Comprehensive CBSE Question Bank in Accountancy XII (Term II)

CBSE II Question Bank in Accountancy CLASS 12 Features Short Answer Type Questions Long Answer Type Questions Strictly Based on the Latest CBSE Term-wise Syllabus Case Study Based MCQs Chapter at a Glance Very Short Answer Type Questions



Comprehensive CBSE Question Bank in Accountancy Term–II (FOR CLASS XII) (According to the Latest CBSE Examination Pattern) By A.S. Siddiqui CMA from The Institute of Cost Accountants of India MBA from Indian Institute of Management, Bangalore B. Com (Hons.) from Delhi University   LAXMI PUBLICATIONS (P) LTD (An ISO 9001:2015 Company) BENGALURU • CHENNAI • GUWAHATI • HYDERABAD • JALANDHAR KOCHI • KOLKATA • LUCKNOW • MUMBAI • RANCHI NEW DELHI

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Contents Part A 3-33 37-74 Unit I: Accounting for Not-for-Profit Organisations 75-93 1. Accounting for Not-for-Profit Organisations 97-108 Unit II: Accounting for a Partnership Firm 111-130 1. Retirement and Death of a Partner  131-146 2. Dissolution of a Partnership Firm 149-156 Unit III: Company Accounts 157-165 1. Accounting for Debentures Part B Unit I: Analysis of Financial Statements 1. Financial Statements of a Company  2. Cash Flow Statement OR Part B Unit I: Computerised Accounting 1. Using Computerised Accounting System  2. Database Management System

Syllabus Accountancy–XII (Term-II) (Code No. 055) (2021-22) Theory: 40 Marks Duration: 90 minutes MARKS Part A UNIT I: Accounting for-Not-for Profit Organisations 10 UNIT II: Accounting for Partnership Firms: 12 1. Retirement and Death of a Partner 8 2. Dissolution of Partnership Firms 10 UNIT III: Company Accounts: 1. Accounting for Debentures 10 40 Part B Unit I: Analysis of Financial Statements: 1. Financial Statements of a Company (i) Comparative and Common Size Statements 2. Cash Flow Statement Or UNIT I: Computerised Accounting 1. Using Computerised Accounting System 2. Database Management System Total Part A Unit I : Accounting for Not-for-Profit Organisations Units/Topics Learning Outcomes • Not-for-profit organizations: concept. After going through this Unit, the students • Receipts and Payments Account: features will be able to: • state the meaning of a Not-for-profit and preparation. • Income and Expenditure Account: features, organisation and its distinction from a profit making entity. preparation of income and expenditure • state the meaning of receipts and payments account and balance sheet from the given account, and understanding its features. receipts and payments account with • develop the understanding and skill of additional information. preparing receipts and payments account. • state the meaning of income and expenditure Scope: account and understand its features. • develop the understanding and skill of (i) Adjustments in a question should not preparing income and expenditure account exceed 3 or 4 in number and restricted to and balance sheet of a not-for-profit subscriptions,consumption of consumables organisation with the help of given receipts and sale of assets/ old material. and payments account and additional information. (ii) Entrance/admission fees and general donations are to be treated as revenue receipts. (iii) Trading Account of incidental activities is not to be prepared.

Unit II : Accounting for a Partnership Firm Accounting for a Partnership firm - • explain the effect of retirement / death of a Reconstitution and Dissolution. partner on change in profit sharing ratio. • Retirement and death of a partner: • develop the understanding of accounting effect of retirement / death of a partner on treatment of goodwill, revaluation of change in profit sharing ratio, treatment of assets and re-assessment of liabilities and goodwill, treatment for revaluation of assets adjustment of accumulated profits and and reassessment of liabilities, adjustment reserves on retirement / death of a partner. of accumulated profits and reserves and • develop the skill of calculation of deceased preparation of balance sheet. partner's share till the time of his death. • Calculation of deceased partner’s share of • discuss the preparation of the capital profit till the date of death. accounts of the remaining partners and the Dissolution of a partnership firm: balance sheet of the firm after retirement / meaning of dissolution of partnership and death of a partner. partnership firm, types of dissolution of a • understand the situations under which a partnership firm can be dissolved. firm. Settlement of accounts - preparation • develop the understanding of preparation of realization account, and other related of realisation account and other related accounts: capital accounts of partners accounts. and cash/bank a/c (excluding piecemeal distribution, sale to a company and insolvency of partner(s)). Note: (i) If realized value of an asset is not given, it is to be presumed that it has not realised any amount. (ii) If a partner has borne and/ or paid the realisation expenses, it should be stated. Unit III : Accounting for Companies Units/Topics Learning Outcomes Accounting for Debentures After going through this Unit, the students • Debentures: Issue of debentures at par, will be able to: at a premium and at a discount. Issue of • explain the accounting treatment of different debentures for consideration other than cash; categories of transactions related to issue of Issue of debentures with terms of redemption; debentures. debentures as collateral security- concept, • develop the understanding and skill of writing interest on debentures. Writing off discount/ of discount / loss on issue of debentures. loss on issue of debentures. • understand the concept of collateral security Note: Discount or loss on issue of debentures to and its presentation in balance sheet. be written off in the year debentures are allotted • develop the skill of calculating interest on from Security Premium Reserve/ Capital Reserve/ • debentures and its accounting treatment. Statement of Profit and Loss as Financial Cost • state the meaning of redemption of debentures. (AS16) in that order. Note: Related sections of the Companies Act, 2013 will apply. Concept of Tax Deducted at Source (TDS) is excluded.

Part B Unit I : Analysis of Financial Statements Units/Topics Learning Outcomes Financial statements of a Company: After going through this Unit, the students • Tools for Financial Statement Analysis: will be able to: Comparative statements, common size • develop the understanding and skill of statements. preparation of comparative and common size financial statements. Units/Topics Learning Outcomes • Meaning, objectives and preparation (as per After going through this Unit, the students AS 3 (Revised) (Indirect Method only) will be able to: Note: • state the meaning and objectives of cash flow statement. (i) Adjustments relating to depreciation and amortization, profit or loss on sale of assets • develop the understanding of preparation of including investments, dividend (both final Cash Flow Statement using indirect method and interim) and tax. as per AS 3 with given adjustments. (ii) Bank overdraft and cash credit to be treated as short term borrowings. (iii) Current Investments to be taken as Marketable securities unless otherwise specified. Note: Previous years’ Proposed Dividend to be given effect, as prescribed in AS-4, Events occurring after the Balance Sheet date. Current years’ Proposed Dividend will be accounted for in the next year after it is declared by the shareholders. Or Part B: Computerised Accounting Unit I : Computerised Accounting Using Computerised Accounting System • Steps in installation of CAS, codification and Hierarchy of account heads, creation of accounts. • Data: Entry, validation and verification. • Adjusting entries, preparation of balance sheet, profit and loss account with closing entries and opening entries. • Need and security features of the system. Unit II : Database Management System (DBMS) • Concept and Features of DBMS. • DBMS in Business Application. • Generating Accounting Information – Payroll.

Part A Unit I: Accounting for Not-for-Profit Organisations 1. Accounting for Not-for-Profit Organisations



1CHAPTER Retirement and Death of a Partner CHAPTER AT A GLANCE • The ratio prescribed as per partnership deed is termed as old ratio, existing partners share profit in such prescribed ratio. • In case of retirement/death the ratio in which remaining partners share future profits/ losses is termed as new ratio. • The remaining partners may decide to keep their capital contributions in their profit sharing ratio at the time of retirement/death of a partner. • Gaining ratio is the ratio in which the continuing partners have acquired the share from the retiring deceased partner. Gaining Ratio = New Ratio – Old Ratio. • As per accounting guidelines it is advised to prepare revaluation account at the time of retirement/death of a partner, to show the assets and liabilities at their current values. • The rate of interest payable to deceased partner on the amount remained unpaid as per Sec. 37 of the Indian Partnership Act @ 6% p.a. • Retiring partner/deceased partner may be paid in one lump sum or in installments with interest. • If goodwill exists in Old Balance Sheet, distribute it among all partners in old profit sharing ratio • Settlement of Retiring Partner Account is done in three situations: (i) Lump sum cash payment, the effect will be recorded in partners’ capital and cash account (ii) Entire amount is transferred to its loan and then it is shown on the Liability side of Balance Sheet. (iii) Partly cash payment and partly through loan. • Interest on loan is computed on outstanding loan amount. • In case of death of a partner, if profits are to be taken out of sales basis, do not multiply it with time factor i.e., date up to which he was alive. • In case of a death, if a partner dies the 15th of any month then it should not be calculated in days, but if he dies on any other date his share should be calculated according to number of days be alive/365. 37

38 Accountancy—XII VERY SHORT ANSWER TYPE QUESTIONS 1. When can a partner retire from a firm? Ans. A partner may retire from the firm under the following conditions: • if there is an agreement to the effect • if all partners consent to his retirement • by notice of a partner if at will 2. In case of a partner’s retirement what is his entitlement? Ans. A retiring partner is entitled to the following: • Share of goodwill • Revaluation Profit and Other Reserve • Balance in Capital/Current Account 3. If the goodwill raised at the time of retirement of a partner is to be written-off then the capital accounts of the remaining partners are debited in what ratio? Ans. If the goodwill raised at the time of retirement of a partner is to be written-off then the capital accounts of the remaining partners are to debited in the New Profit Sharing Ratio. 4. What type of an account can the joint Life Policy Account be categorised as? Ans. Joint Life Policy Account is a Real Account. 5. When the Joint Life Insurance Policy premium is treated as an expense, where is the amount received, on death of the partner, transferred to? Ans. If the Joint life policy Premium is treated as an expense, the amount received on the death of a partner is transferred to Partner’s Capital Account. 6. Name the account which is opened to credit the share of profit of the deceased partner, till the time of his death to his Capital account. Ans. The account which is opened to credit the share of profit of the deceased partner is Profit and Loss Suspense Account. 7. What is Employees’ Provident Fund? Ans. Employees’ Provident Fund represents the statutory liability due to the employees towards Provident Fund and it is not an accumulated profit, hence it is not distributed among the partners. 8. Is Machine Replacement Fund distributed among partners in case of Retirement or death of a partner? Give reasons. Ans. Machine Replacement Fund is in the nature of accumulated depreciation and not in nature of accumulated profit and hence it is not distributed among the partners. 9. Anil, Birender and Chetan are partners sharing profits in the ratio of 6 : 5 : 4. Calculate their new profit sharing ratios if (i) Anil retires; (ii) Birender retires; (iii) Chetan retires. Ans. Old Ratio of Anil, Birender and Chetan = 6 : 5 : 4.

Retirement and Death of a Partner 39 New ratio of the remaining partners will be calculated by striking out the share of the retiring partner. Thus, When Anil retires, the new ratio between Birender and Chetan will be 5 : 4 When Birender retires, the new ratio between Anil and Chetan will be 6 : 4 When Chetan retires, the new ratio between Anil and Birender will be 6 : 5 10. X, Y, Z and A are partners sharing profits in the ratio of 5 : 3 : 1 : 2. Calculate the new profit sharing ratio if Y and Z retire from the firm. Ans. Old Ratio of X, Y, Z and A = 5 : 3 : 1 : 2. When Y and Z retire, the new ratio between X and A will be 5 : 2. 11. A, B, and C are partners sharing profits in the ratio of 2/3 : 1/4 : 1/12. Calculate the new ratio if A retires. Ans. Old ratio of A, B and C is 2 : 1 : 1 . 3 4 12 This can be written as 8:3:1 or 8 : 3 : 1 12 Thus, when A retires, the new ratio between B and C will be 3 : 1. 12. P, Q, R and S were partners sharing profits in the ratio of 5 : 4 : 3 : 1. P and S retire from the firm. Calculate the gaining ratio and new profit sharing ratio of Q and R. Ans. Old Ratio of P, Q, R and S is 5 : 4 : 3 : 1 When P and S retire: Gaining Ratio between Q and R is 4 : 3. New Ratio between Q and R is 4 : 3. 13. On 1st April, 2018 A, N and P were partners sharing profits and losses in the ratio of 2/5, 2/5 and 1/5, respectively. On this date N retires. The New profit sharing ratio of A and P will be 3/4 and 1/4, respectively. Calculate the gaining ratio. Ans. Gaining Ratio = New Ratio – Old Ratio \\ Gaining Ratio of A = =3 – 2 1=5 – 8 7 45 20 20 Gaining Ratio of P = =1 – 1 =5 – 4 1 45 20 20 Gaining Ratio between A and P = 7 : 1 or 7 : 1. 20 20 14. On Ist April, 2018 X, Y and Z were partners sharing profits and losses in the ratio of X 5/10, Y 3/10 and Z 2/10, respectively. On this date B retires. The new profit sharing ratio of X and Z will be X 3/5 and Z 2/5. Calculate gaining ratio. Ans. Gaining Ratio = New Ratio – Old Ratio

40 Accountancy—XII \\ X’s Gaining Ratio = 3 –=150 6=– 5 1 5 10 10 Z’s Gaining Ratio = 2 –=3 4=– 2 2 5 10 10 10 Gaining Ratio between X and Z = 1:2 or 1 : 2. 10 10 15. X, Y and Z are partners sharing profits in the ratio of 1/2 : 1/3 : 1/6. Z retires and X and Y decide to share future profits equally. Calculate the gaining ratio. Ans. Gaining Ratio = New Ratio – Old Ratio \\ X’s Gaining Ratio = 1–1 =0 22 Y’s Gaining Ratio = 1 – 1 = 1 2 3 6 Thus, X gains nothing, whereas Y gains 1 th. 6 16. A, B, C and D are partners sharing profits in the ratio of 5 : 4 : 3 : 2. A retires and B, C and D decide to share the profits and losses equally in future. Calculate the gaining ratio. Ans. Gaining Ratio = New Ratio – Old Ratio \\ B’s Gaining Ratio = =1 – 4 1=4 – 12 2 3 14 42 42 C’s Gaining Ratio = 1=– 3 1=4 – 9 5 3 14 4 42 D’s Gaining Ratio = 1=– 2 1=4 – 6 8 3 14 42 42 Hence, Gaining Ratio of B, C and D = 2:5:8 or 2 : 5 : 8. 42 42 42 17. Neha, Sita and Geeta are partners. Sita retires. Calculate new ratio if continuing partners acquired her share in the ratio of 2 : 3. Also mention the gaining ratio. Ans. Neha will gain 2 of 1 = 2 5 3 15 Hence, Neha’s new share = 1 + 2= 5 + 2= 7 3 15 15 15

Retirement and Death of a Partner 41 Geeta’s will gain = 3 15 Hence, Geeta’s new share = 1 + 3= 5 + 3= 8 3 15 15 15 New Ratio of Neha and Geeta = 7:8 or 7 : 8. 15 15 Gaining Ratio: Since Neha and Geeta have acquired Sita’s share in the ratio of 2 : 3, the gaining ratio will be 2 : 3. 18. Suresh, Ramesh and Gopesh are partners sharing profits in the ratio of 1/9 : 1/3 and 5/9. Gopesh retires and surrenders 3/4th of this share in favour of Suresh and remaining in favour of Ramesh. Calculate the new ratio and gaining ratio. Ans. Gopesh’s share will be divided between Suresh and Ramesh in the ratio of 3:1 44 Suresh will gain 3 of 5 = 15 4 9 36 Hence, Suresh’s new share = 1 + 1=5 4 + 1=5 19 9 36 36 36 Ramesh will gain 1 of 5 = 5 4 9 36 Hence, Ramesh’s new share = 1 + 1=5 12 + =5 17 3 36 36 36 New Ratio of Suresh and Ramesh = 19 : 17 or 19 : 17 36 36 Gaining Ratio: Since Z has surrendered his share of profit in the ratio of 3 : 1 , the gaining ratio will be 3 : 1 between X and Y. 4 4 19. X, Y, Z and F are partners sharing profits in the ratio of 4 : 3 : 2 : 1. A and C retire from the firm. Calculate the new profit sharing ratio of Y and F. Ans. Old Ratio of X, Y, Z and F = 4 : 3 : 2 : 1. When X and Z, retire, the new ratio between Y and F will be 3 : 1. 20. P, Q and R are partners sharing profits in the ratio of 1 : 3 : 1 . Calculate the new ratio if R retires. 2 8 8 Ans. Old Ratio of P, Q and R = 1:3:1 288

42 Accountancy—XII This can be written as 4:3:1 or 4 : 3 : 1 8 Thus, when R retires, the new ratio between P and Q will be 4 : 3. SHORT ANSWER TYPE QUESTIONS 1. A, B and C are partners sharing profits in the ratio of 3 : 2 : 1. B retires from the firm. Calculate new profit-sharing ratio of A and C. Ans. Let the total share be ` 1 B’s share 2 6 Combined share of A and C 3+1 ⇒ 4 66 6 A’s share out of 4 is 3 66 A’s share out of 1 = 3×6 ⇒ 3 64 4 C’s share out of 4 is 1 66 C’s share out of 1 = 1×6 ⇒ 1 64 4 Hence, New Ratio between A and C = 3 : 1 2. X, Y and Z are partners sharing the profits and losses in the ratio of 25 : 15 : 9. Y retires. It is decided that the profit sharing ratio between X and Z will be the same as existing between Y and Z. Calculate the new profit sharing ratio and gaining ratio. Ans. Ratio of Y and Z = 15 : 9, i.e. 5 : 3 Therefore, new ratio of X and Z should be 5 : 3 Gaining Ratio = New Share – Old Share X’s share = 5 – 25 ⇒ 45 8 49 392 Z’s share = 3– 9 ⇒ 75 8 49 392 Gaining Ratio = 45 : 75 or 3 : 5 3. What is Machine Replacement Fund Investment? Ans. If a firm invests the machine replacement fund in the capital market for some period in that case such investment is termed as Machine Replacement Fund Investment and is shown on assets side of Balance Sheet and hence not distributed among the partners.

Retirement and Death of a Partner 43 4. What is Workmen’s Compensation Fund? Ans. Workers may meet with an accident any time and damage their body parts. In such cases firm is required to pay compensation. The firm must create Workmen’s Compensation Fund. Actual claims will be met out of this fund and the balance will be transferred to Partner’s Capital Account. 5. What is Investment Fluctuation Reserve? Ans. The profit or loss of an investment firm, from the purchase and sale of securities (either debited or credited, impact the Investment Fluctuation Reserve. Such reserve shall be available for the payment of income tax in respect to profits made on the sale of securities. 6. Who is an outgoing or a retiring partner? Ans. A partner retires from a partnership business because of old age, illness, etc. Generally, a partnership does not come to an end if one of the partners retire and all other partners continue with their business. So, the partner leaving the partnership firm is known as a retiring or an outgoing partner. 7. State the various cases of retirement of a partner under the Partnership Act. Ans. As per the Partnership Act, 1932, a partner may retire from the firm. (i) With the consent of all the partners. (ii) As per agreement to the effect. (iii) By giving notice in writing to all the partners, if partnership is at will. 8. Give the journal entry for — Increase in the value of Assets. Ans. The journal entry for increase in value of the assets will be as follows: Sundry Assets A/c Dr. (Increased value) To Revaluation A/c (Being value of assets increased) 9. What is new profit-sharing ratio? Ans. The new profit-sharing ratio is the ratio in which the continuing partners will share their profit. The share of each remaining partner will be the sum total of his old share of profit in the firm and the portion of the retiring partner’s share of the profit acquired. 10. Give the journal entry for decrease in the value of assets in case of retirement of a partner. Ans. The journal entry for Decrease in the value of assets will be: Revaluation A/c Dr. (with the Decrease value) To Sundry Assets A/c (Being value of assets decreased) 11. Why is new profit ratio calculated at the time of death or retirement of a partner? Ans. When a partner retires or dies, his share of profit is acquired by the remaining partners. The acquiring of shares by remaining partners increases the partner’s share which

44 Accountancy—XII results in computation of new profit sharing ratio. The new sharing ratio is computed as follows: Net Profit Sharing Ratio = Old Share + Acquired Share from retiring partner. 12. What is the meaning of gaining ratio? Ans. On retirement or death of a partner the share of profit is taken over by the continuing partners. The ratio in which the continuing partners have acquired the share from outgoing partner is called the gaining ratio. Gaining Ratio = New Ratio – Old Ratio. 13. What is the significance of gaining ratio? Ans. The significance of computing gaining ratio is to distribute the amount of goodwill among the remaining partners. Hence, the gaining ratio impacts the retiring partners by crediting their respective capital account and debiting share of goodwill in gaining ratio. 14. Give the journal entry for unrecorded assets. Ans. The journal entry for unrecorded assets is: Unrecorded Assets A/c Dr. (Value of such assets) To Revaluation A/c (Being unrecorded assets accounted) 15. Why do firms revalue assets and reassess their liabilities on an event of retirement or death of a partner? Ans. It is essential to revalue the assets and revalue the liabilities at the retirement or death of a partner. The revaluation helps to reassess the actual value of assets or liabilities and record it at the actual value in firm’s financial books. The revaluation account is nominal in nature and any loss or profit arising from such revaluation is distributed among the partners in their old profit sharing ratio. 16. Give the journal entry for Increase in the value of Liabilities. Ans. The journal entry for Increase in the value of Liabilities is: Revaluation A/c Dr. (Increased value) To Sundry Liabilities A/c (Being value of liabilities increased) 17. For which share of goodwill is a partner entitled at the time of his retirement? Ans. At the time of retirement of a partner, he is entitled to his share of goodwill that will be compensated by the remaining partners in the ratio in which they have purchased the shares of the retiring partner. 18. State the provisions of Accounting Standards as per AS-10 in respect to treatment of goodwill at the retirement/death of a partner. Ans. Para 16 of AS-10, specifies that goodwill can be recorded in the books only when some consideration in money or money’s worth has been paid for it. Hence, only purchased

Retirement and Death of a Partner 45 goodwill can be recorded in the books and the Goodwill A/c cannot be raised. In case of retirement or death of a partner, the adjustment for goodwill will be made through Partners’ Capital A/cs. 19. How is existing goodwill treated at the time of retirement and what is the accounting entry? Ans. At the time of retirement of a partner, the existing goodwill should be written-off among all the partners in their old profit sharing ratio. The entry will be Dr. Continuing partner’s Capital A/c (Gaining ratio) Cr. Retiring Partner’s Capital A/c (Share of goodwill) 20. How are reserves and accumulated profits treated at the time of retirement? Ans. Reserves and accumulated profits belong to the period when all the partners were the partners of the firm. Hence, such reserves or accumulated profits are distributed among all partners by crediting their respective capital accounts. After such distribution reserves and profits are not shown in the new Balance Sheet. 21. Differentiate between retirement and death of a partner. Ans. The retirement of a partner is often planned and it generally takes place at the time of the closing of the accounting books, while the death is an unforeseen event and occurrence of such event may be take place at any time. Secondly, payment of retiring partner’s share will be received by himself but payment of deceased partner’s share will be received by his heirs/executors. 22. Explain the situation of a firm in case of a death of a partner. Ans. A partnership will come to an end immediately, after the death of a partner, although the firm may continue with the remaining partners by purchasing the share of the deceased partner. Thus, when a partner dies it means compulsory retirement and his representatives or the executor of his estate is entitled to all the rights of the deceased partner. 23. Mention the items which are debited to Deceased Partner’s Capital A/c. Ans. The items which are debited to the Deceased Partner’s Capital A/c are as follows: (i) His drawings (ii) Interest on drawings (iii) Share of loss, if any (iv) Reduction in the value of goodwill (v) Loss on revaluation of assets and liabilities. 24. Mention the different ways in which the amount due to retiring partner(s) are paid to him? Ans. The different ways of paying the amount due to retiring partner are as follows: (i) The entire amount due to the retiring partner is paid in cash. (ii) The entire amount due to the retiring partner is transferred to his loan account.

46 Accountancy—XII (iii) Partly payment in cash and partly settled through the loan account. (iv) A fixed asset may be mortgaged with the bank and such amount may be used for making payment to the retiring partner either wholly or partly. 25. Why heirs of a retiring/deceased partner are entitled to a share of goodwill of the firm? Ans. The heirs of a retiring/deceased partner are entitled to a share of goodwill of the firm as after the retirement/death of a partner, the fruits of the collective past performances and reputation will be shared only by the continuing partners. Hence, the remaining partners compensate the retiring or the deceased partner by entitling him/her a share of the firm’s goodwill. 26. L, M and N were partners in a firm sharing profits in the ratio of 8 : 4 : 3. M retires and his share is taken up equally by L and N. Find the new profit sharing ratio. Ans. M’s share will be divided between L and N in the ratio of 1 : 1. L will gain 1 of 4 = 2 2 15 15 Hence, L’s new Share = 8 + 2 =10 15 15 15 N will gain 1 of 4 = 2 2 15 15 Hence, N’s new Share = 3 + 2 =5 15 15 15 New Ratio = L 10 :N 5 or 2 : 1 15 15 27. Ravi, Madan and Shivan were partners in a firm sharing profits in the ratio of 5 : 5 : 4. Madan retired and his share was divided equally between Ravi and Shivan. Calculate the new profit sharing ratio of Ravi and Shivan. Old Ratio of Ravi, Madan and Shivan is 5 : 5 : 4 or 5:5:4 14 14 14 Mohan’s share will be divided between Ravi and Shivan equally. Ravi will gain 1 of 5 = 5 2 14 28 Shivan will gain 1 of 5 = 5 2 14 28 Ravi’s new share = 5 + 5 = 10 + 5 = 15 14 28 28 28 Shivan’s new share 4 + 5 = 8 + 5 = 13 14 28 28 28

2CHAPTER Dissolution of a Partnership Firm CHAPTER AT A GLANCE • Dissolution of partnership means termination of the old partnership agreement and a reconstitution of the firm due to admission, retirement or death of a partner. • Modes of dissolution of firm are: (i) Voluntary dissolution (iii) Compulsory dissolution (ii) Dissolution by court (iv) Dissolution by notice • Realisation expenses are the expenses incurred in connection with the sale of assets and payment of liabilities. • Accounts to be prepared on Dissolution of Firm: (i) Realisation Account; (ii) Partner’s Capital Accounts, (iii) Partner’s Loan Account, (iv) Cash/Bank Account. • Realisation Account is prepared for closing various assets and liabilities accounts, realisation and payments. The balance of realisation account shows the profit/loss realisation which is transferred to partner’s capital accounts in their profit-sharing ratio. • If goodwill does not appear in the Balance Sheet, then there is no need to evaluate it on the dissolution of firm. • Private property of the partner is first used for payment of private debts of the partner. • Voluntary dissolution means when all the partners give their consent to dissolve the firm. • Dissolution by notice states that if any one partner gives a notice in writing to the other partners in case of partnership at will. • Commission or Remuneration payable to a partner. (a) payment of commission in lump sum (b) payment of commission at an agreed percentage of assets realized (c) if there exists a provision against any assets such provision are transferred to ‘credit side’ of Realisation A/c (gross value). Such reserves/provisions are not to be paid off after realisation of assets as these do not denote the outside liabilities of the firm. 75

76 Accountancy—XII VERY SHORT ANSWER TYPE QUESTIONS 1. What does Dissolution of a partnership mean? Ans. Dissolution of a partnership means termination of the old partnership agreement and a reconstitution of the firm due to admission, retirement or death of a partner. 2. What is Voluntary Dissolution of a firm? Ans. Voluntary dissolution happens when all the partners give their consent to dissolve the firm. 3. What is Dissolution by notice? Ans. Dissolution by notice states that if any one partner gives a notice in writing to the other partners in case of partnership at will. 4. On dissolution of a firm, where is bank overdraft transferred to? Ans. On dissolution of a firm, bank overdraft is transferred to Realisation A/c. 5. After transferring liabilities like creditors and bills payable in the Realisation account, in the absence of any information regarding their payment, how are such liabilities treated as? Ans. After transferring liabilities to the Realisation A/c, in the absence of any information regarding their payment, such liabilities are treated as fully paid. 6. What all things does Sundry Asset include? Ans. Sundry Assets includes all Fixed Assets and Current Assets other than Cash and Bank. 7. Where are unrecorded assets, when taken over by a partner, shown in? Ans. Unrecorded assets when taken over by a partner are shown in the credit side of the Realisation A/c. 8. The Capital A/c and Current A/c Balances appearing on ‘Assets Side’ of the Balance Sheet, are they considered a part of the Realisation A/c. Ans. Capital A/c and Current A/c Balances appearing on ‘Assets Side’ are not transferred to Realisation A/c. 9. Unrecorded liabilities when paid, where are they shown? Ans. Unrecorded liabilities when paid, are shown in the debit side of the Realisation A/c. 10. Are Fictitious Assets a part of the Realization Account. Ans. Fictitious Assets are outside the definition of assets so they are not considered in Realisation Account. Examples are Deferred Revenue Expenditure, Advertisement Suspense etc. 11. Where are the accumulated profits and reserves transferred to? Ans. Accumulated profits and reserves are transferred to partner’s capital accounts. 12. Are the Capital Accounts and Current Balances transferred to the Realisation A/c? Ans. The balances of Capital A/c, Current A/c and Accumulated profits are not to be transferred to the Realisation A/c.

Dissolution of a Partnership Firm 77 13. On dissolution how are partner’s capital accounts closed? Ans. On dissolution of a firm partner’s capital accounts are closed through Bank Account. 14. If no information is provided regarding payment of goodwill and liabilities what needs to be done? If no information is provided in regard to realisation of goodwill. No treatment required. If no information is provided in regard to liabilities, always make payment of liabilities in full. Ans. LML Ltd. was dissolved as on 31.3.2018. A Mortgage Loan of `50,000 was appearing in Balance Sheet as on 31st Mar., 2018. Give the journal entry. Mortgage Loan A/c Dr. 50,000 To Realisation A/c 50,000 (Being Mortgage Loan transferred from B/s) 15. What does dissolution of partnership actually mean? Ans. Dissolution of a Partnership refers to the impact of change in the business relationship of partners without affecting the continuation of business. In other words, it implies the change in relation of the partners but it does not end the firm. 16. On dissolution of a firm, where is the balance left in Capital accounts, transferred to? Ans. On dissolution of a firm, balance left in Capital Accounts is transferred to Cash Account. 17. On dissolution of a firm, profit or loss on realization will be shared by partners in what proportion? Ans. On dissolution of a firm, profit or loss on realization will be shared by partners in their Profit sharing ratio. 18. Is dissolution of a partnership different from dissolution of a firm? Ans. Yes. Dissolution of Partnership means termination of the old partnership agreement. Dissolution of a firm means discontinuance of business activities of the firm. 19. To which account is unrecorded liability transferred to, when paid on dissolution of a firm? Ans. Unrecorded liability when paid on dissolution of a firm is debited to Realisation Account. 20. Where is Provision for bad debts appearing in the books at the time of dissolution of firm, transferred to? Ans. Provision for bad debts appearing in the books at the time of dissolution of firm is transferred to the Realisation Account. SHORT ANSWER TYPE QUESTIONS 1. In order to close the books of accounts of a firm on dissolution of a partnership, what all accounts are to be prepared? Ans. To close the books of accounts of a firm, the following accounts are prepared: 1. Realisation account 2. Partner’s Current account

78 Accountancy—XII 3. Partner’s Capital account 4. Partner’s Loan account 5. Cash or Bank account 2. What are the modes of dissolution of a partnership? Ans. There are five ways of dissolution of a firm as per Indian Partnership Act, 1932: (i) Voluntary Dissolution (Section 40) (ii) Compulsory Dissolution (Section 41) (iii) Dissolution by Agreement (Section 42) (iv) Dissolution by Notice (Section 43) (v) Dissolution by Court (Section 44). 3. What is meant by dissolution of a partnership firm? Ans. Dissolution of a partnership firm means the discontinuance of the business activities of the firm. In other words, it refers to the complete close down of the business of a firm where in all assets are disposed off and all liabilities are settled together with the partners accounts. 4. What is compulsory dissolution? Ans. Indian Partnership Act, 1932, Section 41, describes the compulsory dissolution as, (i) when the business of the firm is declared illegal, (ii) on the expiry of the period for which the firm was formed, (iii) when all the partners or all except one partner are declared insolvent, (iv) when all the partners except one decide to retire from the firm. 5. What do you mean by Private Debts and Firm’s Debts? Ans. Where both the debts of the firm and private debts of a partner co-exist, the following rules, as stated in Section 49 of the Act, shall apply. (a) The property of the firm shall be applied first in the payment of debts of the firm and then the surplus, if any, shall be divided among the partners as per their claims, which can be utilized for payment of their private liabilities. (b) The private property of any partner shall be applied first in payment of his/her private debts and the surplus, if any, may be utilized for payment of the firm’s debts, in case the firm’s liabilities exceed the firm’s assets. 6. What is Hidden Goodwill? Ans. If the firm has agreed to settle the retiring or deceased partner by paying him a lump sum amount, then the amount paid to him in excess of what is due to him based on the balance in his capital account after making necessary adjustments in respect of accumulated profits and losses and revaluation of assets and liabilities, etc., shall be treated as his share of goodwill. This goodwill is known as hidden goodwill.

Dissolution of a Partnership Firm 79 7. Distinguish between Firm’s debts and Private debts? Ans. According to Section 49 Payment of Firm’s Debts and Private Debts: Firm’s Debts : Debts which the firm owes to outsiders are called ‘firm’s debts.’ Private Debts : Debts which a partner owes in his personal capacity are called ‘private debts’. (i) Amount realised from the sale of the assets of the firm is first used to pay off firm’s debts and if there is any surplus available, it is distributed among the partners. (ii) Amount realised from the sale of private estate of partners will be used first to pay the private debts of the partners, and if there is any surplus available, it will be used in paying off the firm’s debts. 8. What is the treatment for assets taken away by creditors in regard to their settlement? Ans. Assets taken away by Creditors in regard to their settlement. (a) If value of assets and liability is same No entry is required (b) If the value of assets < value of creditors Dr. Realisation A/c Cr. Cash/Bank A/c (Being payment made to creditors) (c) If the value of assets > value of creditors Dr. Cash/Bank A/c Cr. Realisation A/c (Being amount received from creditors) 9. Journalise the following: (i) Expenses of realisation ` 8,000 (ii) Expenses of realisation ` 10,000 were paid by a partner. (iii) Realisation expenses of ` 12,000 were to be met by Tushar, a partner, but were paid by the firm. Ans. (i) Realisation A/c Dr. 8,000 To Bank A/c 8,000 (Being payment of realisation expenses) (ii) Realisation A/c Dr. 10,000 To Partner’s Capital A/c 10,000 (Being Realisation expenses paid by the partner on behalf of the firm) (iii) Tushar’s Capital A/c Dr. 12,000 To Bank A/c 12,000 (Being realisation expenses paid by the firm on behalf of the partner) 10. Journalise the following: (i) Suresh, a partner, was paid a remuneration of 10,000 and he was to meet all expenses.



Unit III: Company Accounts 1. Accounting for Debentures



1CHAPTER Accounting for Debentures CHAPTER AT A GLANCE • The word ‘debenture’ has been derived from a Latin word ‘debere’ which means to borrow. • Debenture is a written instrument acknowledging a debt under the common seal of the company. • The term debentures is defined in Section 2(30) as per the Companies Act, 2013. • The return on debentures is termed as debenture interest. • Shares are not secured by any charge whereas the debentures are generally secured and carry a fixed or floating charge over the assets of the company. • Debenture is issued at a par, means when the issue price is equal to its nominal value. • Debenture is issued at a discount, means when the issue price is below its nominal value. • Debenture is issued at a premium, means when the issue price is above its nominal value. • Premium on redemption of debentures is a ‘Personal A/c’ in nature and would continue to be shown in Balance Sheet until Debentures are redeemed. • Loss on Issue of Debentures is a ‘Nominal A/c’, in nature and must be written off at the earliest. • Date of maturity means the date on which the debentures are to be redeemed. • Specific coupon rate debenture means debenture which carries a specific rate of interest on them. • Debenture Redemption Reserve shown under Reserves and Surplus on liabilities side. • Profit earned by the company on sale of own debentures are a revenue profit and it is transferred to Statement of Profit and Loss. • Profit earned on cancellation of own debentures are a capital profit and are transferred to Capital Reserve Account. • The sources or the money required for the purpose of redemption are listed below: (i) Out of Capital (ii) Out of Profit (iii) Through Conversion 97

98 Accountancy—XII VERY SHORT ANSWER TYPE QUESTIONS 1. What is a Bond? Ans. A bond is like a debenture. It is an acknowledgement of debt where the rate of interest is not generally predetermined. 2. What is a Coupons Rate Bond? Ans. Debentures are generally issued with a specified rate of interest and issue of debentures with a specified rate is called Coupon Rate Bond. 3. Zero coupon Bond. Ans. Debentures issued without a predetermined rate of interest are called ‘Zero Coupon Band’ or ‘Deep Discount Bond’. The difference between the issue price and the face value is the amount of interest for the entire period of such bonds. 4. What are First Debentures? Ans. First Debentures are ranked first and are to be paid first in priority to other debentures which may be issued later or subsequently by the company. 5. What are second Debentures? Ans. Second Debentures are issued subsequent to First Debentures and rank next in matter of payment i.e., they can be repaid or redeemed only after first debentures are repaid/ redeemed. 6. What is Put Option Bond? Ans. A bond with put option allows the bond holder to return the bond to the borrowing company for a cash payment. 7. What is Call Option Bond? Ans. A bond with call option allows the issuing company to redeem the bond on or after specified period but before full maturity period at a predetermined price. 8. What is Debenture trust deed? Ans. Debenture trust deed is a document created by the company which issue the debentures. A company issuing debentures by way of public issue is required to appoint trustees and execute a trust deed. 9. What are Non-convertible Debentures? Ans. The debentures which cannot be converted into shares or in any other securities are called-non convertible debentures. 10. What are Registered Debentures? Ans. Registered Debentures are the debentures whose name appear on the certificate and are entered as a holder in the registered of debentures holder of the company. 11. What are convertible debentures? Ans. Convertible debentures are the debentures which are issued with an option that they can be converted into equity or preference shares after a certain period of time. These debentures are either fully convertible or partly convertible.

Accounting for Debentures 99 12. What are secured debentures? Ans. Secured debentures refer to those debentures where a charge is created on the assets of the company for the purpose of payment in case of default. The charge may be fixed or floating. 13. How do companies raise their long term funds? Ans. Companies raise their long-term funds through debentures which are issued either through the route of private placement or by offering the same to the public. 14. Explain the meaning of the term ‘Deposits’, as accepted by a company. Ans. In accordance to Companies Act, the term deposits means any deposits of money with a company which includes amount borrowed by a company but excludes of amounts as may be prescribed in consultation with RBI. 15. What is meant by a Debenture? Ans. Section 2(30) of the Companies Act, 2013 defines, ‘debenture’ include debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not. 16. What is meant by loss on issue of debentures? Ans. When a debenture is issued at a price below its nominal value and /or a debenture is redeemable at a price more than its nominal value, it is known as loss on issue of debentures. 17. What do you understand by interest on debentures? Ans. Interest payable on debentures is treated as charge against the profit of the company and must be paid whether the company has earned a profit or not. The interest on debentures is paid periodically and is calculated at a coupon rate on the nominal value of debentures. 18. Explain treatment of interest on own debentures. Ans. When debentures are purchased in the open market for investment purpose, interest becomes due on such debentures also. The company will pay interest only to outsiders and interest on own debentures held by the company is retained by the company. 19. What you mean by issue of debentures at a Premium? Ans. When debentures are issued at more price than its face value, that issued is known as issue at premium. The amount of premium is a capital profit and it is used to write-off the capital losses like discount on issue of shares or debentures, preliminary expenses, goodwill etc. 20. What you mean by issue of debentures other than cash consideration? Ans. When the company purchases assets from vendors and instead paying cash, the company issues debenture. Such issue is known as other than cash consideration and such issue may be at per, premium or at a discount.

100 Accountancy—XII SHORT ANSWER TYPE QUESTIONS 1. State various methods of redemption. Ans. The various methods of redemption are : (i) Lump sum Redemption method (ii) Annual Drawing methods (iii) Open market Redemption method (iv) Conversion of Debentures method 2. State the companies that are being exempted creation of Debenture Redemption Reserve as prescribed by SEBI Guideline. Ans. SEBI guidelines would not apply under the following situations: (a) Infrastructure company (a company wholly engaged in the business of developing, maintaining and operating infrastructure facilities) (b) A company issuing debentures with a maturity period of not more than 18 months. 3. Write short notes on Debenture Redemption Reserve. Ans. As per Section 71 of Companies Act, 2013, the company shall create a Reserve from out of it’s profits every year for redemption of debentures called as Debenture Redemption Reserve. The amount credited to the reserve shall not be used for any other purpose. The company shall pay the interest and redeem the debentures according to the terms and condition of issue. 4. What is meant by redemption of debentures by lump sum payment? Ans. Under this method, all debentures are redeemed by the company in one lot at the expiry of specified period as per the terms of agreement. 5. State the meaning of redemption of debentures out of profit. Ans. Under this method, it is mandatory as per SEBI guidelines to transfer profit equivalent to 50% of the amount of debentures to Debentures Redemption Reserve (DRR). This reduced the balance of profit which is otherwise available for distribution of dividend among shareholders. This method is called as redemption of debentures out of profit. 6. Can the redemption of debentures by carried out from out of capital? Ans. As per SEBI guidelines, 50% amount of issue of debentures must be transferred out of profit to Debentures Redemption Reserve. Thus, the remaining 50% amount of debentures can be redeemed out of capital. SEBI does not permit for 100% redemption of debentures from out of capital. 7. Give an advantage for redemption of debentures purchased in open market. Ans. Purchase of own debentures by a company enables the company to redeem the debentures later as per it’s own convenience i.e., when the company has sufficient funds to redeem the debentures. 8. What is meant by redemption of debentures by conversion? Ans. If at the time of redemption of debentures, company prefers to issue share or other debentures instead of giving cash, such redemption is said to be redemption of debentures by conversion.

Accounting for Debentures 101 9. Explain redemption of debentures by annual drawings method. Ans. Under this method, the company while issuing debentures mention that their debentures will be redeemed in annual installments by drawing a lot in order to decide thr debenture holders whose debentures are to be redeemed, lottery is drawn out of the unpaid debentures. This procedure is known as ‘Drawings by lots’. Transfer of an amount equal to at least 50% of the debenture issued to ‘Debenture Redemption Reserve is necessary before starting redemption of debentures. 10. Explain the meaning of a debenture? Ans. A written document acknowledging a debt under the common seal of the company is known as a debenture. It contains a contract for repayment of principal after a specified period or at intervals or at the option of the company and for payment of interest at a fixed rate payable usually either half-yearly or yearly on fixed dates. 11. According to the Companies Act how do you define debentures? Ans. According to section 2(30) of The Companies Act, 2013 ‘Debenture’ includes Debenture Inventory, Bonds and any other securities of a company whether constituting a charge on the assets of the company or not. 12. What are Redeemable debentures? Ans. Redeemable debentures are those which are payable on the expiry of the specific period either in lump sum or in instalments during the lifetime of a company. Debentures can be redeemed either at par or at premium. 13. What are Irredeemable Debentures? Ans. Irredeemable debentures are also known as Perpetual Debentures because the company does not give any undertaking for the repayment of money borrowed by issuing such debentures. These debentures are repayable on the winding-up of a company or on the expiry of a long period. 14. What are Convertible Debentures? Ans. Debentures which are convertible into equity shares or in any other security either at the option of the company or the debenture holders are called convertible debentures. These debentures are either fully convertible or partly convertible. 15. What are Non-Convertible Debentures? Ans. The debentures which cannot be converted into shares or in any other securities are called non-convertible debentures. Most debentures issued by companies fall in this category. 16. What are Specific Coupon Rate Debentures? Ans. These debentures are issued with a specified rate of interest, which is called the coupon rate. The specified rate may either be fixed or floating. The floating interest rate is usually tagged with the bank rate.

102 Accountancy—XII 17. What are Zero Coupon Rate Debentures? Ans. These debentures do not carry a specific rate of interest. In order to compensate the investors, such debentures are issued at substantial discount and the difference between the nominal value and the issue price is treated as the amount of interest related to the duration of the debentures. 18. Explain Disclosure as per new schedule III of companies act 2013. Ans. 1. Balance Sheet: Under Schedule III of Companies Act, 2013, debentures should be disclosed on the face of balance sheet as ‘Long-Term Borrowing’ under “Non- Current Liabilities”. But debentures are payable within 12 months, unpaid matured debentures and interest accrued thereon should be disclosed as “Other Current Liabilities”. 2. Statement of Profit and Loss: Interest expense and other borrowing cost should be disclosed under finance cost in the statement of profit and loss. 19. What is Forfeiture of Debentures? Ans. Where the payment for debentures is to be made in installments and due to debenture holder’s failure in paying the installment, the company can declare the debentures to be forfeited. The company cannot recover calls made before the forfeiture nor can it obtain an order for payment of subsequent installments (Section 71 of Companies Act, 2013). The accounting treatment for forfeiture of debenture is same as discussed in topic issue of shares. 20. What is Issue of Debentures? Ans. The procedure for the issue of debentures is the same as that for the issue of shares. The intending investors apply for debentures on the basis of the prospectus issued by the company. The company may either ask for the entire amount to be paid on application or by means of instalments on application, on allotment and on various calls. Debentures can be issued at par, at a premium or at a discount. They can also be issued for consideration other than cash or as a collateral security. 21. What is Debentures issued at Premium? Ans. A debenture is said to be issued at a premium when the price charged is more than its nominal value. For example, the issue of ` 100 debentures for ` 110, (` 10 is being the premium). The amount of premium is credited to Securities Premium Reserve account and is shown on the liabilities side of the balance sheet under the head “Reserves and Surplus”. 22. What is Over Subscription of Debentures? Ans. When the number of debentures applied for is more than the number of debentures offered to the public, the issue is said to be over subscribed. A company, however, cannot allot more debentures than it has invited for subscription. The excess money received on over subscription may, however, be retained for adjustment towards allotment and the respective calls to be made. But the money received from applicants to whom no debentures have been allotted, will be refunded to them.

Accounting for Debentures 103 23. What do you mean by issue of debentures at a discount? Ans. When debentures are issued at less price than it’s face value, that issued is known as issue at discount. There is no restriction on issuing debentures at a discount. ‘Discount on Issue of Debentures’ or ‘Discount on Debentures A/c’, is a capital loss and it is, therefore shown separately on the assets side of the balance sheet under the head of ‘Non-Current Assets’. It is written-off with capital profits, like capital reserve, securities premium or from Statement of Profit and Loss gradually. 24. Given the meaning of issue of debentures as collateral securities. Ans. A company often takes loan from bank and issue debentures as collateral securities in addition to principle security. Thus a collateral security refers to secondary securities besides the principle security. Under this agreement the borrower agrees that a particular asset or a group of assets will be realized and the proceeds there from will be applied to repay the loan in the event that the amount due, can’t be paid. The holder of such debentures is entitled to interest only on the amount of loan, but not on the debentures. LONG ANSWER TYPE QUESTIONS 1. Explain the concept of “Charge”, and state types of charge. Ans. Charge is a registration of security given for securing loans taken or debentures issued by a company and includes mortgage. As per Company Act there are two types of charges: 1. Fixed Charge: It is a charge created on specific property (i.e. assets which are ascertained and definite, or are capable of being ascertained and defined at the time of creating charge. 2. Floating Charge: It is an equitable carge, which is created on a constantly changing property i.e., inventories in trade, trade receivable etc. 2. What is meant by redemption of debentures? Ans. Redemption of Debentures refers to extinguishing or discharging the liability on account of debentures and in accordance with the terms of redemption stated in the debenture trust deed. There are three main aspects regarding redemption of debentures: (i) Time of redemption (ii) Amount to be paid (iii) Sources from which redemption will have to be carried out. 3. Give the distinction between shares and debentures. Ans. 1. Ownership: A shareholder in a way owns the company whereas a debenture is only an acknowledgement of a Debt. A share is a part of the owned capital whereas a debenture is a part of a borrowed capital. 2. Return: The return on shares is known as a dividend while the return on debentures is called interest.

2CHAPTER Cash Flow Statement CHAPTER AT A GLANCE • Cash Flow Statement is governed under Accounting Stanard-3 (Revised). • The preparation of cash flow statement has been made mandatory w.e.f. 1st April, 2001. • Cash Flow Statements are prepared for the period for which finance statements are presented. • Cash flows from operating activity are computed in ways Direct Method and Indirect Method. • Declaring of dividends will not affect flow of cash. • Cash Flow refers to the movement of cash and cash equivalent (i.e., by movement it means inflow and outflow of cash). • Activities prepared in Cash Flow Statement are operating activities, investing activities, financing activities and cash and cash equivalents. • Cash at Bank, Cash in Hand, Short-term marketable securities and Bank Overdraft are examples of cash and cash equivalent activities. • Extraordinary items are Bad debts recovered and winning of a lottery. VERY SHORT ANSWER TYPE QUESTIONS 1. What is cash flow statement based upon? Ans. Cash Flow Statement is based upon : Cash basis of accounting. 2. Where is Interest received by other than financial enterprise shown in the Cash Flow Statement? Ans. Interest received by other than financial enterprise is shown in the Cash Flow Statement under Investing activities. 3. Where is Interest paid to other than financial enterprise shown in the Cash Flow Statement? Ans. Interest paid to other than financial enterprise is shown in the Cash Flow Statement under Financing activities. 131

132 Accountancy—XII 4. Where is dividend received by other than financial enterprise shown in the Cash Flow Statement, under which head? Ans. It is shown under investing activities. 5. Where is dividend received by a financial enterprise shown in the Cash Flow Statement under? Ans. It is shown under. Operating activities 6. What is cash flow statement governed by? Ans. Cash flow statement is governed by AS–3 (Revised) 7. Interest paid on debentures will results in. Ans. Interest paid on debentures will result in Outflow of cash 8. Cash paid to supplier will be categorized under which type of activities? Ans. Cash paid to supplier can be categorised under: Operating Activities 9. How will you treat ‘Increase in Fixed Assets’ while preparing cash flow statement? Ans. Increase in fixed assets can be treated under: Investing Activities 10. Under what heading will you show the purchase of machine while preparing cash flow statement? Ans. Purchase of machine can be shown under Investing Activities. 11. Under what heading will you show the purchase of land while preparing cash flow statement? Ans. Purchase of land will be shown under investing activities. 12. How will you classify proceeds from issue of share capital? Ans. Proceeds from issue of share capital can be classified under financing activities. 13. Redemption of Debentures will be classified under. Ans. Redemption of debentures can be classified under Financing Activities 14. Proceed from sale of building will be shown under which head while preparing cash flow statement? Ans. Proceeds from sale of building will be shown under Investing Activities. 15. Interim Dividend paid on equity shares shall be classified under. Ans. Interim dividend paid on equity shares can be classified under Financing Activities. 16. Declaration of Final Dividend would result in. Ans. Redemption of final dividend wold result in no effect. 17. Bank Overdraft shall now be classified under. Ans. Bank overdraft can be classified under Financing Activities. 18. Cash Credit shall now be classified under. Ans. Cash credit can be classified under Financing Activities. 19. Short Term Investment shall now be classified under. Ans. Short term Investment shall now be classified under Investing Activities.

Cash Flow Statement 133 20. Which are the principal revenue generating activities of a business enterprise? Ans. The revenue generating activities of a business enterprise are the Operating Activities. 21. What should be done to the inventories while calculating cash from operating activities? Ans. Increase in inventories should be deducted while calculating cash from operating activities. 22. Bills Receivable endorsed to creditors dishonoured will result in. Ans. Bills receivable endorsed to creditors dishonoured will result in no effect. SHORT ANSWER TYPE QUESTIONS 1. What is the objective of preparing a cash flow statement? Ans. The objectives of preparing the cash flow statement are: (a) To assess the cash flow from different activity. (b) Helps in forecasting of cash budget (c) Helps in planning the finances of company 2. Which are the activities classified according to cash flow accounting standard while preparing the cash flow statement? Ans. The activities are: (a) Operating Activities (b) Investing Activities (c) Financing Activities 3. Define the following term in accordance to Accounting Standard 3. (i) Cash (ii) Cash Equivalent Ans. (i) Cash: The term cash comprises of Cash in hand and demand deposit with Banks. (ii) Cash Equivalent: It is the short term, highly liquid investment that are readily convertible into known amount of cash, and which are subject to an insignificant risk of change in value. They are held for the purpose of meeting short term cash commitments rather for investment or other purpose. 4. Define the following term in accordance to Accounting Standard 3. (i) Cash Flow (ii) Cash management Ans. (i) Cash Flow: They are inflow and outflow of Cash and Cash Equivalent. They exclude movement between items that constitute Cash and Cash Equivalents, because these components are part of the cash management of an enterprise rather than part of it’s operating, investing and financing activities. (ii) Cash Management: It includes the investment of excess Cash and Cash Equivalent. 5. Explain two methods which are used for reporting of Cash Flow from Operating Activities. Ans. As per AS 3, Para 18, an enterprise should report cash flows from operating activities using either :

134 Accountancy—XII (i) Direct Methods, where by major classes of gross cash receipts and gross cash payments are disclosed. (ii) Indirect Method, whereby Net Profit or Loss adjusted for the effects of non cash transactions, any receivable/payable including change in stock, and items of income or expense associated with investing or financing cash flows. 6. State why Cash Flow Statement is not substituted for Income Statement. Ans. Cash Flow Statement deals with inflow and outflow of cash and cash equivalents and it does not reveal profit while Income Statement is prepared with revenue items on accrual basis to depict profit and loss during an accounting period. 7. State why non cash entries are ignored while preparing Cash Flow Statement. Ans. Non Cash items are ignored while preparing a cash flow statement as they do not affect the flow of cash and cash equivalent activities. 8. When does a flow arises? Ans. Cash flow arises when transactions result in an increase or decrease in cash and cash equivalents. 9. State the meaning and purpose of preparing Cash Flow Statement. Ans. AS–3, Cash Flow Statement is a statement that shows inflows and outflows of cash funds from operating, investing and financing activities during a year. (i) The important objective that is fulfilled by preparing Cash Flow Statement is to ascertain the gross inflows and outflow of cash and cash equivalent activities. (ii) It helps in analyzing various reasons responsible for change in cash balance during the accounting year. 10. What are the uses of Cash Flow Statement? Ans. (i) Tools of planning (ii) Efficient cash management (iii) Presenting operating, investing and financial activities separately (iv) Shows the direction of change in cash flows (v) Tools of historical analysis 11. State the objective of preparing Cash Flow Statement. Ans. Cash Flow Statement is prepared to know: (i) To study the trend of cash receipts and payments (ii) To record change in cash and cash equivalents (iii) To know the deviation of cash from earnings 12. State the advantages of Cash Flow Statement. Ans. The advantage of Cash Flow Statement is: (i) Preparing Cash Budget (ii) Management and Cash Planning

Cash Flow Statement 135 13. State the limitations of Cash Flow Statement. Ans. The limitations of Cash Flow Statement are: (i) Ignores accounting concept of accrual basis (ii) Ignores non-cash transactions (iii) Not a substitute for Income Statement (iv) No substitute of Funds Flow Statement 14. Why is ignoring non cash items a limitation of the Cash Flow Statement? Ans. Cash Flow Statement does not state non cash items like conversion of debentures into shares, purchase of fixed assets by issuing shares or debentures, issue of bonus shares etc. 15. What is meant by Operating activities and examples of it? Ans. Operating Activities refer to revenue generating activities of a business firm. They result from the transactions and other events that enter into the determination of Net Profit or Loss. Examples are: (i) Cash Receipts from sale of goods and the rendering of services (ii) Cash Receipts from Royalties, Fees, Commission and other revenue (iii) Cash Payment to suppliers for goods and services and on behalf of employees (iv) Cash Payment or returns of Income, Taxes unless they can be specially identified with financing and investing activities. 16. What is meant by Investing Activities and examples of it? Ans. Investing activities are related to acquisition and disposal of long-term assets and investments which are not included in cash equivalents and are intended to generate future income. Examples are : (i) Sale of Fixed Assets (ii) Sale of Investments (iii) Interest received (iv) Dividend received (v) Purchase of Fixed Assets (vi) Purchase of Investment 17. What is meant by Financing Activities and its examples? Ans. All activities of an enterprise which result in the change in capital and borrowings are referred to as financing activities. In other words, activities which relates in providing funds to business. Example (i) Issue of shares/debentures in cash (ii) Proceeds from Long-Term Loans (iii) Payment of Long-Term Loans (iv) Payment of Interest and Dividend (v) Buy back of equity share (vi) Redemption of preference shares 18. How would you deal ‘Transfer to Reserves’ while calculating cash flows from Operating? Ans. Reserves created out of profits like General Reserve, Sinking Fund and Contingencies Reserve will not affect cash. Hence, the amount transferred from profits should be added to net profits while calculating operating profit.

OR Part B Unit I: Computerised Accounting 1. Using Computerised Accounting System 2. Database Management System



1CHAPTER Using Computerised Accounting System CHAPTER AT A GLANCE • A computerised accounting system is an accounting information system that processes the financial transactions and events to produce reports as per user requirements • It is based on the concept of database and has two basic requirements: (a) Accounting framework and (b) Operating Procedure. • Advantages of Computerised Accounting System : ➢ Speed ➢ Accuracy ➢ Reliability ➢ Up-to-date ➢ Scalability ➢ Legibility ➢ Efficiency ➢ Quality Report ➢ MIS Reports ➢ Real time user interface ➢ Storage and Retrieval ➢ Motivation and Employees interest ➢ Automated document production • Limitations of Computerised Accounting System : ➢ Cost of training ➢ Staff Opposition ➢ Disruption ➢ System failure ➢ Breache of security ➢ Ill-effects on health ➢ Inability to check unanticipated errors • Categories of Accounting Packages : ➢ Ready-to-Use ➢ Customised ➢ Tailored VERY SHORT ANSWER TYPE QUESTIONS 1. Name an input device. Ans. Key-board can be mentioned as an input device. 2. In the computer what is the prime work of the memory. Ans. In a computer the memory’s prime work is to store. 149

150 Accountancy—XII 3. What is the full name of a CPU? Ans. CPUs full name is: Central Processing Unit. 4. What is a computer? Ans. A computer is a group of instructions called a programme. 5. How do you generate reports that are vital for management decision making? Ans. Reports can be generated through Management Information System. 6. How do we deal with receipts and payments of cash? Ans. The Cash and Bank sub system – Deals with receipts and payments of cash. 7. What does Final account subsystem in Accounting Information System (AIS) deals with? Ans. It deals with the Preparation of Final Accounts 8. How should the method of codification be? Ans. The method of codification should be easy to understand and which leads to grouping of accounts. 9. On what basis are Accounting Packages are developed? Ans. Accounting packages are developed on the basis of: Accounting concepts and Conventions. 10. What are the levels of abstraction in a Database? Ans. There are three levels of abstraction in a database: Physical Level, Logical Level and View Level 11. Define tailor-made software. Ans. A tailor-made software means developing software according to the specification of the customer. are not available off-the-shelf. 12. What is codification of accounts required for? Ans. Codification of Accounts required for the purpose of: Hierarchical relationship between groups and components. 13. Define a computerized accounting system. Ans. A computerised accounting system is an accounting information system that processes the financial transactions and events as per Generally Accepted Accounting Principles (GAAP) to produce reports as per user requirements. 14. What does Final account subsystem in Accounting Information System (AIS) deals with? Ans. It deals with the Preparation of Final Accounts. SHORT ANSWER TYPE QUESTIONS 1. What are the components of a computerised accounting system? Ans. The components of computerised accounting system are Software, Hardware, People, Procedure, Data.

Using Computerised Accounting System 151 2. What does grouping of accounts mean? Ans. Grouping of Accounts means the classification of data from: Assets, Capital, Liabilities, Revenues & Expenses 3. What is a management process? Ans. A management process is : (a) Planning (b) Instruction (c) Controlling 4. What are the account groups of Trading Account under Computerised Accounting System? Ans. • Sales account • Purchase account • Direct Expenses Account • Direct Incomes Account 5. What is Accounting? Ans. Accounting, by definition, is the process of identifying, recording, classifying and summarising financial transactions to produce the financial reports for their ultimate analysis. 6. What is identifying? Ans. The identification of transactions, based on application of accounting principles is, common to both manual and computerized accounting system. 7. What is Recording? Ans. The recording of financial transactions, in manual accounting system is through books of original entries while the data content of such transactions is stored in a well- designed accounting database in computerised accounting system. 8. What is classification? Ans. In a manual accounting system, transactions recorded in the books of original entry are further classified by posting into ledger accounts. This results in transaction data duplicity. In computerised accounting, no such data duplication is made to cause classification of transactions. In order to produce ledger accounts, the stored transaction data is processed to appear as classified so that the same is presented in the form of a report. Different forms of the same transaction data are made available for being presented in various reports. 9. What is Summarising? Ans. The transactions are summarised to produce trial balance in manual accounting system by ascertaining the balances of various accounts. As a result, preparation of ledger accounts becomes a prerequisite for preparing the trial balance. However, in computerised accounting, the originally stored transactions data are processed to churn out the list of balances of various accounts to be finally shown in the trial balance report. The generation of ledger accounts is not a necessary condition for producing trial balance in a computerised accounting system.

152 Accountancy—XII 10. What is adjusting Entries? Ans. In a manual accounting system, these entries are made to adhere to the principle of cost matching revenue. 11. What is Closing the Books? Ans. After the preparation of financial reports, the accountants make preparations for the next accounting period. This is achieved by posting of closing and reversing journal entries. In computerised accounting, there is year-end processing to create and store opening balances of accounts in database. It may be observed that conceptually, the accounting process is identical regardless of the technology used. 12. What is operating environment? Ans. In a computerised accounting system, the framework of storage and processing of data is called operating environment that consists of hardware as well as software in which the accounting system, works. 13. Mention two advantages of ready to use the software. Ans. The two advantages of ready to use software are: • The cost of installation is low • Good after sales maintenance service 14. Mention two disadvantages of ready to use the software. Ans. The two disadvantages of ready to use software are: • Have very less scope of linking to other systems • Low-level secrecy 15. State two advantages of customised software. Ans. The two advantages of customised software are: • High-level secrecy for the data • Can link with another information system LONG ANSWER TYPE QUESTIONS 1. Mention two disadvantages of customised software. Ans. The two disadvantages of customised software are: • The high cost of installation and maintenance • Training is required to use the system and is expensive 2. State two advantages of tailor-made software. Ans. The two advantages of tailor-made software are: • The secrecy of data is massive • It can be developed according to the customer’s requirement

ISBN: 978-93-93738-18-9 7 879839933 5723 87 148594 0 1 T12-6742-229-COMP.CBSE QB ACCO T-II XII