DIVIDEND BY COMPANIES – RULES AND PROCEDURES by : DR. T.K. JAIN AFTERSCHO☺OL centre for social entrepreneurship sivakamu veterinary hospital road bikaner 334001 rajasthan, india FOR – PGPSE PARTICIPANTS mobile : 91+9414430763 5 DECEMBER 09
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Basics
Dont give any salary or interest on capital to any partner (unless there is some other agreement). Interest on loan from partners @6% divide profits equally among partners. 5 DECEMBER 09
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Important issues....
Find out gaining ratio or sacrificing ratio : new ratio – old ratio
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Revaluation account Revaluation account is prepared whenever a new partner joins or a partner retires or a partner dies or there is dissolution of partnership or sale of partnership etc.. find the profit / loss from realisation and distribute to partners in their profit sharing ratio 5 DECEMBER 09
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entries...
Credit partners for the money they bring, for their share of profit or for their share of goodwill debit partners for loss, for their withdrawals for thier share of losses 5 DECEMBER 09
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How to identify goodwill?
There are many methods like : average profit method super profit method capitalisation method etc. 5 DECEMBER 09
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What to do with goodwill ? Goodwill is generally not shown in balance sheet. When a partner joins, create a goodwill account by crediting the amount to old partners in their old profit sharing ratio. Afterwards close goodwill account by debiting it to all the partners in their new profit sharing ratio (incuding the new partner's account). 5 DECEMBER 09
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Joint life insurance acount There are two options - treat joint life insurance premium as revenue expenditure or treat it as capital expenditure. If you treat it as revenue expenditure, then joint life policy account will not be created and therefore whenever a partner retires, you have to create a joint life policy account. If you treat it as capital expenditure, you have a joint life policy account in your balance sheet. 5 DECEMBER 09
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Retirement of a partner When a partner retires, he gets credits for his share in reserves, joint life policy (surrender value) and profits. Generally assets, and liabilities are revalued when a partner retires and due to revaluation whatever profit / loss is there is transferred to partners in old profit sharing ratio. 5 DECEMBER 09
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Retirement entries
Suppose a joint life policy is there – which is already there in the balance sheet – then the entry will be for revaluation only.
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Dissolution of partnership
Partnership can be dissolved voluntarily or on insolvancy or on order of court or on death of all the partners. The losses are distributed in profit sharring ratio – but sometimes Garner v/s Murray rule is applied.
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Surplus capital method for distribution of proceeds When a partnership is dissolved, first of all make the payment to secured creditors, then to unsecured creditors and then to partners' loan accounts and then you have to pay to partners for their capital. First find out surplus capital and then distribute the proceeds in this ratio so that the partners capital become in the ratio of profit sharing. 5 DECEMBER 09
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What is the difference between secured / unsecured creditors Secured creditors are those, who have some property exclusively marked for their loans. They may have some property mortgaged or some pledge of some type. Unsecured creditors dont have any security / guarantee / property to guarantee. 5 DECEMBER 09
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What is surplus capital ? X and Y have capital of 10000 and 2000, however, their profit sharing ratio is 1:1, so there is surplus capital of X of 8000, because if you will w ill pay X Rs. 8000, their capital will be in profit sharing ratio. Thus surplus capital is that capital which when paid makes the capital in the ratio of their profit profit sharing. sharing. Suppose A,B,C have capital capital of 1,3, and 5 thousand, but their profit sharing ratio r atio is 1:1:1, so B and C have surplus capital of 2 and 4 and therefore surplus capital ratio is : 1:2 5 DECEMBER 09
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What is Maximum loss method ? In this method, we identify maximum loss at each stage and distribute distribute it to members The maximum loss is identified at each stage of dissolution. And this loss is distributed to partners in their profit sharing ratio. Thereafter whatever balance is left in their capital account is paid to that partner. 5 DECEMBER 09
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Example of maximum loss method Suppose the maximum possible loss is Rs. 1200. The profit sharing ratio is 1:1:1 and the capitals of A,B,C are 1000, 900, 500. now distribute the losses. Each partner gets loss of 400. Thus maximum loss of A,B,C are : 600, 500, 100. Thus A,B,C will be paid Rs. 600, 500 and 100 respectively. 5 DECEMBER 09
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X,Y and Z share profit in 5:3:2. firm is dissolved. Creditors : 7500, Capital : X 18000, Y : 15000, Z : 12000, Cash 3000, Debtors 27000, Stock 22500, Stock was realised in 13500, debtors in 23250, realisation exp. 750
Money realised : (13500+23250-750-7500) = 28500 loss : ( 3750+9000+750)=13500
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Surplus capital method : First divide the capitals by their profit sharing ratios :X 18000/5 = 3600 Y : 15000/3 = 5000, Z : 12000/2 = 6000, the minimum is 3600, so as per that notional capitals should be : 3600*5 = 18000, 36*3= 10800, and 36*2 = 7200. thus surplus capital : X = 0, Y = (1500010800) = 4200, Z = (12000-7200) = 4800 thus Y and Z have to be paid 4200 and 4800. 5 DECEMBER 09
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Maximum loss method Here we distribute the loss to the partners : 13500 distributed in 5:3:2 : 6750, 4050, 2700 this is distributed to X,Y,Z X = (18000-6750)=11250 (18000-6750)=11250 Y=(15000-4050)= Y=(15000-4050)= 10950 Z=(12000-2700) = 9300 to be distributed to X,Y,Z. Answer 5 DECEMBER 09
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A,B,C share profit in ratio 9:4:3, B retires, his share is taken by A and C in 1:3. D was admitted as partner with ¼ share, half of which is gifted by A and remaining by A &C equally. New share of A : 9+1 = 10/16 new share of C: 3+3 = 6/16 A's gaining ratio: 10/16 – 9/16 = 1/16 and that of C : 3/16 D gets : 1/4, 1/8 from A and 1/8 by A and C eqully. So new share of A : 10/16 – 1/8 – 1/16 = 7/16 new share of C: 6/16 – 1/16 = 5/16 thus new ratios are A:C:D: 7:5:4
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