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Reconstitution of the Firm:

It refers to change in Existing agreement of Partnership Deed. Reconstitution of the Firm takes Place when

There is Change in profit Sharing Ratio

On admission, retirement or Death of a Partner

On Amalgamation of two or more Partnership Firms

Determination of Sacrificing Ratio & Gaining Ratio

Sacrificing ratio

The ratio in which partners sacrifice their share of Profit in favour of other partners of the firm.

Sacrificing Ratio /Share of Partner = Old Ratio of Partner – New Ratio of Partner

Gaining Ratio

The ratio in which partners gain their share of Profit ratio due to sacrifice made by other Partners.

Gaining Ratio /Share of Partner = New Ratio of Partner – Old Ratio of Partner

Accounting Treatment of Goodwill/ Premium for Goodwill

Whenever, there is change in Profit Sharing Ratio we pass Journal entry to adjust goodwill A/C by debiting Gaining partners’ capital A/C and Crediting Sacrificing Partners’ Capital A/C by an amount which can compensate Sacrificing Partner/s loss due to sacrifice in their Profit sharing ratio by Gaining Partner/s for acquisition of their shares.

Journal Entry passed is

Gaining Partners’ Capital A/C/ Current A/C ………………Dr

To Sacrificing Partners’ Capital A/C/ Current A/C

Amount of Compensation payable by Gaining Partner to Sacrificing Partner = Firm’s Goodwill Value × Share of Profit Gained.

Note: In case, Multiple Partners sacrifice, then above amount will be credited to sacrificing Partners’ Capital A/C in sacrificing ratio.

For Example,

Partner C Gained 2/10 share equally from Partner A & B that is 1/10 from Partner A and 1/10 from Partner B. value of Goodwill is Rs. 100000. In this case

Amount of Compensation payable by Gaining Partner to Sacrificing Partner = Firm’s Goodwill Value × Share of Profit Gained = 2/10 × Rs. 100000 = Rs. 20000

Amount credited to Partner A & B Capital A/C will be in sacrificing ratio that is 1:1.

1/2 × Rs. 20000 = Rs. 10000 Payable to Partner A.

1/2 × Rs. 20000 = Rs. 10000 Payable to Partner B.

Journal Entry:

C’s Capital A/C ………………..Dr    20000

To A’s capital A/C                                         10000

To B’s capital A/C                                          10000

Accounting Treatment of Existing Goodwill

Existing Goodwill means Goodwill appearing in Balance Sheet. It is a loss to the Firm and is written off by debiting Partners’ Capital / Current A/C in their Old Profit Sharing Ratio.

Journal Entry passed for the same is

Partners’ Capital / Current A/C………………..Dr

To Existing Goodwill A/C

Accounting Treatment of Reserves & Accumulated Profits or Losses

These items are transferred to Partners’ Capital A/C/ Current A/C  in their Old Profit Sharing Ratio, if appearing in Balance Sheet, before Reconstitution of the Firm takes Place.

Journal Entries are as follows:

For Transfer of reserve & Accumulated Profits:

Reserve A/C……………………………………………….Dr

Investment Fluctuation Reserve A/C………….Dr

Workmen Compensation Reserve A/C………..Dr

Accumulated Profit / P&L A/C……………………..Dr

To Partners’ Capital A/C/ Current A/C

For Transfer of Accumulated Losses:

Partners’ Capital A/C/ Current A/C …………………..Dr

To Accumulated Losses / P&L A/C

To Advertisement Expenditure A/C

To Deferred Revenue Expenditure A/C

Note:

Employees’ Provident Fund is a Liability. So it is not distributed among partners.

Reserves, Accumulated Profit & Losses are accounted even if question is silent with regard to it.

Investment Fluctuation Reserve (IFR)

Reserve set aside out of Profit to meet fall in Market Value of Investment. Accounting treatment of IFR can be understood with the help of following cases.

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Goodwill: Nature & Valuation

Goodwill

Goodwill is refers to brand image of a company and monetary valuation of income that it can generate due to its brand value in the market.

Goodwill is of two types:

Self Generated Goodwill – It is brand image of a business organisation generated over a period of time of its business in the market. It is not accounted or written in Balance Sheet.

Purchased Goodwill – It is excess of price paid for a business as a whole over the Book Value or Agreed Value of all tangible net assets purchased.

Methods of valuation of goodwill

There are three methods for valuing Goodwill:

1. Average Profit Method

2. Super Profit Method

3. Capitalisation Method

1. Average Profit Method

Under this Method, Goodwill can be calculated either by Simple Average Profit Method or Weighted Average Profit Method.

A. Simple Average Profit Method

Goodwill = Average Profit × Number of Years ‘Purchase.

Average Profit = Sum total of profits of Business ÷ Number of years of Normal Profit

Number of years’ Purchase means number of years for which Business Organisation who is paying for Goodwill will be able to earn same amount of Profit after change of Ownership of Business.

Calculation of Profit in case of Adjustments to be made Rs. Profit or Loss before Adjustment Add: Abnormal Losses such as Loss by Fire, Loss on sale of Asset Over Valuation of Opening Stock (It has led to reduction in Profit) Undervaluation of Closing Stock (It has led to reduction in Profit) Non Recurring expenses (expenses which do not occur on regular Basis) Capital Expenditure charged as Revenue Expenditure (Purchase of Machinery wrongly debited to Purchase Account)

Less: Abnormal Gains (Profit on Sale of Fixed Assets) Over Valuation of Closing Stock or Under Valuation of Opening Stock (It has increased Profit) Non Recurring Income (Incomes which do not occur on regular Basis) Partners’ Remuneration, if not deducted

Profit after Adjustment / Adjusted Profit

B. Weighted Average Profit Method Weighted Average Profit = ∑ (Pn × Wn) ÷ ∑W = Sum total of (Profit of respective year × weight of Respective year) ÷ Sum Total of Weight. Goodwill = Weighted Average Profit × Number of years’ Purchase

2. Super Profit Method

Excess of Actual profit over Normal Profit is known as Super Profit.

Goodwill = Super Profit × Number of Years’ Purchase.

Super Profit = Adjusted Profit – Normal Profit

Normal Profit = Average Capital Employed × Normal Rate of Return / 100

Average Capital Employed = (Opening Capital Employed + Closing Capital Employed)/2

Net Asset or Capital Employed = Capital + Reserve & Surplus – Fictitious Assets – Non Trade Investment

= All Assets (Except Goodwill & Fictitious Assets & Non Trade Investment) – Non Current Liability – Current Liability

Kindly Refer Ratio Analysis Chapter for more Details on Capital Employed / Net Asset

Normal Rate of Return (NRR) is the return earned by similar type of business of same Industry.

3. Capitalisation Method

Two Methods studied under it is:

A. Capitalisation of Average Profit

Goodwill = Total Capitalised Value of Business – Net Assets

Capitalised Value of Business = Average Profit × 100 /NRR

Net Asset or Capital Employed = Capital + Reserve & Surplus – Fictitious Assets – Non Trade Investment

= All Assets (Except Goodwill & Fictitious Assets & Non Trade Investment) – Non Current Liability – Current Liability

Kindly Refer Ratio Analysis Chapter for more Details on Capital Employed / Net Asset

B. Capitalisation of Super Profit

Goodwill = Super Profit × (100 / NRR)

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Partnership

Association of two or more persons who agree to do business carried by all or any of them and share its profits and losses.

Partner: Members of Partnership.

Firm: All members combined together to form a partnership is collectively known as Firm.

Firm Name- The name under which Partnership Business is carried on.

Partnership Deed:

A written agreement signed by all partners, that contains terms and conditions of Partnership such as,

Description of Partners,

Description of Firm

Nature of Business,

Address of Firm

Interest Rate on Partners’ Loan

Interest Rate on Capital & Drawing

Capital Contribution of Each Partner

Profit Sharing Ratio

Provisions related to Admission, retirement & Death of Partner

Remuneration to Partners etc.

Provisions of Partnership Act, 1932 in Absence of Partnership Deed

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Misri Playway play school and Day care Sector 122 (at Ajnara Ambrosia) https://www.instagram.com/p/B8YTum2HC03/?igshid=nt25imhdk26r

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Misri Playway play school and Day care Sector 122 (at DtF, Sector 119, Noida) https://www.instagram.com/p/B8YTjamnCTq/?igshid=k3c0t9pjykrq

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Misri Playway play school and Day care Sector 122 (at Rg Residency, Sector 120, Noida) https://www.instagram.com/p/B8YTeV-nGEZ/?igshid=6kceidw4u8pa

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Misri Playway play school and Day care Sector 122 (at Janta Flat-Sector 122) https://www.instagram.com/p/B8YTXeIHIqY/?igshid=162mxkpsc2cij

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(via https://www.youtube.com/watch?v=w7FHujv7LQU)

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(via https://www.youtube.com/watch?v=2LKFSSHbpsQ)

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(via https://www.youtube.com/watch?v=bcWR8D23sRg)

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(via https://www.youtube.com/watch?v=bcWR8D23sRg)

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(via https://www.youtube.com/watch?v=N1c8OuKYggY)

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(via https://www.youtube.com/watch?v=orvUUkbW0Tg)

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accounting for debentures loss on issue of debentures 

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# VIDEO 11 PART II - Forfeiture and Reissue of Shares Class 12 Accounts ...