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class 12 commerce accountancy notes – Complete details

class 12 commerce accountancy notes

class 12 commerce accountancy notes:- Accounting as an information system aids in providing financial information. In class XII, Accounting for Not for Profit Organisations, Partnership Firms and companies are taught as a compulsory part. Students will also be given an opportunity to understand about Computerized Accounting System, as an optional course to Analysis of Financial Statements.

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class 12 commerce accountancy notes

class 12 commerce accountancy notes:-Accountancy : Partnership Accounts

C lass 12 CommerceSubjects 
Subject 1
  • Accountancy.
Subject 2
  • Economics.
Subject 3
  • Informatics Practices.
Subject 4
  • Mathematics.
Subject 5
  • Business Studies.

class 12 commerce accountancy notes:-Chapter 1 – Accounting for Partnership : Basic Concepts

class 12 commerce accountancy notes:-Define Partnership Deed.
Partnership Deed is a written agreement among the partners of a partnership firm. It includes agreement on profit sharing ratio, salaries, commission of partners, interest provided on partner’s capital and drawings and interest on loan given or taken by the partners, etc. Generally following details are included in a partnership deed.

  1. Objective of business of the firm
  2. Name and address of the firm
  3. Name and address of all partners
  4. Profit and loss sharing ratio
  5. Contribution to capital by each partner
  6. Rights, types of roles and duties of partners
  7. Duration of partnership
  8. Rate of interest on capital, drawings and loans
  9. Salaries, commission, if payable to partners.
  10. Rules regarding admission, retirement, death and dissolution of the firm, etc.

class 12 commerce accountancy notes:-Why is Profit and Loss Adjustment Account prepared? Explain.
The Profit and Loss Adjustment Account is prepared because of the following two reasons.
1.To record omitted items and rectify errors if any- After the preparation of Profit and Loss Account and Balance Sheet, if any error or omission is noticed, then these errors or omissions are adjusted by opening Profit and Loss Adjustment Account in the subsequent accounting period without altering old Profit and Loss Account.
2.To distribute profit or loss between the partners- Sometimes, besides adjusting the items and rectifying errors, this account is also used for distribution of profit (or loss) among the partners. In this situation, this account acts as a substitute for Profit and Loss Appropriation Account. The main rationale to prepare the Profit and Loss Adjustment Account is to ascertain true profit or loss.
class 12 commerce accountancy notes:-Give two circumstances under which the fixed capitals of partners may change.
The following are the two circumstances under which the fixed capitals of partner may change.

  1. If any additional capital is introduced by the partner during the year.
  2. If any part of capital is permanently withdrawn by the partner from the firm.

class 12 commerce accountancy notes:-Chapter 2 – Reconstitution of a Partnership Firm – Admission of a Partner

class 12 commerce accountancy notes:-Identify various matters that need adjustments at the time of admission of a new partner.
The following are the various items that need to be adjusted at the time of admission of a new partner.

  1. Profit Sharing Ratio: Calculation of new profit sharing ratio.
  2. Goodwill: Valuation and adjustment of goodwill among the sacrificing old partners.
  3. Revaluation of Assets and Liabilities: Assets and liabilities are revalued to ascertain the current value of the assets and liabilities of the partnership firm. Moreover, the profit or loss due to the revaluation need to be distributed among the old partners.
  4. Accumulated profits, losses and reserves are distributed among the old partners in their old ratio.
  5. Adjustment of capital of the partners.

class 12 commerce accountancy notes:-Why i is it necessary to ascertain new profit sharing ratio even for old partners when a new partner is admitted?
When new partner/s is/are admitted, then the old partners in the partnership firm need to sacrifice their share of profit in favour of the new partner/s. This reduces the share of profit of the old partners ,hence, it is necessary to ascertain the new profit sharing ratio even for the old partners in the event of admission of new partner’s.

class 12 commerce accountancy notes:-What is goodwill? What are the factors that effect goodwill?
Goodwill is an intangible asset of a firm. It is the value of a firm’s reputation and its good brand name in the market. A firm earns goodwill by its hard work and thereby winning the blind trust and faith of the customers by fulfilling their demands in both qualitative and quantitative aspects. A positive goodwill helps a firm to earn supernormal profits compared to its competitors that earns normal profits (as their goodwill is zero). In other words, goodwill ensures greater future profits as there will be greater number of satisfied customers in the future. As in the words of Lord Eldon, “Goodwill is nothing more than the probability, that the old customers will resort to the old place.”
Characteristics of Goodwill
The following are the characteristics of goodwill.

  1. It is an intangible asset.
  2. It is not a fictitious asset.
  3. It is difficult to ascertain the exact value of goodwill.
  4. It enhances the future as well as the present earning capacity of a business.
  5. It helps in earning supernormal profits against the normal profits.
  6. It assists the business to enjoy its upper hand over its counterparts.

Factors Affecting GoodwillThe following are the important factors that affect the goodwill of a firm.

  1. Quality Products: If a company produces product of the best quality and in large scale, then automatically the company earns more goodwill.
  2. Location: If a business islocated at easily reachable and convenient place, then more number of consumers will be attracted again and again which will lead to increase in sales and, therefore, the firm will earn higher goodwill.
  3. Management: Efficient management leads to cost efficiency and increases productivity. If a firm’s management is efficient, then superior quality products can be produced at lower cost .These can be sold at lesser price. Superior quality at lower price enables a firm to earn higher goodwill.
  4. Market Structure: If a firm is operating in a monopoly market with no close substitutes, then there will be more goodwill of the firm.
  5. Economies of Scale: If a firm enjoys special advantages like, continuous supply of power, fuel and raw materials at a low price and produces quality product at a large scale, then the firm enjoys higher value of goodwill.

class 12 commerce accountancy notes:-What is sacrificing ratio? Why is it calculated?
Sacrificing ratio refers to the ratio in which the old partners of a partnership firm surrender their share of profit in favour of the new partner/s. It is calculated as a difference between the old ratio and the new ratio of the old partners.
Sacrificing Ratio = Old Ratio – New Ratio
It is very important to calculate this ratio, as the new partner need to compensate the old partners for sacrificing their share of profit. The new partner compensates the old partners by making payment to them in the form of goodwill that is transferred among the old partners in their sacrificing ratio.

class 12 commerce accountancy notes:-Chapter 3 – Reconstitution of a Partnership Firm – Retirement/Death of a partner

class 12 commerce accountancy notes:-What are the different ways in which a partner can retire from the firm?
The following are the different ways in which a partner can retire from a firm.

  1. With the consent of all other partners: A partner must take the consent of all the co-partners of the firm before his/her retirement. Thereafter, the partner can retire from the firm if and only if all the partners agree on the decision of his/her retirement.
  2. With an express agreement by all the partners: In case of written agreement among the partners a partner may retire from the firm by expressing his/her intention of leaving the firm though a notice to the other partners of the firm.
  3. By giving a written notice: If partnership among the partners is at will then a partner may retire by giving notice in writing to all the other partners informing them about his/her intention to retire.

class 12 commerce accountancy notes:-Write the various matters that need adjustments at the time of retirement of partner/partners.
The following are the various matters that need to be adjusted at the time of retirement of partners/partner.

  1. Calculation of new gaining ratio of all the remaining partners of the firm.
  2. Calculation of new ratio of the remaining partners of the firm.
  3. Calculation of goodwill of the new firm and its accounting treatment.
  4. Revaluation of assets and liabilities of the new firm.
  5. Distribution of accumulated profits and losses and reserves among all the partners (including the retiring partner).
  6. Treatment of Joint Life Policy
  7. Settlement of the amount due to the retiring partner
  8. Adjustment of capital accounts of the remaining partners in their new profit sharing ratio.

class 12 commerce accountancy notes:-Distinguish between sacrificing ratio and gaining ratio.
Basis of Difference Sacrificing ratio Gaining Ratio

  1. Meaning It is the ratio in which old partners agree to sacrifice their share of profit in favour of new partners/partner It is the ratio in which continuing partner acquires the share of profit from outgoing partner/partner
  2. Calculation Sacrificing Ratio = Old Ratio – New Ratio Gaining Ratio = New Ratio – Old Ratio
  3. Time It is calculated at the time of admission of new partners/partner. It is calculated at the time of retirement/death of old partners/partner.
  4. Objective It is calculated to ascertain the share of profit and loss given up by the existing partners in favour of new partners/partner. It is calculated to ascertain the share of profit and loss acquired by the remaining partners (of the new firm in case of retirement) from the retiring or deceased partner.
  5. Effect It reduces the profit share of the existing partners. It increases the profit share of the remaining partners.

class 12 commerce accountancy notes:-Chapter 4 – Dissolution of Partnership Firm

class 12 commerce accountancy notes:-State the difference between dissolution of partnership and dissolution of partnership firm.
Basis of Difference Dissolution of Partnership Dissolution of Partnership firm

Meaning It means change in the partnership deed (or the agreement) among the partners. It means that the business is wound up and the firm is dissolved.
Discontinuation Business is not discontinued. Business is discontinued, as the firm is dissolved.
Closure of Books of Accounts Books of accounts are not closed, as there is only change in the existing agreement between the partners. Books of accounts are closed, as the business is discontinued.

Assets and Liabilities In this case, the assets and liabilities are revalued. In this case, all the assets are sold off in order to pay the liabilities of the business.
Role of Court There is no intervention by the court. Dissolution of a partnership firm may be done with the consent of the court.

Nature It is voluntary in nature. It may be voluntary (as per the discretion of the partners) or compulsory (as per the order of the court).

Effect It may or may not involve dissolution of the firm. It necessarily involves dissolution of both the partnership as well as of the partnership firm.

class 12 commerce accountancy notes:-State the accounting treatment for:

  1. Unrecorded assets
  2. Unrecorded liabilities

i) Accounting Treatment for Unrecorded Assets
Unrecorded asset is an asset, the value of which has been written off in the books of accounts but the asset is still in usable position. The accounting treatment for unrecorded asset is:
a) When the unrecorded asset is sold for cash
Cash A/c Dr.
To Realisation A/c
(Unrecorded assets sold for cash)

b) When the unrecorded asset is taken over by any partner
Partner’s Capital A/c Dr.
To Realisation A/c
(Unrecorded asset taken over by the partner)

ii) Accounting Treatment for Unrecorded Liabilities
Unrecorded liabilities are those liabilities which are not recorded in the books of account. The accounting treatment for unrecorded liability is:
a) When the unrecorded liability is paid off
Realisation A/c Dr.
To Cash A/c
(Unrecorded liability paid in cash)

b) When the unrecorded liability is taken over by a partner
Realisation A/c Dr.
To Partner’s Capital A/c
(Unrecorded liability taken over by the partner)

class 12 commerce accountancy notes:-On dissolution, how you deal with partner’s loan if it appears on the

  1. Assets side of the Balance Sheet
  2. Liabilities side of the Balance Sheet

a) If partner’s loan appears on the assets side of the Balance Sheet then it implies that the partner has taken loan from the business and is liable to pay back to the business. In such case, the loan amount is transferred to his capital account. Thus the accounting entry will be:
Partner’s Capital A/c Dr.
To Partner’s Loan A/c
(Partner’s loan transferred to Partner’s Capital Account)

b) If partner’s loan appears on the liabilities side of the Balance Sheet then it implies that the partner has forwarded loan to the firm and the firm is liable to pay back the amount to the partner. In such case, partner’s loan is paid off after paying all the external liabilities. The partner’s loan is not transferred to the Realisation Account, in fact, it is paid in cash. The following accounting entry is passed.-
Partner’s Loan A/c Dr.
To Cash/Bank A/c
(Partner’s loan paid in cash)

class 12 commerce accountancy notes

Recommended Read:- class 12 commerce accountancy notes

class 12 commerce accountancy notes

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