UNIT I Accounts from Incomplete Records

Single Entry System: Accounts from incomplete recording of transactions (or

incomplete system) is often called single entry system. Under this system, only the
personal aspects of each transaction are recorded. But the nominal and real (except
cash account) accounts are completely ignored.
Type of Single Entry:
There are two types of single entry
1. Pure of single entry:
Under this type, only the personal accounts of
debtors and creditors are maintained in the books whereas all real and
nominal accounts are not maintained together.
2. Single entry in the popular sense: Under this method, in addition to the
personal accounts of debtors and creditors, some subsidiary books are also
written up.
Features of Incomplete Records:
The following are the chief features of accounts from incomplete records:
1. It is used by small establishments
2. Under this system, only personal accounts are prepared. It fully or partially,
ignores the impersonal accounts
3. It is an unscientific and unsystematic method
4. Profit or loss under this method is only an estimate
5. It is very difficult to ascertain the true financial position
Reasons for incompleteness:
Although double entry system offers many advantages to businessmen, some of
them keep books of account under incomplete system. The reasons behind it are as
follows:
1. Ignorance of the businessmen with regard to the statutory requirements of
keeping books of accounts
2. Lack of knowledge of keeping accounts under double entry system
3. It is economical as fewer books are to be kept
4. It is suitable to small establishments having only cash transactions
5. Since this system is incomplete, actual profit can be concealed.
Limitations of Incomplete Records:
1. No trail balance: no trail balance can be prepared as the dual aspects of
each transaction are not recorded
2. Unreliable: since the results of trading obtained under the single entry
system is incomplete, this system is unreliable
3. Incomplete profit and loss account: as nominal accounts are not
maintained, the profit and loss account is incomplete and unscientific

4. Difficulty in knowing true financial position: under single entry system,

real accounts are not maintained so the balance sheet cannot be prepared to
show the true financial position of the concern
5. Difficulty in finding errors and frauds
6. Impossibility in comparison: comparison with previous years performance
is not possible on account of incomplete information
7. Difficulty in setting financial claims
8. Tax authorities do not accept accounts prepared under incomplete
records

Ascertainment of Profit or Loss:

Under incomplete system, profit or loss for the period can be ascertained by any
one of the following two methods:

Statement of affairs method or Capital comparison method

Conversion method or Preparation of trading and profit and loss account and
balance sheet

Statement of Affairs Method

The ascertainment of profit or loss under this method involves preparation of two
statements:
(i)
(ii)

statement of affairs, and

statement of profit or loss

Statement of affairs:
Statement of affairs is the statement of assets and liabilities prepared to find out
the capital of the concern which follows the single entry system. It cannot be called
a balance sheet because the amounts shown in it are not the extract of ledger
accounts as under double entry system.
Statement of profit and loss:
Trading and profit and loss account cannot be prepared under single entry system
as no nominal accounts are maintained. However, an approximate figure of profit or
loss can be obtained in an indirect method by comparing the figures of capital at
the beginning and at the end of the financial period.

Unit II Branch and Departmental

Accounts
A business concern is often split into many parts or divisions. Such parts may be
departments or branches. In case various divisions are located under the same roof
or in the same building, they are called departments. When various divisions of the
business are located in different places, in the same city or different cities, they are
called branches.
Types of Branches:
Branches can be broadly classified into three categories. They are as follows:
1. Dependent branch
2. Independent branch
3. Foreign branch
Dependent branch
Branches not keeping full system of accounting are known as dependent branches.
These branches are depend solely on the Head Office for all their requirements, ie.,
for goods and expenses.
Features of dependent branch
1. The branch does not maintain its own set of books. Instead the Head Office
maintains record of all transaction in respect of the branch
2. Goods are received from the Head Office. However, the outside purchases by
branch are not allowed
3. Goods are often supplied by the Head Office at cost price.
4. All expenses of regular nature are directly paid by the Head Office through
cheques
5. All petty expenses at branch are paid by the branch manager from the petty
cash received in advance from the Head Office
6. Usually, branch makes sales on cash basis
7. Cash received on account of cash sales and from debtors is duly remitted to
the Head Office.
Accounting System:
The accounts of the dependent branch are maintained by the Head Office in any
one of the following ways:

1.
2.
3.
4.

Debtors system
Stock and debtors system
Final account system
Wholesale branch system

Unit III Accounts of Non-profit Organizations

In every country, there are institutions that are not profit-oriented. Such institutions
are known as non-profit institutions or non-trading organizations. Clubs,
associations, hospitals, educational institutions, trade unions, charitable institutions,
etc., are some examples of non-profit or non-trading organizations.
Features of Non-profit Organizations:
the following are the main features of non-profit organizations:
1.
2.
3.
4.
5.
6.

Rendering service to the members and to the public

No intention of earning profit
No trading activities
No credit transactions
Only cash book is maintained to record daily transactions
A summary of cash book at the end known as receipts and payments account
is prepared
7. No trail balance is prepared
8. Income and expenditure account is prepared in the place of trading and profit
and loss account
9. No capital, but have only capital fund representing accumulated surplus.
Accounting statements:
Generally non-profit entities prepare the following accounting statements
which form their final accounts.
1. Receipts and payments account
2. Income and expenditure account
3. Balance sheet
Features of receipts and payments account:
The following are the important features of receipts and payments account. Such an
account is
1. Is a summary of cash book merging cash and bank items
2. Is not a part of double entry system. But cash book is a part of double entry
system;
3. Is a real account
4. Starts with the opening cash and bank balances, and ends with the closing
cash and bank balances

5. Contains all receipts and payments of capital and revenue nature

6. Does not reveal the working results (i.e., profit or loss)
7. Records actual receipts and payments.
Features of Income and Expenditure account:
1. It is a revenue statement of non-trading concerns
2. It is prepared in the place of trading and profit and loss account of the trading
concern
3. It has no opening balance

UNIT IV: Partnership Accounts

Partnership DEED:
The document in writing containing the various terms and conditions as to the
relationship of the partners to each other is called the Partnership Deed.
Contents of Partnership Deed:
The partnership deed usually contains the following details or clauses:
1.
2.
3.
4.
5.
6.
7.
8.

Name of the firm

Nature of the firms business
Name and address of all the partners
The principal place of business
Duration of partnership, if any
Amount of capital to be contributed by each partner
The profit sharing ratio
Rate of interest, if any, on capital and drawings, and loans and advances of
partners
9. Amount of salary or commission payable to partner
10.Division of work among the partners and management of the business
11.Mode of valuation of goodwill whenever necessary
12.Arbitration clause in the case of disputes among partners
13.Procedure for maintaining accounts and getting them audited
14.Procedure to be followed in the event of dissolution of the firm and
settlement of accoutns
15.Rights, duties and liabilities of partners
16.Mode of auditors appointment of the firm
17.Valuation of goodwill at the time of retirement or death of partner.
Accounting Adjustments:
The following are the usual accounting problems arising at the time of admission of
a partner:
1. Capital of the new partner

When a new person is admitted in a firm, he is usually asked to bring in

some amount or certain assets for capital. Then the following journal entry
is to be passed:
Cash/other assets a/c
Dr.
New partners capital a/c
2. Computation of the new profit sharing ratio
Usually the profit sharing ratio is mutually decided by all partners. On
admission, the incoming partner is entitled to share the profits or bear the
losses with the other partners. Thus the profit sharing ratio of the partners
will change.
Sacrificing ratio:
Sacrificing ratio = Old share New share
3.
4.
5.
6.

Treatment of goodwill and joint life policy

Revaluation of assets and liabilities
Adjustment of reserves and other accumulated profits or losses
Adjustment of capital accounts of the partners

Good will:
Goodwill is the super-profit earning capacity of a business. It is the value of the
reputation of a firm in respect of profits expected in future over and above the
normal rate of profits.
Factors affecting goodwill:
1. Location: a favorable location of the business helps to a great extent in
attracting customers. It increases the profitability and the value of goodwill.
2. Nature of business: a business dealing in goods having a stable demand
will have a higher value of goodwill as compared to the one which does not
have such a feature
3. Time: a business older in age will have more goodwill than a recently
established one.
4. Efficiency of management: a business managed by persons of high
efficiency enjoys the advantage of high productivity and cost efficiency.
Hence, its goodwill will be greater
5. Capital requirements: a business requiring less capital will have many
buyers and therefore, the value of its goodwill will high
6. Market condition: the monopoly conditions or limited competition enables a
business concern to earn high profits. Hence the value of its goodwill will also
be high
7. Special advantage: a business which enjoys special advantages, such as
import licenses, assured supply of electricity at low rates, etc., has higher
degree of goodwill.
Need for valuation of goodwill

The need for valuation of goodwill arises in the following circumstances:

1.
2.
3.
4.
5.

Admission of a partner
Retirement or death of a partner
Change in the profit sharing ratio of partners
Amalgamation of partnership firm with another firm
Sale of partnership business

Methods of valuating goodwill

The method of valuation of goodwill is usually mentioned in the partnership deed.
The following are some common methods of valuing goodwill:
1.
2.
3.
4.
5.

Average profit method

Weighted average profit method
Super-profit method
Capitalization method
Present value of super-profits method

Retirement of a partner:
A partner may withdraw from the business for various reasons, for example, shift in
business interest and old age. Such a situation is termed as the retirement of a
partner.
Accounting problems on retirement:
The retirement of a partner involves the following accounting problems:
1.
2.
3.
4.
5.
6.
7.
8.
9.

Change in the profit sharing ratio

Computation of gaining ratio
Adjustment regarding goodwill
Distribution of reserves and undistributed profits and losses
Revaluation of assets and liabilities
Determination of profit or loss up to the date of retirement
Computation of the total amount due to the retiring partner
Settlement of the amount due to the retiring partner
Adjustment of capitals of the continuing partners

Death of a partner:
On the death of any one of the partners, the partnership comes to an end. But the
firm may continue with the remaining partners. From the accounting point of view,
the death of a partner is quite similar to the retirement of a partner. However, there
are some differences between death and retirement. They are as follows:
1. Death may happen at any time
2. In the case of death, the partners connection with the firm is broken
automatically.
3. On death, the amount payable to the deceased partner is transferred to his
legal heirs or executors.
Dissolution of Partnership:

Any change in the relation of the partners is called dissolution of partnership. In

other words, it is the termination of the original partnership agreement among the
partners.
The dissolution of partnership takes place in the following circumstances:
1.
2.
3.
4.
5.
6.
7.
8.

Change in profit sharing ratio among partners

Admission of a new partner
Retirement of a partner
Death of a partner
Adjudication of a partner as an insolvent
Merger of partnership with another
On the completion of the purpose for which it is formed
On the expiry of the period for which it is formed.

Dissolution of FIRM:
The dissolution of partnership of all the partners in a firm is called the dissolution of
firm. In such a case, the business of the firm is closed down and its affairs are
wound up. The assets are realized and the liabilities are paid off.

UNIT V : Company Accounts

Forfeiture of Shares:
Forfeiture means cancellation. Hence, forfeiture of shares means cancellation of
shares. If a shareholder fails to pay the allotment or calls made on him, the directors
can forfeit the shares held by him. The shareholder whose shares are forfeited
ceases to be a member of the company.
Conditions for forfeiture of shares:
1. Shares can be forfeited only on non-payment of allotment or calls money due
2. Share can be forfeited only if the articles of association allows it
3. The directors should give clear 14 days notice to the defaulting shareholder
asking him to pay the amount due.
4. The notice should also be stated that if the shareholder fails to pay the
amount within the prescribed date, the shares will be forfeited.
5. The directors should pass the resolution approving the forfeiture.
Forfeiture of shares issued at Par
When the company forfeits the shares issued at Par, the following entry should be
recorded:
Share capital a/c

Dr.

Forfeited shares a/c

Share allotment a/c
Forfeiture of shares issued at a Premium
Share capital a/c Dr.
Securities premium a/c
Dr.
Forfeited shares a/c
Share allotment a/c
Share allotment a/c
And/or
Share call/calls a/c
Forfeiture of shares issued at a Discount
Share capital a/c Dr.
Forfeited shares a/c
Discount on issue of shares a/c
Share allotment and/or
Share call/calls a/c
Reissue of forfeited shares:
The directors can either cancel or reissue the forfeited shares. In most cases, these
shares are reissued at par, at a premium or at a discount.
Accounting treatment for reissue of forfeited shares:
1. For reissue of forfeited shares
Bank a/c
Dr.
Forfeited shares a/c
Dr.
Share capital a/c
2. For transferring balance in the forfeited shares account to capital reserve
Forfeited shares a/c
Dr.
Capital reserve a/c