BSEH SS Accountancy common mistakes
BSEH SS Accountancy · Understand the traps and how to avoid them.
When a partner is admitted, the candidate records the premium for goodwill in the old partners' capital accounts at their old profit-sharing ratio instead of crediting the sacrificing partners individually in their sacrifice ratio.
The candidate memorises 'goodwill goes to old partners' and stops there, forgetting that only partners who give up a share are compensated; when the new partner's share is carved from only some partners, the old ratio and the sacrifice ratio diverge.
What to do instead
Before writing any entry, compute each old partner's sacrifice as old share minus new share and show the working in the answer. Credit goodwill to sacrificing partners in that computed ratio; if all partners sacrifice in the old ratio, note explicitly that the old ratio equals the sacrifice ratio so the simpler treatment is valid.
The candidate calculates interest on capital or drawings on the closing balance or on the full-year amount, ignoring the dates of introduction and withdrawal of capital and the period for which each amount actually stood in the books.
Interest is a time-based charge, but candidates treat it as a flat percentage of the figure at the top of the question; they also forget that drawings interest is charged to the partner and not to the firm, and they mix up product method with simple average method.
What to do instead
Draw a dated timeline of every capital addition and drawing, compute interest month-by-month or by the product method (amount times months), and state the assumption about the date of drawings when the question is silent. Always close the entry through the partner's current account or capital account as instructed.
On retirement or death, the candidate revalues assets and liabilities but forgets to transfer the revaluation profit or loss only to the continuing partners, or forgets to adjust goodwill by crediting the retiring or deceased partner and debiting the continuing partners in their gaining ratio.
The candidate applies the admission routine mechanically; in retirement the person leaving does not bear revaluation gains or goodwill losses, and the direction of the goodwill entry reverses, which is easy to miss under time pressure.
What to do instead
Write a two-line checklist for every reconstitution: (a) who is leaving or joining, (b) who bears or receives the revaluation and goodwill effects. For retirement and death, credit the outgoing partner's capital account for their share of goodwill and debit the gainers in the gaining ratio, then verify the total debits equal the total credits.
In the deceased partner's account, the candidate credits only capital and profit share but omits the share of profit from the last balance sheet date to the date of death, and omits interest on capital up to the date of death.
The candidate treats death like an ordinary retirement at year end and overlooks the time apportionment that the death date forces; the 'previous year's profit' shortcut is applied without checking whether the question asks for time-based or turnover-based estimation.
What to do instead
Build the deceased partner's account line by line: opening capital, interest on capital to date of death, salary to date of death, share of revaluation, share of goodwill, share of estimated profit to date of death, then deduct drawings and interest on drawings. Show the basis of profit estimation and the number of months used.
In dissolution, the candidate records the sale of an asset to a partner or the takeover of a liability by a partner as a cash transaction, or fails to route realisation expenses and the realisation account through the partners' capital accounts correctly.
The candidate confuses realisation with ordinary asset disposal and forgets that the realisation account is a temporary account that must close to zero; assets taken over by a partner and liabilities assumed by a partner are non-cash settlements.
What to do instead
For every item ask 'did cash move?'. If an asset is taken over, debit the partner's capital account and credit realisation; if a liability is assumed, debit realisation and credit the partner's capital account. Close the realisation account to the partners' capital accounts in the profit-sharing ratio and confirm the balance is nil before preparing the bank account.
On issue of shares, the candidate records the securities premium in the share capital account or uses premium to write off preliminary expenses or the discount on issue of shares, which the law does not permit.
The candidate merges the two accounts because both are credited on allotment, and relies on a half-remembered list of permitted uses of securities premium without checking each use against the permitted categories.
What to do instead
Keep share capital and securities premium in separate accounts and memorise the permitted uses by category: issue of fully paid bonus shares, writing off preliminary expenses, writing off discount on issue or commission on issue, premium on redemption of preference shares or debentures, and buy-back. Test each proposed use against that list before accepting it.
When debentures are issued at a discount or redeemed at a premium, the candidate ignores the loss on issue or the premium on redemption until the redemption year, or creates the debenture redemption reserve without linking it to the prescribed percentage of the nominal value of outstanding debentures.
The candidate treats the discount or redemption premium as a year-of-redemption event and does not see that the liability is known at issue; the DRR rules are learned as a formula without understanding that it is created out of profits available for dividend.
What to do instead
At issue, debit 'Discount on issue of debentures' or 'Loss on issue of debentures' and write it off over the life of the debentures against the securities premium or profit and loss. Create the DRR from profits each year and invest the required amount in specified securities; show the DRR as a reserve and the debenture redemption investment separately in the balance sheet.
In the company's statement of profit and loss, the candidate reports the proposed dividend, interim dividend and tax thereon as charges against the current year's profit, and treats them as provisions rather than as appropriations disclosed in the notes.
The candidate carries over the partnership habit of treating distributions as expenses and is unaware of the accounting treatment that follows from the relevant accounting standard and the Companies Act disclosure requirements.
What to do instead
Treat dividends as appropriations of profit, not expenses: show them in the notes on the statement of profit and loss and in the reserves and surplus note, and disclose proposed dividend separately from interim dividend already paid. Check that the finance cost line contains only interest and similar charges, not distributions to shareholders.
In ratio analysis, the candidate mixes a balance sheet figure with a statement of profit and loss figure without averaging the balance sheet item, or compares a ratio computed on cost with one computed on sales, producing a meaningless trend.
Formulas are memorised as fractions without attention to whether the numerator and denominator are stock or flow variables, and questions often supply both opening and closing balances that the candidate ignores.
What to do instead
For every turnover or return ratio, label each input as stock or flow; use the average of opening and closing balances for stock items and state the average used. Keep the basis consistent across years being compared, and write the formula with the chosen figures substituted before calculating.
In the cash flow statement, the candidate classifies interest paid on borrowings as an operating outflow while classifying interest received on investments as an investing inflow in the same answer, or includes non-cash items such as depreciation, write-offs and revaluation gains in the operating section.
The classification choices for interest and dividends are alternatives that must be applied consistently, and candidates patch together remembered rules from different conventions; non-cash adjustments are also skipped when the candidate works only from the profit figure.
What to do instead
State the classification policy at the top of the answer (for a non-financing company, interest paid is a financing outflow and interest received is an investing inflow) and apply it throughout. Start from profit before tax, add back every non-cash and non-operating item, then adjust for working capital changes, and reconcile the closing cash balance to the opening balance as a final check.