet from trial balance with adjustments (depreciation, closing stock, outstanding expenses, accrued income, provision for tax) appears every other year. Format compliance (Schedule III) and correct classification are specifically marked.

⚡ Last-Minute Revision Quick Recall
📌 Partnership — Key Formulas and Rules
  • Sacrificing Ratio = Old Ratio − New Ratio (at Admission)
  • Gaining Ratio = New Ratio − Old Ratio (at Retirement)
  • Goodwill (Super Profit) = Super Profit × Number of Years Purchase
  • Super Profit = Average Profit − Normal Profit
  • Normal Profit = Capital Employed × Normal Rate of Return/100
  • Goodwill (Capitalisation) = Super Profit × 100/NRR
  • Interest on Capital = Capital × Rate/100 (only from profits)
  • Interest on Loan = always charged (P&L, even in loss)
📌 Company Accounts — Share Issue
  • Issue price: At par (face value) | At premium (above FV) | At discount (not allowed now)
  • Securities Premium = credit to Securities Premium Reserve A/c
  • Forfeiture: Share Capital Dr. | Securities Premium (if any) Dr. | To Share Allotment / Calls Dr. | To Forfeited Shares A/c
  • Reissue of forfeited shares: Bank Dr. | Forfeited Shares A/c Dr. | To Share Capital | Capital Reserve = remaining forfeiture credit
📌 Financial Statement Analysis
  • Current Ratio = CA / CL (Ideal: 2:1)
  • Quick/Liquid Ratio = Quick Assets / CL (Ideal: 1:1) | Quick Assets = CA − Inventory − Prepaid
  • Debt-Equity Ratio = Long-term Debt / Shareholders' Equity (Ideal: 2:1)
  • Proprietary Ratio = Shareholders' Funds / Total Assets
  • Gross Profit Ratio = Gross Profit / Net Sales × 100
  • Net Profit Ratio = Net Profit / Net Sales × 100
  • Inventory Turnover = COGS / Average Inventory
📌 Cash Flow Statement
  • Operating: Core business (cash from operations, tax paid)
  • Investing: Purchase/sale of fixed assets and long-term investments
  • Financing: Issue of shares/debentures, repayment, dividends/interest paid
  • Add to Operating Profit: Depreciation, Loss on sale, Decrease in CA, Increase in CL
  • Deduct: Gain on sale, Increase in CA, Decrease in CL
  • Net increase in cash = Operating + Investing + Financing activities
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📝 Practice Questions — Cash Flow Statement

MCQ 1 Under Indirect Method, Net Profit is adjusted for:
(A) Cash receipts only (B) Non-cash items and working capital changes (C) Capital expenditures (D) Dividend paid
Ans: (B) Non-cash items and working capital changes
MCQ 2 Purchase of Fixed Assets is classified under:
(A) Operating Activities (B) Financing Activities (C) Investing Activities (D) None of the above
Ans: (C) Investing Activities
MCQ 3 Dividend paid by a finance company (non-banking finance) is classified as:
(A) Operating (B) Investing (C) Financing (D) Depends on management
Ans: (C) Financing Activities
A-R A: Depreciation is added back to net profit while calculating cash from operating activities under indirect method.
R: Depreciation is a non-cash charge — it reduces accounting profit but does not involve any outflow of cash, so it must be added back to derive actual cash profit.
Ans: (A)

Case: Net Profit Rs 80,000. Depreciation Rs 15,000. Increase in Debtors Rs 10,000. Decrease in Creditors Rs 5,000. Increase in Inventory Rs 8,000. Taxes paid Rs 12,000.

Q1 (1M) Are non-cash adjustments needed? Ans: Yes — under indirect method, add back depreciation (non-cash) to net profit.
Q2 (3M) Calculate Cash from Operating Activities.
Ans: Net Profit 80,000; Add Depreciation 15,000 = 95,000. Less: Increase in Debtors (10,000); Less: Increase in Inventory (8,000); Less: Decrease in Creditors (5,000) = 72,000. Less: Tax paid (12,000). Net Cash from Operating Activities = Rs 60,000.
SA (3M) Distinguish between Investing and Financing Activities with two examples each.
Ans: Investing Activities relate to acquisition and disposal of long-term assets (fixed assets, long-term investments). Examples: (1) Purchase of Plant and Machinery — cash outflow; (2) Sale of Investments — cash inflow. These determine the firm's long-term asset base and investment decisions. Financing Activities relate to changes in the firm's capital structure — equity and debt. Examples: (1) Issue of Shares — cash inflow; (2) Repayment of Bank Loan — cash outflow. These show how the firm raised and repaid long-term funds. The distinction matters for analysing where the firm spends and how it funds itself.
LA (6M) State the objectives and limitations of a Cash Flow Statement.
Ans: Objectives: (1) Shows the actual inflow and outflow of cash over the period — not affected by accounting estimates. (2) Helps assess the firm's ability to generate cash to meet obligations. (3) Useful for comparing liquidity across companies regardless of accounting policies. (4) Enables planning for short-term cash requirements. (5) Shows the sources and uses of cash under three heads — operating, investing and financing. Limitations: (1) Non-cash transactions (barter, depreciation) do not appear — incomplete picture. (2) A cash-rich firm may still be unprofitable; high operating cash may mask poor profitability. (3) Easily manipulated (delaying payments, accelerating receipts at period-end). (4) Does not show the overall financial strength; must be read with Balance Sheet and P&L. (5) Historical — does not predict future cash flows.
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