Category: Commerce Notes PPT

Classification of Cost is the process of arranging costs according to their common characteristics. It is the logical placement of like items together according to their common features.

There are different methods of classifying costs. The methods of classification depending on the purpose to be achieved. The same cost figures are classified according to the different methods depending upon requirements. The important bases of classification are:

1. By nature or element.

2. By function.

3. As direct or indirect.

4. By variability.

5. By controllability.

6. As capital and revenue.

7. By normality.

8. By time.

9. For making managerial decisions.

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Cost Classified by Nature or Element

One of the bases of classification is nature or element, i.e., what they are. On this basis, it is classified into three categories:

1. Material

2. Labour

3. Expenses

There can be further sub-classification of these; for example, material into raw material, components, maintenance material, etc.

This classification is important as it serves to find out the different elements of the cost of a product and what is the relative importance of each element in the total cost of a product. This classification helps in the estimation of the work-in-process.

Cost Classified by Function

Here costs are classified according to functions to which they relate. There are three major functional divisions in an organization:

1. Production

2. Administration

3. Selling and Distribution

In the cost sheet or cost statement, the total cost is split up according to the function and element.

Direct and Indirect

Direct cost is the cost that can be conveniently determined with and is paid for a particular unit of cost, i.e., job, product or process. On the other hand, the term indirect cost means that which is of general disposition and that cannot be identified with a particular unit of cost. It has to be distributed or shared.

Costs which can be directly identified with cost centres, processes or production units are direct costs.

Example: The cost of cloth in the ready-made short, wages payable to a worker who is directly involved in the production, etc.

Costs that cannot be identified with cost centres or cost units and are to be distributed on some equitable basis are indirect costs.

Example: The cost of consumable stores, the salary of a foreman or supervisor, rent of the factory, etc.

There are certain costs that can be identified with a particular unit of cost but the process of identifying them is so costly and cumbersome that it is not worthwhile to do so and therefore, they are treated as indirect costs.

Example: In the case of thread used in stitching a shirt, though it is possible to find out the amount of thread used in a particular shirt, it would not be of much importance, hence it can be treated as an indirect cost.

Such a classification is essential for cost ascertainment and cost control. All direct costs like raw material, direct wages, and expenses are considered while preparing the cost sheet. It helps in cost control through the tools of standard costing and budgeting. 

Cost Classified According to Variability

Variability of cost is estimated in relation to the volume of production. Some costs vary in accordance with production while some remain constant. Under this classification, costs are classified into three groups:

1. Fixed cost

2. Variable cost

3. Semi-variable cost

Fixed Cost

Fixed cost is that cost that is not affected by any variation in the volume of output. The amount of fixed cost tends to remain constant for all volumes or production within the fixed capacity of the plant.

Example: Rent of the office, the salary of the factory manager remain the same even if the 

production goes up or comes down.

Variable Cost

This is a cost that varies directly with variations in the volume of output. Such cost increases when the production goes up and correspondingly the cost decreases when the production declines. However, variations may not always be in the same proportion.

Semi-Variable Cost

This cost is partly variable and partly fixed. It possesses the characteristics of both the fixed and variable.

Example: Maintenance of building and plant.

Costs Classified According to Controllability

Under this basis, costs are classified with respect to the capability of controlling or not. The concept of control of cost is influenced by a specified level of managerial authority and the action of the executive in the undertaking, and if capable of control. Costs are classified as:

1. Controllable 

2. Non-controllable

Controllable Cost

Controllable cost is the direct cost that includes direct labour wage, direct material cost, direct expenses and some overheads that are usually controlled by the middle-level management.

Non-Controllable Cost

Non-controllable cost is not influenced by the action of any executive in undertaking and is beyond control.

Example: Fixed expenditures like rent, salary, insurance and taxes.

Such a classification is very important for cost control and cost reduction. It depends on the management to identify the areas where the costs can be controlled and reduced.

Costs Classified as Capital and Revenue

Capital cost is the cost incurred while purchasing some assets to increase the production capacity of the business.

Example: In a steel plant, the purchase of a rolling machine is an investment. Hence, it is the capital cost. 

Revenue cost is the cost that is incurred for the maintenance of the revenue earning capacity of the business.

Example: The cost of maintaining assets of the business and the cost of running the business.

Costs Classified as Normality

There are two types of costs under this classification that display the normality characteristics. They are

1. Normal Cost

2. Abnormal Cost

Normal Cost

This cost is normally incurred at a given level of output in the conditions in which that level of output is normally attained. 

Abnormal Cost

This cost is incurred at a given level of output under unfavourable conditions like destruction due to fire or shutdown or machinery, etc.

The normal cost is part of the cost of production, whereas abnormal cost is excluded from the cost of production.

Costs Classified by Time

Under this classification, there are two types of costs:

1. Historical Cost

2. Predetermined cost

Historical Cost

This cost is the actual cost that is ascertained after it has been incurred. Historical costs are available only after the completion of production. Such cost figures have only historical value. 

Predetermined Cost

Predetermined costs are estimated costs. These costs are determined prior to production on the basis of actual cost and the factors affecting the cost. Predetermined costs made on a more or less scientific basis result in a standard cost.

Standard costs are compared with actual costs to find out the differences or variances. These variances are analyzed and facilitate the management to take remedial actions, if necessary.

Costs Classified for Managerial Decisions

Costs under managerial decisions are classified into the following types:

1. Marginal Costs.

2. Out of Pocket Costs.

3. Differential Costs.

4. Imputed Costs.

5. Opportunity Costs.

6. Replacement Costs.

7. Avoidable and Unavoidable Costs.

8. Sunk Costs.

9. Conversion Costs.

Marginal Cost

It is the variable cost that comprises the major cost and variable cost. It is incurred when there is an increase in the volume of production. When there is an increase in one unit of output, the total cost is increased and this resultant increase in the total cost from the existing level to the new level is known as marginal cost.

Out of Pocket Cost

This cost arises depending upon the managerial decision to do cash expenditure for a particular operation. Example: A decision taken in order to make price fixation during trade recession or a decision taken for buying any asset.

Differential Cost

This cost is the difference in total cost that arises as result from any variation in operation. This cost is incurred when there is a change in the level pattern, method of production. It could be increment or decrement depending upon whether the operations increase cost or decrease in cost.

Imputed Cost

This cost does not involve any cash outlay and as a consequence, it is not included in the financial records. It is a hypothetical cost that is estimated only for the purpose of decision-making. For example interest on capital not payable, rent on own banking, etc.

Opportunity Cost

This cost arises when one alternative is rejected or sacrificed to use another alternative. It depends upon the managerial decision to give up on one alternative to choose something else.

Replacement Cost

This cost is incurred when an asset is purchased at the current market rate and not at the earlier market cost at which it was purchased. So this cost is related to the current market.

Avoidable and Unavoidable Cost

Avoidable costs are the costs that could have been escaped or eliminated under any given condition of performance efficiency. Unavoidable costs are the costs that are essential and could not have been escaped or eliminated from its occurrence.

Sunk Cost

This is the cost that is already acquired and which is not affected by the decision-making process. This is a historical cost and is sunk in the past. For example: when the management decides to replace old machinery then the depreciation value of the old machine is not taken into account during the decision-making process.

Conversion Cost

This cost is incurred during the process of converting raw materials into finished products. It includes both direct labour cost and manufacturing overheads.

Companies Act 2013 deals with the formation, regulation, responsibilities, and dissolution of companies. It was introduced to replace its predecessor so that the act is more in accordance with the current corporate scenario. Additionally, this act also aims to encourage growth and development of the economy by simplifying the process of setting up and maintaining an organisation.

To this end, many of the rules and regulations mentioned in Companies Act 1965 has been revamped and modernised. As a result, companies Act 2013 only consists of 29 chapters and 470 sections whereas the Companies Act 1956 had 658 sections and 7 schedules.

Companies Act 2013 has defined company as any entity which has come into existence under this act or any other company Act. The main types of company that has been mentioned in this act include – 

1. One-person Company – It is a type of company which has only one person as to its member.

2. Private Company – A type of company which can have maximum members up to two hundred and a minimum of two is known as a private company. Features of a private company are as follows: 

3. Public Company – This refers to those companies where 51% or more shares are held and regulated by central or state governments. Furthermore, this type of company can issue shares to the public. Minimum seven members are needed to form a public company.

Incorporation of Company

Companies Act 2013 also mentions in detail the essential regulations that need to be followed while registering a company under this act. These rules and regulations are discussed below – 

1. First, the company needs to choose a suitable name with the last words being either private limited (in case of a private company) or limited (in case of a public company). 

2. However, the member needs to keep in mind that the name must not be similar to any other company already registered under the Companies Act 2013. Moreover, the name should not be considered offensive under law or is undesirable by the Central Government.

3. Members can ensure that the name chosen for their company does not violate the provisions of names and emblems stated under the prevention of Improper Use Act, 1950, through the name-checking services provided on the official website of the Ministry of Corporate Affairs. 

4. An application should be made along with fee and proper documents to the registrar for approval and reservation of the name under Companies Act 2013.

5. After applying, the name will be reserved for sixty days from the application date.

6. The members then need to fill out form numbers 1, 18 and 32 to apply for registration.

7. Memorandum and articles of association should be drafted and then verified by the Registrar.

8. Memorandum and articles of association should be stamped and signed by all company members in presence of one witness.

9. Members also need to furnish details such as an address, occupation, father’s name, shares subscribed, etc.

10. After the above steps are complete, applicants can log in to the official web portal and submit the forms 1, 18, 32, memorandum and articles of association along with other mandatory documents. 

Important Sections under the Company Act

The Companies Act 2013 also specifies the responsibilities of a company in certain circumstances within the following sections – 

Companies are barred from inviting or accepting any kind of money deposits from the public under Section 73 of Companies Act 2013. Exceptions under this rule include companies like financial institutions, NBFCs or any other companies specified by the Government of India and the RBI.

A company which has a net turnover of Rs.5 hundred crore or more in the preceding year is required to form a corporate social responsibility committee under Section 135 of Companies Act, 2013.  The committee must have three or more directors, out of which one should act as an independent entity.

A company at its first general annual meeting must appoint an auditor under the regulation of Section 139 of Companies Act 2013. The auditor should hold office for five annual general meetings, starting from the conclusion of the AGM in which he or she was appointed.

Board of directors can sell, lease, or dispose of any undertaking of a company only with the consent of the whole company, as per Section 180 of Companies Act 2013.

According to Section 185 of Companies Act 2013, a company cannot offer any loan directly or indirectly to any of its directors, or any other individual or entity in whom the director is interested.

As per Section 186 of Company Act 2013, companies are not allowed to carry out more than two layers of inter-corporate investment.

A public or private limited company cannot carry out any kind of transactions such as selling, disposing of, leasing, buying of property or land, availing or providing services with a related party under Section 188 of Companies Act 2013. Appointing a related party to any place which is profitable to the company is also prohibited.

As specified under Section 189 of Companies Act 2013, more than one registers should be maintained, containing details of arrangements in which directors are interested, as applicable under Sec 185 of Companies Act 2013 and 188.

Remuneration of directors of a public company must not be more than 11% of net profits earned by the company in a financial year, according to section 197 of Companies Act 2013.

The above-mentioned piece paints a brief picture of India’s Companies Act. Every organisation has to fulfil the above-mentioned criteria to successfully register as a company.

It’s high time to upgrade your business communication with e-correspondence platforms. Things have turned a lot simpler and easier with the inception of this new idea, rather than an orb through which you can secure important documents, speed up the approvals, share important details within the team, and publish instantly.  This is the main concept of e-correspondence. 

Why E-correspondence? 

Today, the business industry is moving a lot faster as compared to the times of traditional approach of the business. Whether large-scale or small-scale, each establishment is trying to gain global recognition while becoming mobile and digitizing its business operations. The concept of digitization is quite familiar in workplaces as it has brought several new factors to drive up efficiencies, cost savings, productivity, adaptability, and flexibility. This is where the concept of email comes into play.

 

Electronic correspondence may have moved to the forefront, but there are still some processes that rely on paper-based works. This is a common scene, particularly when it comes to managing contracts, payment certificates, etc. For this, most companies look for hiring third parties to manage these tasks seamlessly. With e-correspondence, business operators will be able to reduce the cost to a great extent without compromising the quality of managing current and previous files.

What is Email?

To make it simpler, e-correspondence is the digital form of communication that is exchanged between two or more parties. They generally come in the form of emails, letters, notes, etc. The concept of email is crucial for a business as it serves to maintain detailed information of various events both in and out of business. Email correspondence is one of the vital parts of any business.

Taking a glance at the advantages of Email:

• E-correspondence is easy to use as it helps in organizing daily correspondence which can be saved in a local storage device.

• The approach is faster than others and thus, can deliver all at once, no matter how far the sender or receiver is located. 

• The language used in composing a mail is easy and simple to understand without being informal.

• If you want to reply to a certain mail, the original message can be attached to keep track of the previous chats and events. This is pivotal, especially if you are receiving tons of emails each day.

• With email correspondence, it is possible to send automated emails with a certain set of messages. This helps when you are out for a vacation. These are usually known as autoresponders.

• You can insert pictures in the emails. This helps in using the platform for sending birthday cards or composing a newsletter in the form of mail. 

• The products or services of a company can be advertised with e-correspondence. The concept of email helps in making the business owner reach out to several people and keep them informed about the business’s existence.

There are several templates available with e-correspondence solutions. These must be chosen based on the personal needs and demands of a company. These templates help in ensuring flexible workflows and managing user access. Moreover, these templates are known for integrating all types of documents as they can manage various tasks. Some of the common features of e-correspondence mails are: 

Subject Lines

There is a big difference between email and letter. It means the subject lines of an email must look like the headline of a newspaper. They must seamlessly convey the purpose of the mail to the reader. Make sure to be as specific as possible and do not include short terms like DIY, FYI, etc. Simply, it does not look professional. If the message is sensitive to time, make sure to include a date in the subject line.

Greetings and Sign-offs

Make sure to match greetings and sign-offs. Don’t just start with the message all at once and also, do not stop without adding a polite note. This is the primary difference between email and letter. It is important to properly address the person to whom the message is to be sent.

 

The meaning of email has made business life a lot easier as it enables easy capture of an establishment’s information to uplift key contracts, projects, and eliminate duplicates from the storage. All inbound and outbound messages are centralized, and thus, they are available to people who are authorized to access them. This altogether ensures transparency and clear communication.

The Customer Protection Act is a law in favor of customers, wherein their interests are taken into consideration and given the preference. The law was recently amended in 2019 to replace the existing one which was passed back in 1986, thereby enabling customers with further rights to exercise in their daily lives.

As per the meaning of consumer rights, the main objective behind enacting this law is to facilitate consumers with remedies or quick redressal of their grievances. This law holds special provisions meant for consumers through which the higher authorities can resolve the disputes faced by consumers.

What is the Consumer Protection Act?

The definition of Consumer Protection Act 1986 says that it is a law meant for preserving the rights of the consumers and resolving their disputes faster as and when they arise. This law allows for the establishment of an authoritative body called the Central Consumer Protection Authority or CCPA.

This body examines the unfair practices in trade and advertisements that provide misleading information, and other such illegal or unethical aspects. It shall take necessary actions and/or provide apt solutions to address grievances arising out of such practices.

Students should note that it was initially the Consumers Protection Act 1986 when it was first introduced by the Indian Parliament. The act allows a concerned authoritative body to punish the law violators with a penalty as well. 

What are Consumer Rights and Responsibilities?

According to the Consumer Protection Act definition, consumers are given specific rights and obligations that they can exercise as well as have to abide by regularly. Let us take a look at those, one by one.

A proper understanding of the rights given to consumers through COPRA Act 1986 will help in further developing an idea on which grievances will be resolved and which will not.

According to the Copra act, points given below make up a list of rights granted to consumers.

• Right to Consumer Education: Consumers should know their rights to avoid falling prey to violations.

• Right to Safety: They can ask for quality assurance of any product or service they purchase.

• Right to Choose: They should hold the option to choose among multiple options and purchase only when it suffices their demands.

• Right to be Informed: They should be aware of product details before deciding to purchase.

• Right to be Heard: They should be heard of their complaints or feedback on their availed goods or services at a forum.

• Right to Seek Compensation: They can ask for compensation, monetary or any other means, against complaints that they file for unfair trading practices.

According to the consumer protection act, the following are the responsibilities of a customer

• Responsibility to speak out

• Responsibility to complain

• Responsibility to think independently

• Responsibility to be aware

• Responsibility to be an ethical customer

Therefore, it is evident that a customer has multiple rights and responsibilities to follow at all times. You should be able to understand each point separately so that you do not forget while listing them in your exam. Make sure you regularly revise for in-depth learning.

How can a Consumer file a Complaint?

Based on the meaning of consumer protection, customers have the right to complain against discrepancies in goods and services that they purchase from traders or service providers.

Irrespective of whether an issue is related to quality or price of a product/service, consumers have the right to raise a complaint regarding it and get that redressed to their favor if their grievances hold valid in the jurisdiction’s eyes. 

However, based on the consumer protection definition, a consumer should make sure that a particular purchase was made within the last two years of raising a complaint.

Four simple steps to file a complaint are listed below –

1. Individuals have to mention the relevant details or purpose of raising a complaint. They may opt for a replacement, exchange, health jeopardy, etc. 

2. One needs to attach the relevant bills or receipts that he/she had received while making a purchase.

3. Concerned customers may submit a written application via email, fax, or self-delivered hard copy to the Consumer Forum. Following that they need to make sure it is acknowledged by a concerned authority after you have sent an application.

4. An individual can write a complaint in his/her preferred language. There is no hard and fast rule for the language. That person only needs to ensure that his/her concern is clearly described, irrespective of the language.

Consumers in context should keep into consideration that the Copra 1986 does not demand them to hire a lawyer for this purpose. They can directly speak for themselves and stand for their grievances.

All a person has to do is keep all the relevant documents and receipts that he/she sends to and receives from a specific authority as well as to and from the violator.

To know more about Customer Protection Act and other topics in 10+2 commerce, go through our online learning programmes. There are quality study materials drafted by our subject experts at to help you build a solid foundation on every topic. So, without any further delay, avail our study notes for enhanced guidance towards your exam preparation.

Rights and Responsibilities of the Consumer 

Consumers are considered the best factor of a business. They have rights over the business and the deals, but there are also responsibilities they must fulfill. Here are some points that may help explain the concept.

When making a purchase, don’t make a rash decision. Instead, compare prices and consider which payment method would be most convenient. In most cases, if you regret your decision afterwards, you cannot undo the transaction. Don’t hesitate to ask the salesperson if you can return the item if you change your mind.

It is imperative for the customer to read the conditions of the product before proceeding to sign an agreement and to ensure they know how much the final cost of the product will be. An agreement, when signed, means that the consumer is bound to it by the amount of time it is agreed upon, for example 12-month contracts, and the payments should be made regularly for the duration. The product cannot be returned or exchanged unless it is defective. Provided that the product is not defective, you cannot return it unless the seller has granted you entitlement to compensation.

You can easily get a loan online but be careful – they normally include different fees which will considerably increase your original borrowed sum. These loans have created serious financial problems for many people. And watch out for scams! Consumers should be extremely careful when an offer sounds lucrative — too good to be true. For example, if an online advert invites you to buy a laptop for one dollar, it is most probably a scam.

If you are unable to pay on time, contact the billing agent. Billing agents are used to discussing payments and your cooperation is valued. The product and service must reflect the agreement made between the buyer and seller.

Cost audit is an important and continuous process that a company has to execute properly during its entire existence in the market. It accounts for the complete verification of the cost records of the company and also takes into consideration the other different types of accounts. Tracking the cash flow in a company and correcting the instances where wrong data exists is the main objective of the cost audit. To understand in-depth what cost audit is, you have to understand its functions, importance, and advantages.

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Objectives of Cost Audit

If someone has to read about why Cost audits are important, they have to understand what are the objectives and benefits of cost audits. Some of the objectives of cost audit are enlisted below:

• To maintain the accuracy of the data related to cost.

• To ensure coverage of all arithmetic data in any account book. 

• It helps in maintaining all cost-related principles and complete adherence to preparing cost accounts.

• It helps in detecting errors, drawbacks, and frauds in accounts and correcting them immediately.

• To observe if all features of cost audit are properly followed.

• To check the overall working condition of the cost department also comes under the process of cost audit.

• For ensuring proper management and usage of cost strategies at the right time. 

• To develop correctness among internal auditors of the company. 

If one has to understand what a cost audit is, the best way is to study its objectives mentioned above. 

Types of Cost Audits

There are several types of cost audit processes. Each one is done on behalf of some organization. Below are the examples.

• Cost Audit on behalf of the government.

• Auditing on behalf of Assist Management. 

• Cost Audit on behalf of tribunals. 

• Auditing for the trade association. 

• Cost Auditing under the Statute of the company.

However, apart from the above, there are other types of cost audits that depend on the necessity of the companies. One has to understand the meaning of cost audit properly to exclusively design the process for a specific company.

Applicability of Cost Records

According to Rule 3 of the Companies, Cost Records and Audit 2014, all cost records should be placed for the companies that produce commodities cited on Table A or Table B. The applicability of cost records will be considered mandatory in case of the above situation or has an aggregated turnover in the preceding year over INR 35 crore. 

So, the applicability of the cost records is generally for large companies with a high turnover. In no case, the cost records will be applicable if both the above conditions are not satisfied. 

Functions of the Cost Auditor

A cost auditor is the one who is responsible for the execution of cost auditing. The functions of a cost auditor are as follows.

• Make clear cost audit reports with all the facts and data intact.

• A cost auditor should make qualifiable reports.

• Helping the central government with the cost auditing report in case of an investigation.

• Cost auditor and financial audit have a vital connection as he has to omit the drawbacks and wrong implementations. 

Advantages of Cost Audit

There are a number of advantages of cost audit and they are mentioned below briefly.

• The features of cost audit help it to point out any wastage for the company.

• The importance of cost audit is there as it points out the drawback in the production process of a company. 

• The stock value and worth of inventories can be integrated easily by cost auditing. 

• Proper cost auditing ensures effective staff management and tracking the functions of a staff auditor. 

• One of the other advantages of cost audit is to mark the inefficiency of staff or processes that can decrease the profit of the company. 

Fun Facts

An efficient cost audit by a company can lead to a lesser number of incidents of fraud and laundering. Nowadays, large companies organize half-yearly cost audits to be clear about cost-related outcomes.

Solved Examples

Q1. What is the provision of a Cost Audit?

Answer: The Companies Act, Section 148 states that there are two tables on which the applicability of the audit depends on. These are tables A and B. the details of Table A and Table B goods are as follows.

1. Table A Goods: Total turnover greater than 50 crores and aggregate turnover over 25 crores in case of commodities and services.

2. Table B Goods: Total turnover of goods over 100 crores and aggregate turnover over 35 crores for commodities and services. 

A partnership firm is an organization that is formed with two or more individuals with a common objective to earn revenue. The structure of an organization and its capital tend to undergo massive change in the event of the admission of a new partner or the retirement or death of an existing partner. Notably, the accounting treatment in case of a retirement and death of a partner is not entirely different. On that note, let’s read along to find out more about the death of a partner in accounting and its impact on a firm’s capital.

 

What Happens When a Partner Dies?

In such a situation, the partnership deed after the death of a partner is terminated. Subsequently, the rights of the legal representatives of a deceased partner depend on the provisions of that firm’s partnership deed. In most cases, surviving partners decide to continue the venture and may end up purchasing the shares of their deceased partner once his/her due is computed and subsequently treated as a loan. 

 

The most common death of partner problems and solutions pertaining to the unpredictability of the incident as to when a partner may succumb to death. Typically, legal representatives would receive the deceased’s portion of profits that were accrued between the period when accounts were closed and until the death of the said partner. Now such duration can range anywhere between 1 day and 365 days.

 

Nonetheless, in the absence of an agreement or arbitrary decision, accounts must be prepared as they were on the date while profit and loss were being ascertained. 

How is a Partners’ Capital Adjusted?

In such a situation, these following are credited in the capital account of the deceased partner –

• Undistributed earnings or reserves.

• Profit generated on revaluation of assets and liabilities.

• Sum of money lent by the partner.

• Interest in the capital.

• Goodwill.

• Designated share in Joint Life Policy.

• A share in successive earnings.

On the other hand, these following are debited their account as well –

• Drawings made by the deceased.

• The interest levied on such drawings.

• The loss is incurred on the revaluation of assets and liabilities.

• A share in successive losses.

 

Notably, legal representatives of the deceased are entitled to avail a share in successive earnings. They also have the right to decide whether they want a share in profits or wish to avail interest at 6% annually. Once these adjustments are recorded in deceased partners’ capital account, the final amount standing is paid to their legal representatives.

 

How is the Subsequent Profit of a Deceased Partner Calculated?

Primarily, there are two ways to determine the subsequent profit or earnings of a deceased partner. Notably, such an earning is generated from the date of the latest balance sheet until the date of a partner’s death. These two methods are used to compute the earnings of a deceased partner –

• Time Basis

• Sales or Turnover Basis

 

Time Basis

In this method, it is assumed that earnings are steadily generated throughout the year. Typically, the previous year’s profit is taken into account to estimate such earnings. For example – Bobby, Sam, and Dean were partners of a firm and shared profits in the ratio 2:2:1. Bobby died on 01.07.19.

 

According to their agreement, Bobby’s share in profit until his death is to be calculated based on profits earned during the previous financial year, which is Rs.15,00,000.

 

Solution: Total profit for 3 months = Rs.15,00,000 x (3/12) =Rs.37,5000

 

Therefore, Bobby’s share = Rs.37,5000 x (2/5) = Rs.150000

 

Sales or Turnover Basis

With the help of this particular method, the earnings along with the total sales of the previous year are taken into account. Therefore, based on the sales of last year, one can estimate the earnings until the date of the partner’s death. For example – Crowley, Rowena, and Kevin are partners in a firm and share profits in the ratio 3:2:1. Kevin dies on 01.09.18.

 

Last year’s sales amounted to Rs.900000. Profit on it stood at Rs.60000. Also, sales up to 31.08.18 accounted for Rs.460000

 

Solution: The earnings on sale of Rs.460000 = 60000/900000 x 460000 =Rs.30667

 

Therefore, Kevin’s share = Rs. (30667 x 1/6) =Rs.5111

 

Partnership Deed Format 

A series of journal entries are passed in the books of account immediately after the death of a partner. The following serves as a sample of the partnership deed format after the death of a partner.

 

Alan, Kara, and Oliver are partners in a firm and share profits as 3:2:1. Oliver died on 1st July 2018. This balance sheet as of 31st March 2018 –

 

 

Alan and Kara agree to share future earnings and losses equally. The goodwill stood at Rs.29000, however, it does not appear in the books of account.

 

Revaluation profit amounted to Rs.14000, and the Joint Life Policy was realised at Rs.50000. John, the legal representative of the deceased partner in a partnership for a share in successive earnings. Oliver’s portion in successive profits amounts to Rs.10000. 

 

Task for you: Find out how to pass necessary journal entries and create a partner’s capital A/C. Refer to ’s compact study solutions and solve the problem mentioned above. Also, learn in detail what happens after the death of a partner in a limited partnership at our live online classes.

 

You can also refer to the retirement of partner notes and gain a fair understanding of the procedure for the retirement of a partner in a partnership firm and strengthen your fundamentals of partnership chapter.

 

Download App now to learn some smart shortcut techniques of showing working notes!  

 

Procedure After the Death of Partner Member

Partnerships in Business has a long history since the 14th century. A merchant of Florence named Francesco di Marco Datini is the one who implemented the first partnership. This new mode of starting an enterprise created a revolution in the commercial scenario of Europe.  This system helped individuals to come together with the required capital to start a business. Starting in medieval times, partnerships are still in existence and quite successful too. All administrations and governments have prescribed the necessary rules and regulations for the operation and taxation of such firms. Apart from this all partnerships also come up with their own laws and rules to abide by that are necessary for the smooth running of the firm or organization.

Any partner who exits out of the partnership is a great change for the body he was a part of. It can be due to many reasons starting with a change in the interest of the partner to the death of any partner. In such situations, the partnership deed dictates all the legal procedures to be followed. The legal representatives as per the deed are entitled to the portion of the profit in the entity until the death of the partner in question. If there are no such provisions then it can be prepared with the general consensus of all the remaining partners. The most crucial part is the adjustment of the capital that is done according to the predetermined agreement or is decided following the mishap. All other policies and benefits that the deceased partner enjoyed are revised and adjusted.