Part 1 Class 12 NCERT Accountancy: Partnership and Company Accounts

What Accountancy Part 1 Covers and Why It Matters

Class 12 Accountancy Part 1 has two big blocks: partnership accounting and company accounting. Partnership chapters explain how profits, losses, assets, liabilities, goodwill, and capital are adjusted when partners join, retire, die, or dissolve the firm. Company chapters explain how a company issues shares, forfeits shares, reissues shares, issues debentures, and redeems them. The common thread is equity: accounts must show who contributed, who sacrificed, who gained, and what claim each person has. If you understand this logic, journal entries become predictable instead of memorised.

Key Terms You Must Know

Partnership Deed

A written agreement among partners stating profit-sharing ratio, interest on capital, salary, commission, drawings, and other rules used while preparing accounts.

Goodwill

The value of a firm reputation, customer base, earning capacity, and business connections over and above normal assets.

Sacrificing Ratio

The ratio in which old partners give up a part of their share in favour of a new partner. It is used to compensate old partners for goodwill.

Gaining Ratio

The ratio in which continuing partners gain the share of an outgoing partner. It is used mainly in retirement or death of a partner.

Revaluation Account

A nominal account prepared to record profit or loss due to revaluation of assets and reassessment of liabilities during admission, retirement, or death.

Securities Premium

The amount received by a company over the face value of shares. It is a capital profit and must be used only for legally permitted purposes.

How to Approach Partnership Adjustment Questions

1. Step 1: Identify the event — First decide whether the question is admission, retirement, death, dissolution, or change in profit-sharing ratio. The event tells you which ratio to use and which accounts are affected.
2. Step 2: Write old, new, sacrificing, or gaining ratio clearly — Most wrong answers start with the wrong ratio. For admission, calculate sacrificing ratio unless the question directly gives it. For retirement or death, calculate gaining ratio unless it is given.
3. Step 3: Adjust goodwill and accumulated profits — Goodwill compensates partners who sacrifice. Accumulated profits, reserves, and losses are distributed among old partners in the old profit-sharing ratio before the change becomes effective.
4. Step 4: Revalue assets and liabilities — Prepare the Revaluation Account. Increases in assets and decreases in liabilities are credited; decreases in assets and increases in liabilities are debited. Transfer profit or loss to partners capital accounts in the old ratio.
5. Step 5: Prepare capital accounts and balance sheet — After all adjustments, prepare partners capital accounts. If the question asks for new balance sheet, show revised assets, liabilities, and closing capital balances.

Worked Examples with Steps

• Example 1: A and B share profits in the ratio 3:2. C is admitted for 1/5 share. C brings Rs 40,000 as capital and Rs 20,000 as goodwill. A and B sacrifice equally. Pass goodwill adjustment. Step 1: C brings goodwill in cash, so Bank A/c is debited and Premium for Goodwill A/c is credited by Rs 20,000. Step 2: Old partners receive compensation in sacrificing ratio. Sacrificing ratio is given as equal, so A:B = 1:1. Step 3: Distribute Rs 20,000 equally: A gets Rs 10,000 and B gets Rs 10,000. Journal: Bank A/c Dr Rs 60,000 To C Capital A/c Rs 40,000 To Premium for Goodwill A/c Rs 20,000. Then Premium for Goodwill A/c Dr Rs 20,000 To A Capital A/c Rs 10,000 To B Capital A/c Rs 10,000. Final answer: Goodwill compensation is credited equally to A and B because they sacrifice equally.
• Example 2: X, Y, and Z share profits 5:3:2. Z retires. X and Y decide to share future profits 3:2. Calculate gaining ratio. Step 1: Old shares are X = 5/10, Y = 3/10, Z = 2/10. Step 2: New shares are X = 3/5 and Y = 2/5. Convert to denominator 10: X = 6/10, Y = 4/10. Step 3: Gain = New share minus Old share. X gains 6/10 - 5/10 = 1/10. Y gains 4/10 - 3/10 = 1/10. Step 4: Gaining ratio = 1/10 : 1/10 = 1:1. Final answer: X and Y gain equally, so any goodwill payable to Z will be borne by X and Y in the ratio 1:1.
• Example 3: A company issues 1,000 shares of Rs 10 each at a premium of Rs 2 per share, payable fully on application. Pass the entry. Step 1: Total money received per share = face value Rs 10 + premium Rs 2 = Rs 12. Step 2: Total bank receipt = 1,000 x Rs 12 = Rs 12,000. Step 3: Share Capital is credited only with face value = 1,000 x Rs 10 = Rs 10,000. Step 4: Securities Premium is credited with premium = 1,000 x Rs 2 = Rs 2,000. Journal: Bank A/c Dr Rs 12,000 To Share Capital A/c Rs 10,000 To Securities Premium A/c Rs 2,000. Final answer: Capital and premium must be shown separately because premium is not ordinary share capital.

Board Exam Tips and Common Traps

Always show ratios and workings before journal entries. In admission, do not assume sacrificing ratio equals old ratio unless the question says so. In retirement or death, use gaining ratio for goodwill adjustment, not old ratio. In company accounts, never credit securities premium to share capital. In revaluation, remember: asset increase is credit, asset decrease is debit; liability increase is debit, liability decrease is credit. For CBSE answers, correct format, narration, and clear working notes can earn marks even when the final balance differs slightly.

Partnership Accounts and Company Accounts Compared

Practice Questions with Solutions

• Q: A and B share profits in the ratio 4:1. They admit C for 1/5 share, which he acquires equally from A and B. Find the new profit-sharing ratio. A: Step 1: C acquires 1/5 equally from A and B, so each sacrifices 1/10. Step 2: A old share = 4/5. A new share = 4/5 - 1/10 = 8/10 - 1/10 = 7/10. Step 3: B old share = 1/5. B new share = 1/5 - 1/10 = 2/10 - 1/10 = 1/10. Step 4: C share = 1/5 = 2/10. Final answer: New ratio A:B:C = 7:1:2.
• Q: P and Q share profits 3:2. Their balance sheet shows General Reserve of Rs 50,000. R is admitted as a new partner. How should the reserve be treated? A: Step 1: General Reserve is an accumulated profit earned before R admission. Step 2: It belongs only to old partners P and Q. Step 3: Distribute Rs 50,000 in old ratio 3:2. P share = 50,000 x 3/5 = Rs 30,000. Q share = 50,000 x 2/5 = Rs 20,000. Step 4: Journal entry: General Reserve A/c Dr Rs 50,000 To P Capital A/c Rs 30,000 To Q Capital A/c Rs 20,000. Final answer: Credit P by Rs 30,000 and Q by Rs 20,000 in the old ratio.
• Q: A machine appears at Rs 80,000 in the books. On admission of a partner, it is revalued at Rs 72,000. What is the effect in the Revaluation Account? A: Step 1: Book value = Rs 80,000 and revalued amount = Rs 72,000. Step 2: Decrease in asset = 80,000 - 72,000 = Rs 8,000. Step 3: Decrease in an asset is a loss for the firm. Step 4: Loss is debited to Revaluation Account by Rs 8,000. Final answer: Debit Revaluation Account and credit Machinery Account by Rs 8,000.
• Q: A company forfeits 100 shares of Rs 10 each, on which Rs 7 per share was called and Rs 5 per share was received. Pass the forfeiture entry assuming unpaid amount is Share Call. A: Step 1: Called-up value = 100 x Rs 7 = Rs 700, so Share Capital is debited by Rs 700. Step 2: Amount received = 100 x Rs 5 = Rs 500, so Share Forfeiture is credited by Rs 500. Step 3: Unpaid amount = 100 x Rs 2 = Rs 200, so Share Call A/c is credited by Rs 200. Step 4: Journal entry: Share Capital A/c Dr Rs 700 To Share Forfeiture A/c Rs 500 To Share Call A/c Rs 200. Final answer: Debit Share Capital Rs 700; credit Share Forfeiture Rs 500 and Share Call Rs 200.

High-Value Points to Revise Before Tests

• Goodwill is adjusted through sacrificing or gaining partners, not randomly through all partners.
• Revaluation profit or loss is always transferred to old partners in the old profit-sharing ratio at admission or retirement.
• Partners capital accounts may be fixed or fluctuating; check the question before preparing the format.
• In share issue, face value goes to Share Capital and premium goes to Securities Premium.
• Forfeited shares account shows the amount already received on forfeited shares, not the unpaid amount.
• Workings for ratios, goodwill, and revaluation should be shown clearly because CBSE marking often awards step marks.

Frequently Asked Questions