HIGHER FNANCIAL ACCOUNTING PPT (2) (2) (1).pptx

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1. II B.COM HIGHER FINANCIAL ACCOUNTING K.GOWRI ASSISTANT PROFESSOR DEPARTMENT OF COMMERCE VETIAS

2. ADMISSION OF A PARTNER A Partnership firm suffering from shortage of funds or administrative incapabilities may decide to admit a partner. Such a person who is admitted to the firm is known as incoming or a new partner. According to sec 31(1) of the Indian Partnership Act 1932, a new partner can be admitted only with the consent of all the existing partners.

3. When a new person is admitted as partner, one or more of the following accounting adjustments become necessary: Adjustment in the profit sharing ratio Adjustment for goodwill Adjustment for evaluation of assets and liabilities Adjustment of reserves and other accumulated profits Adjustment for capital

4. 1.Adjustment in the Profit sharing Ratio Whenever a partner is admitted into the firm, he will get some share in the profits of the firm and the old partners are required to sacrifice some share of profit in favour of the new partner.

5. Calculation of Sacrificing ratio There is an admission of a new partner , old partners have to surrender some of their old shares in favour of the new partner. The surrender of shares by old partners is made in certain ratio . This ratio is called Sacrifcing ratio. Sacrificing Ratio= Old Ratio-New Ratio 3

6. P and Q are partners sharing profits in the ratio of 3:2. The admit R as a partner for 1/5 th share in future profit. Calculate the new ratio and sacrificing ratio.

7. A and B are partners in a business sharing profits in the ratio of 5:3. They decide to admit C into the firm giving him 1/6 th share. Calculate the new profit sharing ratio and sacrificing ratio of the partners

8. 2.Adjustment for goodwill

9. Goodwill is an intangible asset that is either self-generated or purchased. It is the value of benefits that a business has because of the factors that help in increasing its profitability, say its location, favourable contracts, access to supplies and customer loyalty, etc. Goodwill is the reputation earned by the business through hard work, honesty and quality, and satisfactory services to customers. The efforts and hard work done by the existing partners frame the goodwill of the firm.

10. Factors affecting the value of goodwill Q uality Location or site Competition Capacity of management Capital required Nature of business Types of customer

11. Methods of Valuation of Goodwill

12. 1 ] Average Profits Method i) Simple Average:  Under this method, it is valued at agreed number of years’ of purchase of the average  profits  of the past years. Goodwill = Average Profit × No. of years’ of purchase ii) Weighted Average:  Under this method, it is valued at agreed number of years’ of purchase of the weighted average profits of the past years. Goodwill = Weighted Average Profit  × No. of years’ of purchase

13. II. SUPER PROFIT METHOD Under this method, valued at agreed number of years’ of purchase of the super profits of the firm. Goodwill = Super Profit × No. of years’ of purchase Super Profit = Actual/ Average profit – Normal Profit Normal Profit = Capital Employed * Normal Rate of Return / 100

14. III. Capitalization Method: (i) Capitalization of Average Profits: Under this method, the value of goodwill is calculated by deducting the actual capital employed from the capitalized value of the average profits on the basis of a normal rate of return. Goodwill = Capitalized Average profits – Actual Capital Employed Capitalized Average profits = Average Profits  ×  100 / Normal Rate of Return Actual Capital Employed = Total Assets (excluding goodwill) – Outside Liabilities

15. ( ii). Capitalization of Super Profits: Under this method, it is calculated by capitalizing the super profits directly. Goodwill = Super Profits × 100/ Normal Rate of Return

16. 4.ADJUSTMENT FOR REVALUATION OF ASSETS AND LIABILITIES