PROJECT REPORT

ON

FINALIZATION OF PARTNERSHIP FIRM

MASTERS OF COMMERCE DEGREE

SEMESTER- 2

ACADEMIC YEAR: 2015-16

SUBMITTED BY
MR: ODIYAR SUMANRAJ
ROLL NO: 36

N.E.S. RATNAM COLLEGE OF ARTS, SCIENCE AND COMMERCE,

N.E.S. MARG, BHANDUP (WEST), MUMBAI-400078

1
 PROJECT REPORT ON
FINALIZATION OF PARTNERSHIP FIRM

MASTERS OF COMMERCE DEGREE

SEMESTER- 2

ACADEMIC YEAR: 2015-16

SUBMITTED BY
IN PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD
OF MASTER DEGREE OF COMMERCE
MR: ODIYAR SUMANRAJ
ROLL NO: 36

N.E.S. RATNAM COLLEGE OF ARTS, SCIENCE AND COMMERCE,

N.E.S. MARG, BHANDUP (WEST), MUMBAI-400078

2
 N.E.S. RATNAM COLLEGE OF ARTS, SCIENCE
AND COMMERCE,
N.E.S. MARG, BHANDUP (WEST), MUMBAI- 400078

CERTIFICATE

This is to certify that the project report on FINALIZATION OF

PARTNERSHIP FIRM is bonafide record of project work done by MR.
ODIYAR SUMANRAJ submitted in partial fulfillment of the requirement of
the award of the Master of Commerce Degree University of Mumbai during the
period of his study in the academic year 2015-16

INTERNAL EXAMINER:

EXTERNAL EXAMINER:

Principal Mrs. Rina Saha

DECLARATION
3
I hereby declare that this Project Report entitled FINALIZATION OF
PARTNERSHIP FIRMsubmitted by me for the award of Masters of
Commerce Degree; University of Mumbai is a record of Project work
done by me during the year 2015-16. This is entirely my own work.

NAME:ODIYAR SUMANRAJ ROLL NO: 36

Place: Mumbai, Bhandup (W)

Date: Signature:

ACKNOWLEDGEMENT

4
 I owe a great many thanks to great many people who helped and
supported me doing the writing of this book.

My deepest thanks to lecturer, Prof. RAJIV MISHRAof the project for

guiding and correcting various documents of mine with attention and care. He
has taken pains to go through my project and make necessary corrections as and
when needed.

I extend my thanks to the principal of NES Ratnam College of Arts

Science and Commerce, Bhandup (w), for extending her support.

My deep sense of gratitude to Principal Mrs. Rina Saha of NES Ratnam

College of Art, Science and Commerce for support and guidance. Thanks and
appreciation to the helpful people at NES Ratnam College of Arts, Science and
Commerce , for their support.

I would also thank my institution and faculty members without whom this
project would have been a distant reality. I also extend my heartfelt thanks to
my family and well-wishers.

Candidate Name: ODIYAR SUMANRAJ

INDEX
5
SR. NO. DESCRIPTION

1 WHAT IS FINALIZATION OF ACCOUNTING

2 BALANCING OF DIFFERENT ACCOUNTS

3 Purpose of Adjusting Entries

4 Classification of Assets & Liabilities

5 WHAT IS PARTNERSHIP FIRM

CONCLUSION& BIBLIOGRAPHY

FINALIZATION OF PARTNERSHIP FIRM

CHAPATER:1
6
 WHAT IS FINALIZATION OF ACCOUNTING?
Preparation of final account is the last stage of the
accounting cycle. The basic objective of every concern
maintaining the book of accounts is to find out the profit or
loss in their business at the end of the year. Every
businessman wishes to ascertain the financial position of
his business firm as a whole during the particular period. In
order to achieve the objectives for the firm, it is essential to
prepare final accounts which include Manufacturing and
Trading, Profit and Loss Account and Balance Sheet. The
determination of profit or loss is done by preparing a
Trading, Profit and Loss Account. The purpose of preparing
the Balance Sheet is to know the financial soundness of a
concern as a whole during the particular period.

The following procedure and important points to be

considered for preparation of Trading, Profit and Loss
Account and Balance Sheet.

Finalization of accounts refers to closing the books

of accounts for the particular period of time. This includes
verification of account balances, passing adjustment
journal entries, preparing trail balance, preparing profit &
loss account and balance sheet for the same period, etc.
This help to give a clear picture of the financial
performance of the organization during the year and to
give the financial position of the organization at the end of
the year.

7
 STEPS/PROCESS OF FINALIZATION OF ACCOUNTS
The process of finalization is something like this:
Prepare a Trial Balance See whether it agrees or not If it
does not agree then investigate the ledgers That process
means that see whether Purchase ledger tallies with cash
book purchase entries etc.
After that you are ready to finalize the accounts but
provide for taxes prepare provision for doubtful
debts, prepare gross block of fixed assets and depreciation,
prepare net block of fixed assets, prepare gross and net
block of inventory and value inventory at cost or market
value whichever is less for this purpose the market value
of the inventory need to be ascertained, prepare bank
reconciliation statement and tally all bank balances with
bank accounts prepare gross and net block of furniture and
fixtures provide for wages and salaries etc. if they are
payable after finalization period.
These are the following steps involved in
Finalization.

1. PRIMARY BOOK (JOURNAL ENTRIES):

Journalizing is the process of recording transaction

in an accounting journal. The journalizing process starts
when a business transaction occurs. Accountants or
bookkeepers must analyze each business transaction in
order to understand what accounts are affected by the
business transaction. Once the accounts are identified, the
accountant must figure out how the accounts are affected.
The business transaction can then be journalized starting
with the account to be debited and the ending with the
credited accounts. Each journal entry is typically
8
accompanied with a date and a description of the business
transaction.

Example

Let's take a look at an example business transaction that

we can show the journalizing process. Assume Pizza Pizza,
Inc. just bought a new delivery car for $1,000 cash on
January 1st.

First, the transaction must be analyzed to identify what

accounts were affected. Pizza Pizza, Inc. bought a new car,
so the vehicle account would have been affected and it
paid cash for the car, so the cash account would also have
been affected.

Second, we must analyze how these accounts changed.

The vehicle account increased because we just added
another vehicle to it and the cash account decreased
because we just paid cash for the vehicle.

Third, we must record the transaction. Since both of these

accounts are asset accounts, they both have debit
balances. We will debit the vehicle account to increase it
and credit the cash account to decrease it. Here is what our
example journal entry will look like in the purchases
journal.

2. SECONDARY BOOK (LEDGER ACCOUNT):

A journal, as we have studied, is a sequential record

of business transactions. It records all financial transactions
of business in a book in chronological order; however, it
does not record transactions relating to a particular
subject, thing or persons into one account. For example, if
we want to know the total purchase of business for a period

9
of three months, we have to go through all journals of three
months, which is quite time consuming and tedious. To
overcome the short coming of journal, a ledger account is
maintained.

Ledger is a statement prepared to collect and record

transactions relating to similar nature or subject into one
place. In other words, a book which records transactions
having similar features, nature and subject into the account
is called ledger account. It is a book which contains a
classified and summer' zed form of permanent record of all
transactions. Ledger is called the book of secondary entry
because it is prepared from journal.

A ledger may be prepared either in T-shape or

showing balance after each transaction which is called a
Ledger account showing running balance i.e. running
shape.

T-shape ledger account:

This type of ledger account commonly used in book

keeping. The ledger is divided into two parts, the left part
of debit and right part for credit. A specimen ruling of
ledger accounting is presented below:
1. Date dr.
2. Particulars
3. JF
4. Amount rs
5. Date cr.
6. Particular
7. JF
8. Amount rs

10
BALANCING OF LEDGER ACCOUNTS

After posting transaction journalized into ledger

account, all the ledger account must be closed to find their
and posting on the business at the end of certain period.
For example, if the ledger has to determine the amount of
cash balance at the end of certain period. Then he has to
prepare cash a/c and debit and credit of the account are
totaled. The difference between two sided (i.e. dr, and cr.)
is balance of the account. The process is called balance of
ledger accounts.
Balancing of account is done periodically i.e. monthly,
quarterly, semi-annually as per requirement. Normally,
monthly balancing is common in practice.

Debit side of an account greater than credit side

In this case, the debit of an account will be greater
than credit total. It is known as debit balance of an
account. Here the excess debit in the credit side of the
account as by balance C/D and closed the account in the
beginning of next period. The balancing figure is brought
down as to balance b/d.

Credit side of an account greater than debit side

In this case, the credit total of an account is
greater than debit total. It is knows as credit balance of an
account. Here excess credit amount is entered in the debit
side of account as " to balance c/d' and closed the account.
In the next period, the balancing figure is brought down as
"By balance b/d".

11
CHAPATER:2
BALANCING OF DIFFERENT ACCOUNTS:

Balancing is done periodically, i.e., weekly, monthly,

quarterly, half yearly or yearly, depending on the
requirements of the business.
I. PERSONAL ACCOUNTS: These accounts are generally
balanced regularly to know the amounts due to the persons
(creditors) or due from the persons (debtors).

II. REAL ACCOUNTS: These accounts are generally

balanced at the end of the financial year, when final
accounts are being prepared. However, cash account is
frequently balanced to know the cash on hand.

A debit balance in an asset account indicated the value of

the asset owned by the business. Assets accounts always
show debit balances.

III. NOMINAL ACCOUNTS: These accounts are in fact, not

to be balanced as they are to be closed by transfer to final
accounts. A debit balance in a nominal account indicates
that it is an expense or loss. A credit balance in a nominal
account indicates that it is an income or gain.

All such balances in personal and real accounts are shown

in the Balance Sheet and the balances in nominal accounts
are taken to the Profit and Loss Account.

12
EXAMPLE

Illustration:

Journalise the following transactions in the books of

Amar and post them in the Ledger:-
2004
March1 Bought goods for cash Rs. 25,000
2 Sold goods for cash Rs. 50,000
3 Bought goods for credit from Gopi Rs.19,000
5 Sold goods on credit to Robert Rs.8,000
7 Received from Robert Rs. 6,000
9 Paid to Gopi Rs.5,000 20 Bought furniture for cash
Rs. 7,000

Solution: Journal of Amar

Date Particulars L.F Debit Credit

. (Rs.) (Rs.)
2004 Purchases a/c 25,000
Mar 1 Dr. 25,000
To Cash a/c
2 Cash a/c 50,000
Dr. 50,000
To sales a/c
3 Purchases a/c 19,000
Dr. 19,000
To gopi a/c
5 Robert a/c 8,000
Dr. 8,000
To sales a/c
7 Cash a/c
Dr.
13
 To Robert a/c
9 Gopi a/c 5,000
Dr. 5,000
To cash a/c
2 Furniture a/c 7,000
0 Dr. 7,000
To cash a/c
Explanation : There are six accounts involved: Cash,
Purchases, Sales, Furniture, Gopi & Robert, so six accounts
are to be opened in the ledger.
Ledger of Amar

Cash account

Dat Particula J.F Amt. Dat Particulars J.F Amt.

e rs . e .
2004 200
Mar To sales 50,00 4 By 25,000
5 a/c 0 Mar purchases
1 a/c
To Robert 6,000 By gopi a/c 5,000
7 a/c 9
2 By furniture 7,000
0 a/c

Purchases a/c
Date Particula J.F Amt. Dat Particulars J.F Amt.
rs . e .
2004
Marc To cash 25,00
h1 a/c 0
To gopi 19,00
3 a/c 0

Sales a/c

14
Dat Particula J.F Amt. Dat Particulars J.F Amt.
e rs . e .
200
4 By cash a/c 50,000
Mar
2
By Robert 8,000
5 a/c

Furniture a/c
Dat Particula J.F Amt. Dat Particulars J.F Amt.
e rs . e .
2004
Mar To cash 7,000
20 a/c

Gopi a/c
Dat Particula J.F Amt. Dat Particulars J.F Amt.
e rs . e .
2004 To cash 5,000 200
Mar a/c 4 By 19,000
9 Mar purchases
3 a/c

Robert a/c
Dat Particula J.F Amt. Dat Particulars J.F Amt.
e rs . e .
2004 200
Mar To sales 8,000 4 By cash a/c 6,000
5 a/c Mar
7

3. PREPARATION OF SUBSIDIARY BOOK:

15
What is subsidiary book?

Most of the big companies are recording the

business transactions in one journal and the posting of the
same to the concerned ledger accounts are very difficult
tasks and which require more clerical labour also. For
avoiding such kind of difficulties most of the business
organizations are subdividing the journal in to subsidiary
journals or subsidiary books.
Subsidiary books are those books of original entry
in which similar nature of transactions are recording in a
chronological order.
In a business most of the transactions are related
to receipt and payment of cash, sale of goods and purchase
of goods. Hence separate books are maintained for
recording these transactions. The journal is subdivided into
different books. These books are known as Subsidiary
Books. These are the books of prime or original entry. All
transactions are first recorded in the subsidiary books and
then posted to the ledger.

KINDS OF SUBSIDIARY BOOKS:

There are different kinds of subsidiary books which

includes purchase day book, Sales day book, purchase
returns book, Sales returns book, Bills receivable books,
Bills payable books, Cash book.

1. Purchase Day Book:

Purchase day book is used for recording credit

purchase of goods only. This will not record any cash
purchase or credit purchase of any assets. The term goods
means all the commodities and services in which the
company deals in day to day activities. The preparation of
16
purchase day book involves the Date column, Particulars
column, Invoice number column, Ledger folio column, inner
amount column and Amount column.
Purchase book is prepared to record all the credit
purchases of an organization. Purchase book is not a
purchase ledger.
Format:
Date Particula Inward L.F. Amount
rs Invoice
No.

2. Sales Day Book:

Sales day book is mainly used for recording credit

sales of goods and services in an organization. This will not
record any cash sales or assets sales. The ruling for the
preparation of this book is same as like Purchase day book.

This involves the Date column, Particulars column, Invoice

number column, Ledger folio column, inner amount column
and Amount column.
The features of a sale book are same as a purchase
book, except for the fact that it records all the credit sales.

Format:
Date Particula Outward L.F. Amount
rs Invoice
No.

3.Purchase Returns Book:

17
 This is maintained to record the transactions of
goods returned to the supplier when purchase on credit.
The ruling of the preparation of purchase return book or
returns outward book involves Date, Particulars, Debit note
number, Ledger folio and amount column.
Sometimes goods are to be retuned back to the
supplier, for various reasons. The most common reason
being defective goods or poor quality goods. In this case, a
debit note is issued.
Format:
Date Particula Credit L.F. Amount
rs Note No.

3. Sales Returns Book:

This book is used to record the goods returned by the

customer the goods sold on credit. The ruling of the
preparation of Sales return book or returns inward book
involves Date, Particulars, credit note number, Ledger folio
and amount column.
The reason of Sale return is same as for purchase
return. Sometimes customers return the goods if they dont
meet the quality standards promised. In such cases, a
credit note is issued to the customer.
Format:
Date Particula Debit L.F. Amount
rs Note No.

4. Bills Receivable Books:

It is used to record the transactions when the bills

received from the customer for credit sales. This provides a
medium for posting bills receivable transaction. The
preparation of this book involves Date when received,
18
Drawer, Acceptor, Where payable, date of bill, term, due
date ledger folio, Amount, remarks columns.
Bills are raised by creditors to debtors. The debtors
accept them and subsequently return them to the
creditors. Bills accepted by debtors are called as Bills
Receivables in the books of creditors, and Bills Payable in
the books of debtors. We keep them in our record called
Bills Receivable Books and Bills Payable Book.
Format:
Date Received Term Due L.F. Amt.
from date

5. Bills Payable Books:

This is used to record the acceptances given to the

suppliers for credit purchase. The preparation of bills
payable book involves Date of acceptance, giver, payee,
Where payable, date of bill, term, due date, ledger folio,
Amount, remarks columns.
Bills payable issues to the supplier of goods or
services for payment, and the record is maintained in this
book.
Format:
Date To Whom Term Due L.F. Amt.
Given date

4. PREPARATION OF CASH BOOK:

The cash book is used to record all the receipts and

payments of cash. For the preparation of cash book there
are different rules are available according to the nature of
business. Cash book is a record of all the transactions
related to cash. Examples include: expenses paid in cash,

19
 revenue collected in cash, payments made to creditors,
payments received from debtors, cash deposited in bank,
withdrawn of cash for office use, etc.
Note: In modern accounting, simple cash book is the most
popular way to record cash transactions. The double
column cash book or three column cash book is practically
for academic purpose. A separate bank book is used to
record all the banking transactions as they are more than
cash transactions. These days, cash is used just to meet
petty and routine expenditures of an organization. In most
of the organizations, the salaries of employees are paid by
bank transfer.
Note: Cash book always shows debit balance, cash in
hand, and a part of current assets.
The different forms of cash book are as follows:-

1. Single Column Cash Book

Cash book is just like a ledger account. There is

no need to open a separate cash account in the ledger. The
balance of cash book is directly posted to the trial balance.
Since cash account is a real account, ruling is followed, i.e.
what comes in debit, and what goes out credit.
All the received cash is posted in the debit side and
all payments and expenses are posted in the credit side of
the cash book.
Format:
Dr.
Cr.
Date Particula L.F. Amt. Date Particula L.F. Amt.
rs rs

2. Double Column Cash Book:

20
 Here, we have an additional Discount column on
each side of the cash book. The debit side column of
discount represents the discount to debtors of the company
and the credit side of discount column means the discount
received from our suppliers or creditors while making
payments.
The total of discount column of debit side of cash
book is posted in the ledger account of Discount Allowed
to Customers account as To Total As Per Cash Book.
Similarly, credit column of cash book is posted in ledger
account of Discount Received as By total of cash book.
Format:
Dat Particular L.F. Discou Rs Dat Particul L.F. Discou Rs
e s nt e ars nt

3. Triple Column Cash Book:

When one more column of Bank is added in both

sides of the double column cash book to post all banking
transactions, it is called triple column cash book. All
banking transactions are routed through this cash book and
there is no need to open a separate bank account in ledger.

4. Petty Cash Book:

In any organization, there may be many petty

transactions incurring for which payments have to be done.
Therefore, cash is kept with an employee, who deals with it
and makes regular payments out of it. To make it simple
and secure, mostly a constant balance is kept with that
employee.
Suppose cashier pays Rs 5,000 to Mr A, who will
pay day-to-day organization expenses out of it. Suppose Mr
A spend Rs 4,200 out of it in a day, the main cashier pays
Rs 4,200, so his balance of petty cash book will be again Rs
21
 5,000. It is very useful system of accounting, as it saves
the time of the main cashier and provides better control.
We will soon discuss about Analytical or Columnar
Petty Cash Book which is most commonly used in most of
the organizations.
Format:
Amt C.B.F Dat Particul Rs Stationer Cartag Loadin Posta L
Receiv . e ars . y& e g ge .
ed Printing F
.

5. PREPARATION OF TRIAL BALANCE:

Trial balance is a summary of all the debit and credit

balances of ledger accounts. The total of debit side and
credit side of trial balance should be matched. Trial balance
is prepared on the last day of the accounting cycle.
Trial balance provides us a comprehensive list of
balances. With the help of that, we can draw financial
reports of an organization. For example, the trading
account can be analyzed to ascertain the gross profit, the
profit and loss account is analyzed to ascertain the profit or
Loss of that particular accounting year, and finally, the
balance sheet of the concern is prepared to conclude the
financial position of the firm.
Format:
TRIAL BALANCE
S. LEDGER ACCOUNTS L.F DEBIT CREDIT
NO. . AMT AMT
1. Advance From Customers X
2. Advance To Staff X
3. Audit Fees X
4. Balance At Bank X
5. Bank Borrowings X
6. Bank Interest Paid X
7. Capital X
8. Cash In Hand X
22
 9. Commission On Sale X
10. Electricity Expenses X
11. Fixed Assets X
12. Freight Outward X
13. Interest Received X
14. Inward Freight Charges X
15. Office Expenses X
16. Outstanding Rent X
17. Prepaid Insurance X
18. Purchases X
19. Rent X
20. Repair & Renewals X
21. Salary X
22. Salary Payable X
23. Sale X
24. Staff Welfare Expenses X
25. Stock X
26. Sundry Creditors X
27. Sundry Debtors X
Total XX XX

6. ADJUSTMENTS AND DEALING WITH ADJUSTMENTS:

Adjusting entries are usually made on the last day of
an accounting period (year, quarter, month) so that
the financial statements reflect the revenues that have
been earned and the expenses that were incurred during
the accounting period.

Sometimes an adjusting entry is needed because:

Revenue has been earned, but it has not yet been

recorded.

An expense may have been incurred, but it hasn't yet

been recorded.

A company may have paid for six-months of insurance

coverage, but the accounting period is only one month.

23
 (This means that five months of insurance expense is
prepaid and should not be reported as an expense on
the current income statement.)
A customer paid a company in advance of receiving
goods or services. Until the goods or services are
delivered, the amount is reported as a liability. After the
goods or services are delivered, an entry is needed to
reduce the liability and to report the revenues.
CHAPATER:3
Purpose of Adjusting Entries:

The main purpose of adjusting entries is to update

the accounts to conform with the accrual concept. At the
end of the accounting period, some income and expenses
may have not been recorded, taken up or updated; hence,
there is a need to update the accounts. If adjusting entries
are not prepared, some income, expense, asset, and
liability accounts may not reflect their true values when
reported in the financial statements. For this reason,
adjusting entries are necessary.

Types of Adjusting Entries:

Generally, there are 4 types of adjusting entries.

Adjusting entries are prepared for the following:

1. Accrued Income income earned but not yet received

2. Accrued Expense expenses incurred but not yet paid
3. Deferred Income income received but not yet earned
4. Prepaid Expense expenses paid but not yet incurred

24
Also, adjusting entries are made for:

5. Depreciation
6. Doubtful Accounts or Bad Debts, and other
allowances

For example:

7. PREPARATION OF FINAL ACCOUNT:

Preparation of final account is the last stage of the

accounting cycle. The basic objective of every concern
maintaining the book of accounts is to find out the profit or
loss in their business at the end of the year. Every
businessman wishes to ascertain the financial position of
his business firm as a whole during the particular period. In
order to achieve the objectives for the firm, it is essential to
prepare final accounts which include Manufacturing and
Trading, Profit and Loss Account and Balance Sheet. The
determination of profit or loss is done by preparing a
Trading, Profit and Loss Account. The purpose of preparing
the Balance Sheet is to know the financial soundness of a
concern as a whole during the particular period. The
following procedure and important points to be considered
for preparation of Trading, Profit and Loss Account and
Balance Sheet.
The final account includes the following:
1. MANUFACTURING ACCOUNT:
Manufacturing Account is the important part which
is required to preparing Trading, Profit and Loss Account.
Accordingly, in order to calculate the Gross Profit or Gross
Loss, it is essential to determine the Cost of Goods
Manufactured or Cost of Goods Sold. The main purpose of
preparing Manufacturing Account is to ascertain the cost of
goods manufactured or cost of goods sold, which is
25
 transferred to the Trading Account. This account is debited
with opening stock and all items of costs including
purchases related to production and credited with closing
balance of work in progress and cost of goods produced
transferred to Trading Account. The term "Cost of Goods
Sold" refers to cost of raw materials consumed plus direct
related expenses.
Components of Manufacturing Account:
The following are the important components to be
considered for preparation of Manufacturing Accounts:
a. Opening Stock of Raw Materials.
b. Purchase of Raw Materials.
c. Purchase Returns.
d. Closing Stock of Raw Materials. Final Accounts
e. Work in Progress (semi-finished goods).
f. Factory Expenses.
g. Opening Stock of Finished Goods.
h. Closing Stock of Finished Goods.
(1) Opening Stock: The term Opening Stock refers to
stock on hand at the beginning of the year which include
raw materials, work-in-progress and finished goods.
(2) Purchases: Purchases include both cash and credit
purchase of goods. If any purchase is returned, the same
will be deducted from gross purchases.
(3) Direct Expenses: Direct expenses are chargeable
expenses or productive expenses which include factory
rent, wages, freight on purchases, manufacturing
expenses, factory lighting, heating, fuel, customs duty,
dock duty and packing expenses. In short, all those
expenses incurred in bringing the raw materials to the
factory and converting them into finished goods will
constitute the direct expenses that are to be shown on the
debit side of the trading account.

Format:
26
 Particulars Amt. Particulars Amt.
Work in progress XX Sale of scrap XX
(opening balance)
Raw material Work in progress XX
consumed
Opening stock XX Cost of production XX
(balancing figure)
Add: purchase XX
Less: closing stock XX
Factory wages XX
Factory overheads XX
XX XX

2. TRADING ACCOUNT:
Trading Account and Profit and Loss Account are
the two important parts of income statements. Trading
Account is the first stage in the final account which is
prepared to know the trading results of gross profit or
loss during a particular period. In other words, it is a
summary of the purchases, and sale of a business or
production cost of goods sold and the value of sales. The
difference between the elements establishes the gross
profit or loss which is then carried forward to the profit or
loss account for calculation of net profit or net loss.
Accordingly, if the sales revenue is higher than the cost
of goods sold the difference is known as 'Gross Profit,'
Similarly, if the sales revenue is less than the cost of
goods sold the difference is known as 'Gross Loss.'

Specimen Proforma of Trading Account

The following Specimen Proforma of a Trading
Account which is widely used in practice:
Trading Account
For the year ended 31st..

Particulars Amt. Particulars Amt

.
27
 To Opening Stock XX By Gross Sales XX
To Purchases XX Less: Sales Return (X)
Less: Purchase (X) Net Sales XX
Return
To Direct Expenses: By Closing Stock XX
Carriage Inward XX By Gross Loss C/D XX
Wages XX (Transferred To XX
Freight P&L A/C)
Freight XX
Custom Duty XX
Fuel And Power XX
Factory Expenses XX
Royalty On XX
Production
Other Direct XX
Expenses
To Gross Profit C/D XX
(Transferred To P&L
A/C)
XX XX

Equation of Trading Account

The purpose of preparing the Trading Account is to
calculate the Gross Profit or Gross Loss of a concern during
a particular period. The following equations are highly
useful for determination of Gross Profit or Gross Loss :

Calculation of Gross Profit or Loss

Gross Profit = Sales - Cost of Sales
Sales = Cost of Sales + Gross Profit
(or)
Sales =Stock in the beginning + Purchases +
Direct Expenses
- Stock at the end + Gross Profit
(or)
Stock in the beginning + Purchases +
Direct Expenses
+ Gross Profit = Sales + Stock at the end

28
3. PROFIT AND LOSS ACCOUNT:

The determination of Gross Profit or Gross Loss is

done by preparation of Trading Account. But it does not
reveal the Net Profit or Net Loss of a concern during the
particular period. This is the second part of the income
statement and is called as Profit and Loss Account. The
purpose of preparing the profit and loss account to
calculate the Net Profit or Net Loss of a concern. Net profit
refers to the surplus which remains after deducting related
trading expenses from the Gross Profit. The trading
expenses refer to inclusive of office and administrative
expenses, selling and distribution expenses. In other words,
all operating expenses such as office and administrative
expenses, selling and distribution expenses and non-
operating expenses are shown on the debit side and all
operating and non operating gains and incomes are shown
on the credit side of the Profit and Loss Account. The
difference of two sides is either Net Profit or Net Loss.
Accordingly, when total of all operating and non-operating
expenses is more than the Gross
Profit and other non-operating incomes, the difference is
the Net Profit and in the reverse case it is known as Net
Loss. This Net Profit or Net Loss is transferred to the Capital
Account of Balance Sheet.

Specimen Proforma of a Profit And Loss Account

The following Specimen Proforma which is used for
preparation of Trading, Profit and Loss Account.

Trading, Profit & Loss Account

For the year ended 31st Dec....
Particulars Amt. Particulars Amt.
To opening stock XX By sales XX
To purchases XX Less: returns (X)
Less: returns (X) By closing stock XX
To carriage XX By gross loss c/d XX
inwards

29
To wages XX
To gross profit c/d XX
XX XX
To gross loss b/d XX By gross profit XX
b/d
To office & By non-operating
administrative incomes:
expenses:
Office salaries XX Interest received XX
Office rent and XX Discount received XX
rates
Printing and XX Dividend received XX
stationary
Telephone XX Income from XX
charges investment
Legal charges XX Interest on XX
debenture
Audit fees XX Any other XX
incomes
General expenses XX
To Selling By net loss c/d
Expenses:
Advertisement XX (transferred to XX
capital account)
Discount Allowed XX
Commission Paid XX
Salesmen Salaries XX
Godown Rent XX
Carriage Outward XX
Agent Commission XX
Travelling XX
Expenses
To Distribution
Expenses:
Depreciation on XX
Vehicle
Upkeep of Motor XX
30
Van
Travellers' XX
Salaries
Repairs and XX
Maintenance
To Non-Operating
Expenses:
Discount on Issue XX
of Shares
Preliminary XX
Expenses
To net profit c/d XX
(Transferred to
capital a/c)
XX XX

Components appearing on Debit side of the P& L A/c:

Those expenses incurred during the manufacturing process

of conversion of raw materials into finished goods will be
treated as direct expenses which are recorded in the debit
side of Trading Account. Any expenditure incurred
subsequent to that will be known as indirect expenses to
be shown in the debit side of the Profit and Loss Account.
The indirect expenses may be classified into: (1) Operating
Expenses and (2) Non-Operating Expenses.

(1) Operating Expenses: It refers to those expenses as

the day-to-day expenses of operating a business include
office & administrative expenses, selling and distribution
expenses.

(2) Non-Operating Expenses: Those expenses incurred

other than operating expenses. Non-Operating expenses
which are related to a financial nature. For example,
interest payment on loans and overdrafts, loss on sale of
fixed assets, writing off fictitious assets such as preliminary
expenses, under writing commission etc.

31
Components appearing on Credit Side of P&L A/c:
The following are the components as shown on the Credit
Side:
(1) Gross Profit brought down from Trading Account

(2) Operating Income: It refers to income earned from

the operation of the business excluding Gross Profit and
Non-Operating incomes.

(3) Non-Operating Income: Non-Operating incomes refer

to other than operating income. For example, interest on
investment of outside business, profit on sale of fixed
assets and dividend received etc.

4. PROFIT AND LOSS APPROPRIATION ACCOUNT:

Profit and loss appropriation account shows the

distribution of net profit among the shareholders in the
form of dividend and transfer of profit to various reserves
and issue of bonus share. Profit and loss appropriation
account is prepared after the preparation of profit and loss
account. Profit and loss account provides the information
about adjustment relating to last year. Profit and loss
appropriation account also provides the information about
the appropriation of dividend out of available profit. Profit
and loss appropriation account is prepared after profit and
loss account and before the preparation of balance sheet.
Profit and loss appropriation account is a vital item of final
account.

The profit and loss appropriation account is an

extension of the profit and loss account. The main intension
of preparing a profit and loss appropriation account is to
show the distribution of profits among the partners. It is
debited with interest on capital and remuneration to
partners and credited with the net profits b/d from the

32
profit and loss account and interest on drawings. The
balance of the profit and loss appropriation account is
transferred to the capital accounts of the partners.

Profit and Loss Account

Dr. For the year ended on..

Cr.

Particulars Amt. Particulars Amt.

To interest on By profit and loss XX
capital: A/c
A (net profit subject
XX to appropriations)
B XX By interest on
XX Drawings:
To salary to XX A
partner XX
To commission to XX B XX
partner XX
To reserve XX
To profit
transferred to:
As capital A/c
XX
(or As current a/c)
Bs capital A/c XX
XX
(or Bs current a/c)
XX XX

5. BALANCE SHEET:

33
 According to AICPC (The American Institute of
Certified Public Accountants) defines Balance Sheet as a
tabular Statement of Summary of Balances (Debit and
Credits) carried forward after an actual and constructive
closing of books of accounts and kept according to
principles of accounting. The purpose of preparing balance
sheet is to know the true and fair view of the status of the
business as a going concern during a particular period. The
balance sheet is on~ of the important statement which is
used to owners or investors to measure the financial
soundness of the concern as a whole. A statement is
prepared to show the list of liabilities and capital of credit
balances of the business on the left hand side and list of
assets and other debit balances are recorded on the right
hand side is known as "Balance Sheet."
The Balance Sheet is also described as a statement
showing the sources of funds and application of capital or
funds. In other words, liability side shows the sources from
where the funds for the business were obtained and the
assets side shows how the funds or capital were utilized in
the business. Accordingly, it describes that all the assets
owned by the concern and all the liabilities and claims it
owes to owners and outsiders.

Specimen Form of Balance Sheet:

Companies Act 1956 has prescribed a particular
form for showing assets and liabilities in the Balance Sheet
for companies registered under this Act. There is no
prescribed form of Balance Sheet for a sole trader and
partnership firm. However, the assets and liabilities can be
arranged in the Balance Sheet into
a. In the Order of Liquidity
b. In the Order of Performance

a) In the Order of Liquidity: When assets and liabilities

are arranged according to their order of liquidity and ability
to meet its short-term obligations, such an arrangement of
order is called "Liquidity Order." The Specimen form of

34
Balance Sheet arranged in the Order of Liquidity is given
below:
Balance Sheet (I)
As on .....
Liabilities Amt. Assets Amt.
Current liabilities Current assets:
Sundry creditors XX Cash in hand XX
Bill payable XX Cash at bank XX
Bank overdraft XX Sundry debtors XX
Outstanding XX Short term XX
expenses investment
Long term Stock in trade XX
liabilities
Loan from bank XX Bill receivable XX
Loan from XX Prepaid expenses XX
mortgage
Debentures XX Accrued income XX
Any other long XX Fixed assets
term loans
Total liabilities XX Plant and XX
machinery
Capital account: Furniture and XX
fixture
Add: net profit XX Buildings XX
Add: interest on XX Loose tools XX
capital
Less: drawing XX Motor cars XX
Reserves and Intangible assets:
surplus:
General reserve XX Goodwill XX
Reserve for XX Patents XX
contingency
Reserve for XX Copy rights XX
sinking fund
Trade marks XX
Fictitious assets
Preliminary XX

35
 expenses
Advertisement XX
Misc. expenses XX
XX

(b) In the order of Performance: This method is commonly

used by the companies. The specimen form of Balance
Sheet arranged in the order of Performance is given below:

Balance sheet (II)

As on....
Liabilities Amt. Assets Amt.
Current Liabilities XX Current Assets XX
Fixed Liabilities XX Fixed Assets XX
Long Term XX Fictitious Assets XX
Liabilities
Capital, Reserves XX Any Other XX
And Surplus Investment
XX XX

36
CHAPATER:4
Classification of Assets & Liabilities:
I. Assets
Business assets are resources or items of values owned by
the business and which are utilized in the normal course of
business operations to produce goods for sale in order to
yield a profit. The assets are grouped into:
(1) Fixed Assets
(2) Current Assets or Floating Assets
(3) Fictitious Assets
(4) Liquid Assets
(5) Contingent Assets

(1) Fixed Assets:

This class of assets include those of a tangible
nature having a specific value and which are not consumed
during the normal course of business and trade but provide
the means for producing saleable goods or providing
services.
Components of Fixed Assets
(1) Goodwill
(2) Land and Buildings
(3) Plant and Machinery
(4) Furniture and Fixtures
(5) Patents and Copy Rights
(6) Livestock
(7) Leaseholds
(8) Long-term Investments
(9) Vehicles

(2) Current Assets or Floating Assets:

37
 The assets of a business of a transitory nature which
are used for resale or conversion into a cash during the
course of business operation. In other words, those assets
which are easily converted into cash in normal course of
business during the shorter period say, less than one year
are treated as current or floating assets.

Components of Current Assets

(1) Cash in hand
(2) Cash at Bank
(3) Inventories:
Stock of raw materials
Stock of work-in-progress
Stock of finished goods
(4) Sundry Debtors
(5) Bills Receivable
(6) Short-Term Marketable Securities
(7) Short-Term Investments
(8) Prepaid Expenses

(3) Fictitious Assets:

Fictitious Assets refer to any deferred charges.
They are really not assets. Preliminary expenses, Share
issue expenses, discount on issue of shares and
debentures, and debit balance of profit and loss account
etc. are the important components of fictitious assets.

(4) Contingent Assets:

It refers to a right to property which may come
into existence on the happening of some future event. For
example, a right to obtain for shares in another company
on favourable terms, a right to sue for infringement of
patents and copy rights etc.

(5) Liquid Assets:

Liquid Assets which are immediately converted
into cash. In other words, these assets are easily
encashable in the normal course of business. Cash in hand,

38
Cash at bank, Bills Receivable Sundry debtors, Marketable
Securities, Short-term investments etc. are the important
components of liquid assets. While measuring Liquid
Assets, Stock of raw materials, work-in-progress, finished
goods and prepaid expenses are excluded from the
components of Current assets.

II. Liabilities
According to Accounting Principles Board, define
liabilities as an economic obligations of an enterprise that
are recognized and measured in conforming with generally
accepted accounting principles. The liabilities are classified
into:
(1) Non-Current Liabilities
(2) Capital
(3) Current Liabilities
(1) Non-Current Liabilities: Non-Current Liabilities
otherwise known as Long-Term Liabilities. Liabilities which
are become due for payment beyond a period of one year
say, five to ten years, are treated as Long-Term Liabilities.
The following are the examples of
Non-Current Liabilities:
(a) Long-Term Debit.
(b) Debenture.
(c) Long-Term Loan from Bank.
(d) Long-Term Loan from Financial Institutions.
(e) Long-Term Loan raised by Issue of Public Deposits.
(f) Long-Term Debt raised by Issue of Securities.

(2) Capital:
Capital refers to the value of assets owned by a
business and which are used during the course of business
operations to generate additional Capital or Wealth. It is
also known as Owner's Equity or Net Worth. When a
business first comes into existence the initial capital may
be provided by the proprietor. The initial influx of capital
will normally be in the form of cash which need to be
converted into plant and machinery, building and stock of

39
materials prior to commencing operations. Thus, capital is
equal to the total assets.

(3) Current Liabilities:

Any amount owing by the business which are
currently due for payment are referred to as current
liabilities. In other words, these liabilities which are paid
within one year are treated as current liabilities. The
following are the components of current liabilities:
(1) Bills Payable.
(2) Sundry Creditors.
(3) Short-Term Bank Loans.
(4) Dividend Payable.
(5) Provision for Taxes Payable.
(6) Short-Term Bank Overdraft.
(7) Trade Liabilities and Accrued Expenses.
(8) Outstanding Expenses.

40
CHAPATER:5
WHAT IS PARTNERSHIP FIRM?

The Indian Partnership Act, 1932 is an act

enacted by the Parliament of India to regulate partnership
firms in India. It received the assent of the Governor-
General on 8 April 1932 and came into force on 1 October
1932. Before the enactment of this act, partnerships were
governed by the provisions of the Indian Contract Act. The
act is administered through the Ministry of Corporate
Affairs. The act is not applicable to Limited Liability
Partnerships, since they are governed by the Limited
liability Partnership Act, 2008.

The term 'partnership' is defined under section 4 of

Indian partnership act 1932 as under "Partnership is an
agreement between two or more persons who have agreed
to share profits of the business carried on by all or any one
of them acting upon all."

Section 2 of the act defines,

(a) an "act of a firm" means any act or omission by all the

partners, or by any partner or agent of the firm which gives
rise to a right enforceable by or against the firm;

(b) "business" includes every trade, occupation and

profession;
41
(c) "prescribed" means prescribed by rules made under this
Act; (c-1) "Registrar" means the Registrar of Firms
appointed under sub-section (1) of section 57 and includes
the Deputy Registrar of Firms and Assistant Registrar of
Firms appointed under sub-section (2) of that section;

(d) "third party" used in relation to a firm or to a partner

therein means any person who is not a partner in the firm;
and

(e) expressions used but not defined in this Act and defined
in the Indian Contract Act, 1872, shall have the meanings
assigned to them in that Act.

Partnership refers to an agreement between

persons to share their profits or losses arising on account of
actions carried by all or one of them acting on behalf of all.
The persons who have entered such an agreement are
called partners and give their collective business a name,
which is necessarily their firm-name. This relation between
partners arises out of a contract or an agreement, which
means a husband and wife carrying on a business or
members of a Hindu undivided family are not into
partnership. The share of profits received by any individual
from the firm, money received by a lender of money, salary
received by a worker or a servant, annuity received by a
widow or a child of a deceased partner, does not make
them a partner of the firm.

The Indian Partnerships have the following common

characteristics:

1) A partnership firm is not a legal entity

42
Apart from the partners constituting it. It has limited
identity for the purpose of tax law as per section 4 of the
Partnership Act of 1932.

2) Partnership is a concurrent subject.

Contracts of partnerships are included in the Entry no.7 of

List III of The Constitution of India (the list constitutes the
subjects on which both the State government and Central
(National) Government can legislate i.e. pass laws on).

3) Unlimited Liability.

The major disadvantage of partnership is the unlimited

liability of partners for the debts and liabilities of the firm.
Any partner can bind the firm and the firm is liable for all
liabilities incurred by any firm on behalf of the firm.

If property of partnership firm is insufficient to meet

liabilities, personal property of any partner can be attached
to pay the debts of the firm.

4) Partners are Mutual Agents.

The business of firm can be carried on by all or any of them

for all. Any partner has authority to bind the firm. Act of
any one partner is binding on all the partners.

43
Thus, each partner is agent of all the remaining partners.
Hence, partners are mutual agents. Section 18 of the
Partnership Act, 1932 says "Subject to the provisions of this
Act, a partner is the agent of the firm for the purpose of the
business of the firm"

5) Oral or Written Agreements.

The Partnership Act, 1932 nowhere mentions that the

Partnership Agreement is to be in written or oral format.
Thus the general rule of the Contract Act applies that the
contract can be in be 'oral' or 'written' as long as it satisfies
the basic conditions of being a contract i.e. the agreement
between partners is legally enforceable.

A written agreement is advisable to establish existence of

partnership and to prove rights and liabilities of each
partner, as it is difficult to prove an oral agreement.

6) Number of Partners is minimum 2 and maximum

50 in any kind of business activities.

Since partnership is agreement there must be minimum

two partners. The Partnership Act does not put any
restrictions on maximum number of partners.

However, section 464 of Companies Act 2013, and Rule 10

of Companies (Miscellaneous) Rules, 2014 prohibits

44
partnership consisting of more than 50 for any businesses,
unless it is registered as a company under Companies
Act, 2013 or formed in pursuance of some other law. Some
other law means companies and corporations formed via
some other law passed by Parliament of India.

7) Mutual agency is the real test.

The real test of partnership firm is mutual agency set by

the Courts of India, i.e. whether a partner can bind the firm
by his act, i.e. whether he can act as agent of all other
partners.

CONCLUSION:

The business transaction can then be journalized starting

with the account to be debited and the ending with the
credited accounts. Each journal entry is typically
accompanied with a date and a description of the business
transaction.

45
 The term 'partnership' is defined under section 4 of
Indian partnership act 1932 as under "Partnership is an
agreement between two or more persons who have agreed
to share profits of the business carried on by all or any one
of them acting upon all.

The major disadvantage of partnership is the unlimited

liability of partners for the debts and liabilities of the firm.
Any partner can bind the firm and the firm is liable for all
liabilities incurred by any firm on behalf of the firm.

The business of firm can be carried on by all or any of them

for all. Any partner has authority to bind the firm. Act of
any one partner is binding on all the partners.

The Balance Sheet is also described as a statement showing the

sources of funds and application of capital or funds. In other words,
liability side shows the sources from where the funds for the business
were obtained and the assets side shows how the funds or capital were
utilized in the business.

BIBLIOGRAPHY:
what-is-the-finalisation-of-balancesheet-and-ho...

46
www.futureaccountant.com/partnership.../parntership-accounts-
accounti
www.baroda-icai.org/Module2011/DownBranchEvents/Full/1_1
www.yourarticlelibrary.com/.../partnership-
account/partnership.../51950/

unawat.com/.../SpecificIssuesinFinalisationofAuditsunderCompanie
sAct

www.researchfaculty.com General accounting 1 and 2

47