Kerala Plus Two Accountancy with AFS (DHSE) common mistakes
Kerala Plus Two Accountancy with AFS (DHSE) · Understand the traps and how to avoid them.
They credit the entire subscription received during the year to income in the Income and Expenditure Account, and then show the closing outstanding subscription as an asset without checking whether it belongs to the current year.
They read the Receipts and Payments Account as if it were the income statement, so cash received in the year is treated as income of the year, and arrears of the previous year and advances for the next year are never separated out.
What to do instead
Prepare a Subscription Account: opening outstanding plus current-year subscription on the debit side; subscription received (including previous arrears and current advances) plus closing outstanding on the credit side. Transfer only the current-year figure to the Income and Expenditure Account; closing outstanding is an asset and advance subscription is a liability.
They debits partner's salary, commission and interest on capital in the Profit and Loss Account, and where the deed is silent they still allow interest on capital while forgetting that interest on a partner's loan is payable at 6% per annum.
Appropriations are mentally grouped with business expenses, and the default rules of the Indian Partnership Act are memorised as a list rather than applied to the items in the question.
What to do instead
The Profit and Loss Account ends at net profit. Salary, commission and interest on capital are debits in the Profit and Loss Appropriation Account; interest on drawings is a credit there. In the absence of a deed: no interest on capital and no salary, but interest on a partner's loan at 6% per annum is a charge against profit.
On admission of a partner, they raise goodwill in the books and credit it to all partners, including the new partner, in the new profit-sharing ratio.
They remember that goodwill must be 'adjusted' but not who has sacrificed it; the credit is copied from the new profit-sharing ratio already written at the top of the answer.
What to do instead
Premium for goodwill belongs only to the sacrificing partners. Compute sacrifice ratio as old share minus new share and credit the old partners in that ratio (or debit the new partner's capital and credit the sacrificing partners if goodwill is not to remain in the books). The incoming partner is never credited for goodwill on admission. Goodwill already appearing in the books is written off among the old partners in the old ratio before admission.
On retirement they calculate gaining ratio as old ratio minus new ratio, and they adjust the retiring partner's share of goodwill by debiting all continuing partners in their old profit-sharing ratio.
The direction of the formula is reversed and the goodwill entry is copied from the admission chapter, where old partners are credited rather than gaining partners debited.
What to do instead
Gaining ratio = new share minus old share. The retiring partner's share of goodwill is debited to the gaining partners in the gaining ratio and credited to the retiring partner's capital account. Revaluation profit or loss and reserves are shared by all partners including the retiring partner in the old ratio, because the revaluation is done before retirement.
They transfer the firm's cash and bank balance to the Realisation Account, and when a partner takes over an asset they record it at book value instead of the agreed takeover value.
They treat every item on the asset side as if it must pass through Realisation, and they assume the book value is the settlement figure.
What to do instead
Cash and bank are not transferred to the Realisation Account; only actual receipts and payments on realisation are recorded there. An asset taken over by a partner is recorded at the agreed value: debit the partner's capital account and credit the Realisation Account. Similarly, a partner's loan is settled separately and is not merged with capital until the final settlement.
On forfeiture they credit the Share Forfeiture Account with the full called-up amount on the shares, and on reissue they debit the whole reissue discount to Share Forfeiture even when it is larger than the amount forfeited.
They confuse called-up capital with cash actually received, and they treat Share Forfeiture as an unlimited pool that can absorb any discount.
What to do instead
Forfeiture entry: Share Capital Dr with the called-up amount, Calls in Arrears Cr with the unpaid amount, Share Forfeiture Cr with the amount actually received. On reissue, debit the discount to Share Forfeiture only up to the amount forfeited on those shares; any balance left in Share Forfeiture is transferred to Capital Reserve.
They create the Debenture Redemption Reserve only in the year of redemption, and when debentures are actually redeemed they debit the DRR Account and treat it as the source of payment.
DRR is confused with a cash fund, so it is thought of as money set aside in the bank rather than as an appropriation of profits.
What to do instead
DRR is created out of profits over the life of the debentures as required, and where the rules demand it, an equivalent amount is invested in specified securities. On redemption, the debentures are paid out of cash or bank; the DRR is then transferred to General Reserve. It is never debited as if it were a payment.
In the company balance sheet they add calls in advance to the paid-up amount of share capital, and they show calls in arrears as an asset.
Both items carry the word 'calls', so they are placed near share capital instead of being treated as a liability and a deduction respectively.
What to do instead
Show subscribed capital, then less calls in arrears, to arrive at paid-up capital. Calls in advance is not part of share capital; it is shown under current liabilities (other current liabilities). Calls in arrears is deducted from the called-up amount and never appears on the assets side.
They compute the debtors turnover ratio using only the closing trade receivables, leaving out bills receivable, and they compute the proprietary ratio by taking total assets including fictitious assets.
Formulas are memorised as single-line definitions from a guide, without the underlying idea of average receivables and of assets that have no realisable value.
What to do instead
Use average trade receivables including bills receivable (opening plus closing divided by two) for turnover and average collection period. Proprietary ratio = proprietors' funds divided by total assets, where total assets exclude fictitious assets such as preliminary expenses and debit balance of profit and loss. State the formula you use before substituting figures.
They show the issue of shares to vendors against purchase of machinery as a financing inflow and an investing outflow, and they classify interest paid on debentures as an operating activity.
The transaction looks like two cash flows on paper, and interest is assumed to belong with operating expenses because it appears in the statement of profit and loss.
What to do instead
Non-cash transactions are excluded from the Cash Flow Statement and disclosed separately in a note. Interest paid on debentures by a non-financial company is a financing outflow. Start operating activities from profit before tax and add back non-cash charges such as depreciation and loss on sale of fixed assets before adjusting working capital changes.