Accountancy I

CBSE Class 12 Accountancy Chapter 1 introduces partnership firms — their legal definition under the Indian Partnership Act 1932, essential features, partnership deed contents, and accounting treatment covering capital accounts, profit distribution, interest on capital and drawings, and rectification of past errors.

• 1Partnership is defined in Section 4 of the Indian Partnership Act 1932; partners are individually called 'partners' and collectively called 'firm', and the firm has no separate legal entity apart from its partners.
• 2Essential features of partnership: at least two persons (maximum 50 as prescribed by the Central Government under Section 464 of the Companies Act 2013), an agreement, carrying on a business, mutual agency, sharing of profits and losses, and unlimited liability of each partner.
• 3The Partnership Deed is a written document containing terms such as capital contributions, profit-sharing ratio, interest on capital and drawings, partners' salaries and commissions, and rules for admission, retirement, and dissolution.
• 4When the partnership deed is silent: profits and losses are shared equally, no interest on capital is payable, no interest on drawings is charged, no salary or remuneration is due to any partner, and a partner who has advanced a loan to the firm receives interest at 6 per cent per annum.
• 5Under the fixed capital method, two accounts are maintained per partner — a Capital Account (always credit balance, unchanged unless capital is added or withdrawn) and a Current Account for all other adjustments; under the fluctuating capital method, only one capital account is maintained and its balance changes from year to year.

Chapter 2 of CBSE Class 12 Accountancy covers the reconstitution of a partnership firm through admission of a new partner, including calculation of new and sacrificing profit-sharing ratios, valuation and treatment of goodwill, revaluation of assets and liabilities, and adjustment of accumulated profits and partner capitals.

• 1Reconstitution of a partnership occurs through admission of a new partner, change in profit-sharing ratio, retirement, death, or insolvency of a partner; the firm continues but the agreement changes.
• 2A new partner can be admitted only with unanimous consent of existing partners under the Partnership Act 1932; the partner acquires the right to share assets and profits.
• 3The sacrificing ratio equals each old partner's old share minus new share; the premium for goodwill brought by the new partner is shared among old partners in this sacrificing ratio.
• 4Goodwill is an intangible asset representing the present value of anticipated excess earnings; it exists only when the firm earns super profits above the normal rate of return on capital.
• 5Factors affecting goodwill include nature of business, location, efficiency of management, market conditions (monopoly or limited competition), and special advantages such as patents, trademarks, and long-term supply contracts.

CBSE Class 12 Accountancy Chapter 3 covers reconstitution of a partnership firm on retirement or death of a partner, including calculation of new profit sharing ratio, gaining ratio, treatment of goodwill, revaluation of assets and liabilities, and settlement of the amount due to the retiring or deceased partner's executors.

• 1New profit sharing ratio is the ratio in which remaining partners share future profits after retirement or death; New Share = Old Share + Acquired Share from the outgoing partner. In the absence of any information, continuing partners acquire the share in their old profit sharing ratio.
• 2Gaining ratio is the ratio in which continuing partners acquire the share from the retiring or deceased partner; when the new profit sharing ratio is specified, Gaining Share = New Share minus Old Share.
• 3The retiring or deceased partner is entitled to his share of goodwill; the gaining partners are debited in their gaining ratio and the retiring partner's capital account is credited. If goodwill already appears in the books, it is first written off by debiting all partners' capital accounts in the old profit sharing ratio.
• 4Hidden goodwill arises when the lump sum agreed to be paid to the retiring partner exceeds the balance in his capital account after all adjustments; the excess is treated as his share of goodwill and is debited to the continuing partners in their gaining ratio.
• 5A Revaluation Account is prepared to record increases and decreases in the values of assets and liabilities as well as unrecorded items; the net profit or loss on revaluation is transferred to all partners including the retiring or deceased partner in their old profit sharing ratio.

Chapter 4 of CBSE Class 12 Accountancy covers the dissolution of a partnership firm — its distinction from dissolution of partnership, five modes of dissolution under the Partnership Act 1932, rules for settlement of accounts, and preparation of the Realisation Account.

• 1Dissolution of partnership changes the existing relationship between partners but the firm may continue; dissolution of a firm (Section 39, Partnership Act 1932) ends all business and requires assets to be sold, liabilities paid, and books to be closed.
• 2Five modes of dissolution of a firm: by agreement, compulsorily (insolvency of all or all but one partner, or business becomes illegal), on certain contingencies (death, fixed term expiry, completion of venture), by notice in case of partnership at will, or by court order.
• 3A court may order dissolution when a partner becomes insane or permanently incapable, is guilty of misconduct, persistently breaches the partnership agreement, has transferred his entire interest to a third party, or when the business cannot be carried on except at a loss.
• 4Under Section 48 of the Partnership Act 1932, losses on dissolution are met first from profits, next from capital, and lastly by partners individually in their profit sharing ratio.
• 5Assets on dissolution are applied in order: paying third-party debts (secured loans have precedence), then partners' loans and advances, then partners' capital balances, with any residue divided in the profit sharing ratio.