Accountancy for Class 12, Part 1, Chapter 3 Reconstitution of a Partnership Firm - Admission of a Partner.

Learn CBSE Accountancy Index Terms for Class 12, Part I, Chapter 3 Accounting for Partnership: Basic Concepts

1. Goodwill – Goodwill is an intangible asset associated with the purchase of one company by another. Specifically, goodwill is recorded in a situation in which the purchase price is higher than the sum of the fair value of all visible solid assets and intangible assets purchased in the acquisition and the liabilities assumed in the process. The value of a company’s brand name, solid customer base, good customer relations, good employee relations, and any patents or proprietary technology represent some examples of goodwill.

2. Reconstitution of Partnership Firm – A reconstitution of a partnership firm is defined as the act of all partners in a firm entering into an agreement to rewind their respective interests in the business, and then, continue on together with the same or similar business.

The reconstitution of a partnership firm begins the process of creating a new business entity. It includes the formation of a partnership agreement between the new partners and the dissolution of the old one. Entities that go through this procedure no longer exist as operating businesses, but rather as investors in another organisation. A reconstituted firm is able to retain information, including documents and financial records, as well as investments previously made.

The reconstitution of a partnership firm is a legal proceeding in which there is a change in the partnership agreement.

3. Revaluation of Assets – The revaluation of assets (RVA) is a process through which the value of an asset is re-appraised in terms of market value to reflect changes in the financial performance of the company.

Revaluation of assets is a process which evaluates the valid economic value of the property, including physical assets and intangible assets.

4. Reassessment of Liabilities – Reassessment of liabilities is a collection of the amounts for which companies are liable that are subject to changes. The liabilities may include cash and non-cash, and past due accounts. When any of these amounts increases or decreases by more than a certain amount, the company is required to reassess its liabilities. When a company is reorganised, its liabilities are assessed in accordance with the principles of reorganisation law to reflect the value of assets acquired by the company.

The reassessment of liabilities is a process that reduces the amount of tax payable on the amount of income shown by a company’s financial records. A reassessment of liabilities is a change in the accounting treatment of an asset or liability. Reassessment occurs most frequently when a business has measures of profit and loss for one period that differ from those used in another period, such as when the measurement process improves but other factors have not changed.

5. Undistributed Profit and Loss – Undistributed profit and loss is a retained earnings account that represents the difference between earnings earned during the year and the total costs of production. The income statement shows this for each accounting period.

Undistributed profit and loss represent errors and omissions in a company’s accounting or overstatements of assets and liabilities, depreciation of assets, and write-offs of loans. Undistributed profit and loss is the amount of profit and loss that has not been allocated to a specific asset. This is typical, found in the income statement, and represents any non-cash expenses incurred during the period.

Undistributed profit and loss is the profit and loss that is not allocated to any reserve account.

6. Accumulated Losses – The losses or profits which are left undistributed throughout the long term and have not been debited or credited to the partner’s capital record are known as accumulated losses and profits.

Accumulated losses and profits are the amounts of an undertaking’s losses and profits left after the profit is paid. It can likewise be named as either earned surplus, retained earnings, or retained capital.

Sometimes, an undertaking could have accrued benefits yet, but not yet moved to the capital accounts of the partners. These are normally in the form of reserve funds, profit and loss accounts, or general reserves. Nonetheless, the new partner isn’t qualified to have any share in such accumulated benefits. These are just distributed among the old partners by moving them to their capital A/c in the old benefit-sharing ratio; correspondingly, if there are a few accumulated losses as a Dr (debit) balance of profit and loss account appearing in the balance sheet of the firm.7. Profit Sharing Ratio – The profit sharing ratio is the relationship between the profit and the operating expenses that a business makes. The profit-sharing ratio is essential for businesses because it helps them know whether or not they should be increasing their marketing or introducing new products or services to the market.

The profit-sharing ratio is a common way to measure the compensation of employees. It measures the ratio between total revenue and the cost of goods sold. The profit-sharing ratio refers to the relationship between what a company has earned and paid out over the course of a year. A profit-sharing ratio of less than 100% indicates that there are economic losses to be shared. A profit sharing ratio greater than 100% indicates profits have been shared.

8. Reserve – A reserve is retained earnings secured by a company to strengthen a company’s financial position, clear debt, and credits, buy fixed assets, company expansion, legal requirements, investment, and other plans. These are usually done to save the cash from being used for other purposes. Reserve funds do not have any legal restrictions, so the company can use them for any purpose.

The term reserve means the amount of liquid assets a business has on hand that can be used to meet financial obligations. A reserve makes up part of a business’s liquidity, which is its ability to pay dividends or make payments on time in bad economic conditions. Reserve ratios are used by banks and credit unions to determine their overall financial health and stability.

A reserve is a financial cushion held in a business’s bank account. The purpose of money is to be able to buy things, but if there isn’t enough money within the business to purchase these items or in case future expenses need to be paid, reserves can help.

9. Revaluation Account – A revaluation account is a process used to determine the value of a business’s assets, liabilities, and owner’s equity using the latest market values. When one deals with a revaluation account, one’s business assets, liabilities, and owner’s equity might be updated to ensure that they can be more valued in relation to their businesses.

A revaluation account is a subaccount in a bank’s balance sheet that revalues assets using more current market prices. The purpose is to reflect the value of assets at market prices, instead of accounting values that do not include changes in the economic environment.

A revelation account provides an important tool for tracking and summarising the financial results of the business. A revaluation account is a periodic account that records the amount of revenue, expenses, gains, or losses that have resulted from the change in the value of the stock or other assets held by a company.

10. Sacrificing Ratio – Sacrificing ratio is computed at the time of addition or admission of a new associate partner. It is the portion in which old partners forego their share to the new admitting partner.

A new partner needs to recompense the old partners for their forfeiture of share in the profits of the business firm, for which the partners get in a supplement amount known as goodwill.

This ratio is normally given as consented among the partners, which can be the old ratio, an equal amount of sacrifice, or a defined ratio. The difficulty appears where the ratio in which the new partner obtains the share from the old partners is not defined. Rather, the NPSR (New Profit Sharing Ratio) is given. In such an outline, the sacrificing ratio is to be functioned out by subtracting each associate partner’s new share from their old share.

The formula to calculate sacrificing ratio is:

Sacrificing ratio = old profit sharing ratio – new profit sharing ratio.11. Change in Profit Sharing Ratio – There are certain situations apart from retirement or admission of a partner when the existing partners decide about bringing a change in their current ratio of profit sharing. This may result in profits for some partners, while some partners may be on the losing side.

In other words, a change in profit sharing ratio is the change in the percentage of a company’s total net income shared with its shareholders as a result of changes to profit sharing ratios. This indicates either an increase or decrease in dividends paid to shareholders.

We hope that the offered Accountancy Index Terms for Class 11 with respect to Part 1, Chapter 1: Accounting for Partnership: Basic Concepts will help you.

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