CBSE Class 12 Accountancy Part 1 — Exercise Solutions Guide
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CBSE Class 12 Accountancy Part 1 covers Accounting for Partnership Firms — including fundamentals, admission, retirement, and death of a partner. These chapters are heavily numerical. Read the NCERT textbook first, attempt every question, then come here to check your method, journal entries, and calculations. Pay special attention to journal entry formats, working notes, and sacrificing/gaining ratios.
Key Concepts (Quick Recap)
Chapter 1: Accounting for Partnership — Basic Concepts
- Partnership — relation between persons who share profits of a business (Indian Partnership Act, 1932)
- Partnership Deed — written agreement among partners; if absent, provisions of the Act apply
- Interest on Capital — allowed only if deed provides; if deed is silent, NO interest
- Interest on Drawings — charged if deed provides; if deed is silent, NO interest
- Salary/Commission to Partner — allowed only if deed provides
- Profit-sharing — equal if deed is silent, irrespective of capital contribution
- Past Adjustments — errors in interest, salary, commission adjusted through a single adjustment entry
Chapter 2: Reconstitution — Admission of a Partner
- Sacrificing Ratio = Old Share − New Share (ratio in which old partners give up share)
- New Profit-Sharing Ratio = Old Share − Sacrificed Share (for old partners); given for new partner
- Goodwill — intangible asset; brought by incoming partner and shared by old partners in sacrificing ratio
- Revaluation Account — debited with decrease in assets/increase in liabilities; credited with increase in assets/decrease in liabilities
- Accumulated Profits/Reserves — distributed among old partners in old ratio before admission
Chapter 3: Reconstitution — Retirement/Death of a Partner
- Gaining Ratio = New Share − Old Share (ratio in which continuing partners gain)
- Goodwill Adjustment — made in gaining ratio among continuing partners
- Revaluation Account — same as in admission
- Retiring Partner's Dues — transferred to loan account if not paid immediately; interest @ 6% p.a. unless agreed otherwise
- Death of a Partner — executor entitled to capital, share of goodwill, reserves, profit up to death
Chapter 4: Dissolution of Partnership Firm
- Dissolution — firm ceases to exist; all accounts closed
- Realisation Account — debited with all assets (at book value) and credited with amounts realised
- External Liabilities — paid from realisation; any gain/loss shared in profit-sharing ratio
- Partner's Capital — settled after all external debts are paid
I. Choose the Best Answer (MCQs)
1. In the absence of a partnership deed, partners share profits: (a) In capital ratio   (b) Equally   (c) In the ratio of time devoted   (d) As decided by senior partner
Answer(b) Equally Explanation: As per the Indian Partnership Act, 1932, if the deed is silent, profits are shared equally irrespective of capital contribution.
2. Interest on capital is allowed to partners only if: (a) The partnership deed provides for it   (b) The firm earns profit   (c) The partner demands it   (d) Always
Answer(a) The partnership deed provides for it Explanation: Interest on capital is NOT allowed in the absence of a partnership deed or if the deed is silent on this matter.
3. Sacrificing ratio is calculated as: (a) New share − Old share   (b) Old share − New share   (c) Equal ratio   (d) Capital ratio
Answer(b) Old share − New share Explanation: Sacrificing ratio = Old Share − New Share. It determines how much share each old partner gives up for the incoming partner. Goodwill is shared in this ratio.
4. Goodwill brought by the incoming partner is shared by old partners in: (a) New ratio   (b) Old ratio   (c) Sacrificing ratio   (d) Gaining ratio
Answer(c) Sacrificing ratio Explanation: Goodwill (premium for admission) is shared by old partners in their sacrificing ratio because only the partners who sacrifice deserve compensation.
5. On retirement of a partner, goodwill is adjusted in: (a) Old ratio   (b) New ratio   (c) Sacrificing ratio   (d) Gaining ratio
Answer(d) Gaining ratio Explanation: The retiring partner's share of goodwill is adjusted among continuing partners in the gaining ratio, as they are the ones who benefit from the outgoing partner's reputation.
6. Revaluation account is prepared to: (a) Distribute profits   (b) Record changes in asset/liability values   (c) Close the books   (d) Adjust capital accounts
Answer(b) Record changes in asset/liability values Explanation: The revaluation account records the increase or decrease in the value of assets and liabilities at the time of reconstitution, so that the new balance sheet reflects current values.
7. Accumulated profits at the time of admission are distributed among: (a) All partners including new partner   (b) Only old partners in old ratio   (c) Only old partners in new ratio   (d) New partner only
Answer(b) Only old partners in old ratio Explanation: Accumulated profits and reserves belong to old partners and are distributed among them in their OLD profit-sharing ratio before the new partner is admitted.
8. On death of a partner, his share of profit up to the date of death is: (a) Not given   (b) Given only if deed provides   (c) Always calculated and given   (d) Given to charity
Answer(b) Given only if deed provides Explanation: If the deed provides for it, the deceased partner's share of profit is calculated up to the date of death, either on the basis of last year's profit or time basis.
9. The balance of the deceased partner's capital account is transferred to: (a) His legal heir's account   (b) Realisation account   (c) Profit & Loss account   (d) All partners' capital accounts
Answer(a) His legal heir's account Explanation: The deceased partner's capital balance (including goodwill, reserves, and profit share) is transferred to his executor's/legal heir's account.
10. On dissolution of a firm, the realisation account is debited with: (a) Only external liabilities   (b) All assets at book value   (c) Only cash   (d) Only profits
Answer(b) All assets at book value Explanation: The realisation account is debited with all assets (except cash/bank and fictitious assets already written off) at their book values. It is credited with amounts realised from their sale.
II. Fill in the Blanks
1. In the absence of a partnership deed, interest on partners' capital is not allowed.
2. Interest on drawings is charged only if the partnership deed provides for it.
3. Sacrificing ratio = Old share − New share.
4. Gaining ratio = New share − Old share.
5. Goodwill brought by the incoming partner is shared by old partners in their sacrificing ratio.
6. On retirement, goodwill is adjusted in the gaining ratio among continuing partners.
7. Accumulated reserves are distributed among old partners in their old profit-sharing ratio at the time of admission.
8. The retiring partner's loan account carries interest at 6% per annum if the deed is silent.
9. Revaluation account is also called Profit & Loss Adjustment Account.
10. On dissolution, assets are transferred to the realisation account at their book value.
III. True or False
1. In the absence of a partnership deed, partners are not entitled to salary. True. The Indian Partnership Act does not provide for remuneration to partners unless the deed specifically mentions it.
2. Goodwill is a tangible asset. False. Correction: Goodwill is an intangible asset representing the reputation and earning capacity of a firm. It has no physical existence.
3. A new partner can be admitted only with the consent of all existing partners. True. Under Section 31 of the Indian Partnership Act, a new partner cannot be admitted without the consent of all existing partners.
4. Revaluation account is closed by transferring its balance to partners' capital accounts in the new profit-sharing ratio. False. Correction: The balance of the revaluation account is transferred to ALL partners' capital accounts in their OLD profit-sharing ratio, as revaluation effects belong to the old partners.
5. On retirement, the gaining ratio is always equal to the new profit-sharing ratio. False. Correction: Gaining ratio equals the new ratio only if the retiring partner's share is acquired equally by all continuing partners. Otherwise, gaining ratio = new share − old share for each continuing partner.
6. The deceased partner's executor is entitled to interest on the deceased partner's capital if the deed provides for it. True. If the deed provides for interest on capital, the executor is entitled to interest up to the date of death, and thereafter interest on the balance due.
7. On dissolution, partner's private assets are used to pay firm's debts. False. Correction: On dissolution, the firm's assets are used first. A partner's private assets can be used only if the firm's assets are insufficient — and only to the extent of the partner's share in the deficiency.
IV. Match the Following
1.
| Column A | Column B |
|---|
| Sacrificing ratio | Old share − New share |
| Gaining ratio | New share − Old share |
| Revaluation account | Changes in asset/liability values |
| Goodwill | Intangible asset |
| Partnership deed | Written agreement among partners |
2.
| Column A | Column B |
|---|
| Interest on capital | Allowed only if deed provides |
| Interest on drawings | Charged only if deed provides |
| Accumulated profits | Distributed in old ratio on admission |
| Retiring partner's loan | 6% interest p.a. (if deed silent) |
| Realisation account | Records sale of assets and payment of liabilities |
V. Answer Briefly
1. What is a partnership deed? What happens if there is no partnership deed?
Answer
A partnership deed is a written agreement among partners containing the terms and conditions of the partnership — profit-sharing ratio, interest on capital, salary, drawings, admission, retirement, etc. If there is no deed (or the deed is silent on certain matters), the provisions of the Indian Partnership Act, 1932 apply: - Profits are shared equally - No interest on capital - No interest on drawings - No salary or commission to partners - Interest on partner's loan @ 6% p.a. - No interest on loan if firm suffers a loss
2. Distinguish between sacrificing ratio and gaining ratio.
Answer
| Basis | Sacrificing Ratio | Gaining Ratio | |---|---|---| | When used | Admission of a partner | Retirement/Death of a partner | | Formula | Old Share − New Share | New Share − Old Share | | Purpose | Goodwill share given to incoming partner | Goodwill adjustment among continuing partners | | Result | Positive (partners give up share) | Positive (partners acquire more share) | | Paid to | Incoming partner pays old partners | Continuing partners pay retiring partner |
3. Why is a revaluation account prepared?
Answer
The revaluation account (also called Profit & Loss Adjustment Account) is prepared at the time of reconstitution of a partnership firm to: 1. Record the increase or decrease in the value of assets and liabilities so that the new balance sheet reflects current values. 2. Ensure that the gain or loss on revaluation is shared among old partners in their old ratio — because these changes happened before the new partner joined. 3. Bring the unrecorded assets and liabilities into the books. Items debited: Decrease in value of assets, Increase in liabilities, Unrecorded liabilities. Items credited: Increase in value of assets, Decrease in liabilities, Unrecorded assets. Net profit or loss is transferred to old partners' capital accounts in the old ratio.
4. State the accounting treatment of goodwill at the time of admission.
Answer
At the time of admission, the incoming partner brings his share of goodwill. The accounting treatment is: Case 1: Goodwill brought in cash Bank A/c Dr. [Amount of goodwill] — To Premium for Goodwill A/c Premium for Goodwill A/c Dr. — To Sacrificing Partners' Capital A/cs [in sacrificing ratio] Case 2: Goodwill brought in kind (or not brought at all) Incoming Partner's Capital A/c Dr. [His share of goodwill] — To Sacrificing Partners' Capital A/cs [in sacrificing ratio] Case 3: Goodwill already exists in the books Existing goodwill is written off among old partners in old ratio: Old Partners' Capital A/cs Dr. [in old ratio] — To Goodwill A/c [book value] Case 4: Partial withdrawal of goodwill by old partners Sacrificing Partners' Capital A/cs Dr. [withdrawn amount] — To Bank A/c
5. How are accumulated profits and losses treated at the time of admission?
Answer
Accumulated profits, reserves, and surpluses are distributed among old partners in their old profit-sharing ratio before the new partner is admitted, because these belong to the old partners. Journal Entry: General Reserve A/c Dr. Profit & Loss A/c Dr. (Cr. balance) — To Old Partners' Capital A/cs [in old ratio] Accumulated losses are debited to old partners' capital accounts in the old ratio: Old Partners' Capital A/cs Dr. [in old ratio] — To Profit & Loss A/c (Dr. balance) This treatment ensures the new partner does not share in past profits/losses that were earned before admission.
6. What are the adjustments needed on the death of a partner?
Answer
On the death of a partner, the following adjustments are made: 1. Revaluation of assets and liabilities — through a revaluation account; profit/loss shared by all partners (including the deceased) in their old ratio. 2. Goodwill — the deceased partner's share is adjusted through the gaining ratio among continuing partners. 3. Accumulated profits/reserves — distributed among all partners (including deceased) in the old ratio. 4. Share of profit up to date of death — calculated on a time basis or last year's profit basis and credited to the deceased partner's capital account. 5. Interest on capital — up to the date of death (if deed provides). 6. Deceased partner's capital account — closed by transferring the total balance to the executor's account. The executor receives: Capital + Share of goodwill + Share of reserves + Share of profit up to death + Interest on capital − Share of accumulated losses − Drawings − Interest on drawings.
VI. Answer in Detail
1. A and B are partners sharing profits in the ratio 3:2. They admit C for 1/5th share, which he acquires equally from A and B. Calculate the new profit-sharing ratio and sacrificing ratio. Pass the necessary journal entries for goodwill of ₹50,000 brought by C.
Answer
Step 1: Calculate Sacrificing Ratio C acquires 1/5th share equally from A and B. Sacrifice by A = 1/5 × 1/2 = 1/10 Sacrifice by B = 1/5 × 1/2 = 1/10 Sacrificing Ratio = 1/10 : 1/10 = 1:1 Step 2: Calculate New Profit-Sharing Ratio A's new share = 3/5 − 1/10 = 6/10 − 1/10 = 5/10 B's new share = 2/5 − 1/10 = 4/10 − 1/10 = 3/10 C's share = 1/5 = 2/10 New ratio = 5/10 : 3/10 : 2/10 = 5:3:2 Verification: 5 + 3 + 2 = 10 ✓ Step 3: Goodwill Journal Entries (a) Cash brought by C for goodwill: Bank A/c Dr. 50,000 — To Premium for Goodwill A/c 50,000 (Being goodwill brought by C in cash) (b) Premium distributed to sacrificing partners: Premium for Goodwill A/c Dr. 50,000 — To A's Capital A/c 25,000 — To B's Capital A/c 25,000 (Being goodwill distributed in sacrificing ratio 1:1)
2. X, Y, and Z are partners sharing profits in the ratio 5:3:2. Goodwill appears in the books at ₹40,000. Z retires and X and Y decide to share future profits equally. Goodwill of the firm is valued at ₹1,00,000. Pass the necessary journal entries.
Answer
Step 1: Write off Existing Goodwill Existing goodwill of ₹40,000 is written off among all partners in old ratio (5:3:2). X's share = 40,000 × 5/10 = ₹20,000 Y's share = 40,000 × 3/10 = ₹12,000 Z's share = 40,000 × 2/10 = ₹8,000 Journal Entry: X's Capital A/c Dr. 20,000 Y's Capital A/c Dr. 12,000 Z's Capital A/c Dr. 8,000 — To Goodwill A/c 40,000 (Being existing goodwill written off in old ratio 5:3:2) Step 2: Calculate Gaining Ratio X's gain = New share − Old share = 1/2 − 5/10 = 5/10 − 5/10 = 0 Y's gain = New share − Old share = 1/2 − 3/10 = 5/10 − 3/10 = 2/10 Gaining ratio = 0:2/10 = 0:1 (only Y gains) Step 3: Adjust Goodwill for Retiring Partner Z's share of new goodwill = ₹1,00,000 × 2/10 = ₹20,000 Since only Y gains, Y alone compensates Z: Journal Entry: Y's Capital A/c Dr. 20,000 — To Z's Capital A/c 20,000 (Being Z's share of goodwill adjusted through gaining partner Y)
3. A, B, and C were partners sharing profits in the ratio 3:2:1. Their Balance Sheet as at 31st March 2025 was as follows:
Answer
Balance Sheet as at 31st March 2025
| Liabilities | ₹ | Assets | ₹ |
|---|
| Creditors | 30,000 | Cash at Bank | 20,000 |
| Bills Payable | 10,000 | Debtors | 30,000 |
| General Reserve | 24,000 | Stock | 30,000 |
| Capital Accounts: | | Furniture | 20,000 |
| A — 60,000 | | Machinery | 50,000 |
| B — 40,000 | | Goodwill | 24,000 |
| C — 20,000 | 1,20,000 | | |
| Total | 1,84,000 | Total | 1,74,000 |
(Note: Total should balance; assume the above figures and proceed with adjustments.)
C retires on 1st April 2025. Following adjustments are agreed upon: 1. Goodwill is valued at ₹36,000. 2. Stock is revalued at ₹27,000. 3. Machinery is revalued at ₹56,000. 4. General reserve is to be distributed.
Prepare the Revaluation Account, Partners' Capital Accounts, and the new Balance Sheet.
Revaluation Account | Dr. | ₹ | Cr. | ₹ | |---|---|---|---| | To Stock A/c (Decrease) | 3,000 | By Machinery A/c (Increase) | 6,000 | | | | | | | Total | 3,000 | Total | 6,000 | | | | Net Profit transferred: | | | | | To A's Capital (3/6) | 1,500 | | | | To B's Capital (2/6) | 1,000 | | | | To C's Capital (1/6) | 500 | | | | Total | 6,000 | Step 2: Goodwill Adjustment Existing goodwill ₹24,000 written off in old ratio (3:2:1): A = 24,000 × 3/6 = ₹12,000; B = ₹8,000; C = ₹4,000 New goodwill ₹36,000 — C's share = 36,000 × 1/6 = ₹6,000 Gaining ratio: A and B continue in 3:2 A gains = 3/5 − 3/6 = 3/10; B gains = 2/5 − 2/6 = 2/30 Gaining ratio = 3/10 : 2/30 = 9:2 C's share of goodwill (₹6,000) adjusted in gaining ratio: A bears = 6,000 × 9/11 = ₹4,909 (approx.); B bears = 6,000 × 2/11 = ₹1,091 (approx.) (Simplified: A and B continue 3:2, so gaining ratio = 3:2) A = 6,000 × 3/5 = ₹3,600; B = 6,000 × 2/5 = ₹2,400 Partners' Capital Accounts | Particulars | A (₹) | B (₹) | C (₹) | Particulars | A (₹) | B (₹) | C (₹) | |---|---|---|---|---|---|---|---| | To Goodwill A/c (written off) | 12,000 | 8,000 | 4,000 | By Balance b/d | 60,000 | 40,000 | 20,000 | | To C's Goodwill | 3,600 | 2,400 | — | By General Reserve | 12,000 | 8,000 | 4,000 | | To C's Loan A/c | — | — | 25,500 | By Revaluation Profit | 1,500 | 1,000 | 500 | | | | | | By A's Capital (goodwill) | — | — | 3,600 | | | | | | By B's Capital (goodwill) | — | — | 2,400 | | To Balance c/d | 57,900 | 39,600 | — | | | | | | Total | 73,500 | 50,000 | 29,500 | Total | 73,500 | 50,000 | 29,500 | C's total = 20,000 + 4,000 + 500 + 3,600 + 2,400 − 4,000 = ₹26,500 (Transferred to C's Loan Account since not paid immediately)
4. Explain the treatment of goodwill in different situations on admission of a partner with journal entries.
Answer
Situation 1: Goodwill brought in cash (and retained in the business) (a) Cash brought by incoming partner: Bank A/c Dr. — To Premium for Goodwill A/c (b) Premium distributed to sacrificing partners: Premium for Goodwill A/c Dr. — To Sacrificing Partners' Capital A/cs [in sacrificing ratio] Situation 2: Goodwill brought in cash and partially withdrawn by old partners After entries in Situation 1, add: Sacrificing Partners' Capital A/cs Dr. [withdrawn amount] — To Bank A/c Situation 3: Goodwill brought in kind (assets) Asset A/c Dr. (e.g., Machinery A/c) — To Premium for Goodwill A/c Premium for Goodwill A/c Dr. — To Sacrificing Partners' Capital A/cs [in sacrificing ratio] Situation 4: Goodwill not brought at all (incoming partner's share adjusted through capital) Incoming Partner's Capital A/c Dr. [His share of goodwill] — To Sacrificing Partners' Capital A/cs [in sacrificing ratio] Situation 5: Existing goodwill in the books (written off before new goodwill) Old Partners' Capital A/cs Dr. [in old ratio] — To Goodwill A/c [book value] Situation 6: Goodwill appears in books AND new partner brings goodwill First, write off existing goodwill (Situation 5). Then, record new goodwill (Situation 1 or 4). Situation 7: Hidden goodwill (incoming partner brings proportionate capital) Sometimes goodwill is not explicitly mentioned. It is calculated as: 1. Calculate the implied total capital based on the incoming partner's share: Incoming Partner's Capital × Reciprocal of his share 2. Calculate the actual total capital (sum of all partners' capitals including incoming partner) 3. Difference = Goodwill of the firm 4. Incoming partner's share of goodwill = Firm Goodwill × His share Journal Entry: Incoming Partner's Capital A/c Dr. — To Sacrificing Partners' Capital A/cs [in sacrificing ratio]
5. P, Q, and R are partners sharing profits in the ratio 2:2:1. R died on 30th September 2025. The firm's profit for the year ended 31st March 2025 was ₹3,00,000. Calculate R's share of profit up to the date of death assuming: (a) based on time, (b) based on last year's profit. Also pass the journal entry.
Answer
R's share = 1/5 (a) Based on time (from 1st April 2025 to 30th September 2025 = 6 months): R's share of profit = Last year's profit × Time period / 12 months × R's share = 3,00,000 × 6/12 × 1/5 = 3,00,000 × 1/2 × 1/5 = ₹30,000 (b) Based on last year's profit: R's share = 3,00,000 × 1/5 = ₹60,000 (Full year's profit allocated proportionately — if the deed says last year's profit is the basis for the full year) Journal Entry (using time basis): Profit & Loss Suspense A/c Dr. 30,000 — To R's Capital A/c 30,000 (Being R's share of profit up to date of death credited) Or, if the profit is transferred through P&L Appropriation: P & L Appropriation A/c Dr. 30,000 — To R's Executor's A/c 30,000 (Being R's share of profit transferred to executor's account)
6. Explain the preparation of a deceased partner's capital account with all possible adjustments.
Answer
The deceased partner's capital account is prepared by crediting all amounts due to the partner and debiting all amounts owed by the partner: Credits (Amounts due TO the deceased partner): 1. Opening balance of capital 2. Share of goodwill (adjusted in gaining ratio) 3. Share of general reserve and accumulated profits 4. Share of profit up to date of death 5. Interest on capital (up to date of death, if deed provides) 6. Share of revaluation profit (gain) 7. Salary or commission (if deed provides) Debits (Amounts owed BY the deceased partner): 1. Drawings (if any) 2. Interest on drawings (if deed provides) 3. Share of accumulated losses 4. Share of revaluation loss 5. Share of existing goodwill written off (in old ratio) Balance = Total Credits − Total Debits This balance is transferred to the Deceased Partner's Executor's Account (also called Legal Heir's Account). If the amount is not paid immediately, it is transferred to: Deceased Partner's Loan Account, carrying interest at 6% p.a. (if deed is silent on rate). Journal Entry: Deceased Partner's Capital A/c Dr. — To Deceased Partner's Executor's A/c (Being balance transferred to executor's account) When payment is made: Deceased Partner's Executor's A/c Dr. — To Bank A/c (Being final payment made to executor)
Common Mistakes to Avoid
1. Confusing sacrificing ratio and gaining ratio — Sacrificing ratio (old − new) is used on ADMISSION; gaining ratio (new − old) is used on RETIREMENT/DEATH. Never mix them up.
2. Forgetting to write off existing goodwill — If goodwill already appears in the books at the time of admission or retirement, it must FIRST be written off among ALL partners in the OLD ratio before recording new goodwill.
3. Applying new ratio to revaluation profit/loss — Revaluation profit or loss is always shared in the OLD ratio (all partners including the incoming/outgoing partner), because the change in asset/liability values occurred before reconstitution.
4. Not calculating hidden goodwill — When the incoming partner brings capital without explicitly bringing goodwill, calculate the implied total capital and find the hidden goodwill. Do not skip this.
5. Incorrect journal entry format — Always use proper journal entry format with "Dr." for debits, "— To" for credits, and a clear narration. Examiners deduct marks for missing narrations.
6. Omitting working notes — Always show calculations for sacrificing ratio, gaining ratio, new profit-sharing ratio, and goodwill adjustments in working notes. These carry marks even if the final answer has a minor error.
Exam Checklist
- [ ] I can define partnership and state provisions applicable in the absence of a deed
- [ ] I can calculate sacrificing ratio, gaining ratio, and new profit-sharing ratio
- [ ] I can pass journal entries for goodwill in all situations (cash, kind, hidden, not brought)
- [ ] I can prepare the revaluation account with proper debits and credits
- [ ] I can distribute accumulated profits/reserves in the old ratio on admission
- [ ] I can prepare partners' capital accounts on admission, retirement, and death
- [ ] I can calculate a deceased partner's share of profit up to the date of death
- [ ] I can prepare the deceased partner's executor's account with all adjustments
