KSEAB II PUC Accountancy common mistakes
KSEAB II PUC Accountancy · Understand the traps and how to avoid them.
When a new partner is admitted, the candidate revalues assets and liabilities but records the resulting gain or loss in the Revaluation Account and then closes it to all partners' capital accounts, including the new partner's, instead of only the old partners.
The revaluation is treated as an ordinary operating adjustment applied to whoever is a partner at the end of the year. Candidates forget that the profit or loss on revaluation arose before admission, so only the sacrificing (old) partners own it; the incoming partner's capital is credited only for the premium/goodwill and the capital actually brought in.
What to do instead
Before writing any entry, draw a timeline: pre-admission items go to old partners only; post-admission items go to all partners. Post revaluation profit/loss to old partners' capital accounts in old ratio, and state the ratio explicitly in the working note. Practise one admission problem end-to-end where the new partner's capital account shows only cash brought in plus share of goodwill, nothing from revaluation.
The candidate credits the whole goodwill amount to the old partners' capital accounts in the old profit-sharing ratio when a partner is admitted, and separately raises a Goodwill Account in the books, so goodwill appears as an asset in the new balance sheet.
Textbook presentations of treatment (a), (b) and (c) are memorised as three interchangeable routines. Under the premium method the new partner's share alone is credited and the old partners share it in the sacrificing ratio; raising goodwill as an asset is only correct when the partners decide to keep it in the books, which the question usually does not say.
What to do instead
Read the admission question for the words 'brings his share of goodwill in cash' versus 'goodwill is to be raised'. If cash is brought, debit Cash, credit Premium for Goodwill, then transfer to old partners in sacrificing ratio, no goodwill asset. If the question is silent, use the premium method and add a note saying so. Never leave a Goodwill Account balance in the balance sheet unless the question explicitly raises it.
In a retirement or death problem, the candidate distributes the retiring or deceased partner's share of goodwill by debiting all continuing partners in the old profit-sharing ratio instead of the gaining ratio.
The old ratio is the ratio used everywhere else in the problem, so it is applied by habit. The correct logic is that the continuing partners acquire the retiring partner's share, so they must compensate the retiring partner in the ratio of the share each of them gains.
What to do instead
Compute gaining ratio as new ratio minus old ratio for each continuing partner, and check that it adds to the retiring partner's share. Write the gaining ratio as an explicit line in the working note before passing the goodwill entry. For death, also remember the deceased partner's share of profit to date of death is credited through Profit and Loss Suspense Account, not the Profit and Loss Account.
When a partner dies mid-year, the candidate computes the deceased partner's share of profit for the full year and credits it to the Profit and Loss Account, or ignores it altogether because the trial balance shows no profit figure for the period.
Annual financial statements are the default mental model, so the fraction of the year up to the date of death is skipped. Candidates also do not know which of the two permitted bases, time basis or turnover basis, to apply when the question gives only last year's profit.
What to do instead
Always compute profit to date of death as previous year's profit multiplied by months or days to death over twelve, then multiply by the deceased partner's share, and credit it to Profit and Loss Suspense Account. If the question gives turnover up to death, use the turnover proportion instead. Show the fraction as a separate line so the examiner can see the period was restricted.
In a dissolution problem, the candidate settles outside liabilities and partner's loan accounts from the firm's cash without applying the order of payment, and treats a partner's loan as part of the partner's capital.
All credit balances look alike in the ledger, so the loan account is merged with capital. The statutory order, which places third-party liabilities and the wife's loan before partners' loans and capitals, is not applied because candidates do not see it as a scored step.
What to do instead
Before writing any realisation entries, list the claims in order: realisation expenses, outside creditors, partners' loans (including loans from a partner's spouse treated as a third party), then capitals. Keep the Partner's Loan Account as a separate ledger, never merged into capital. When cash is insufficient, apply the Garner v. Murray rule only among solvent partners' capitals, using the last agreed capital ratio.
The candidate records the issue of shares at a premium by crediting the entire amount received to Share Capital, then separately tries to adjust the premium through the Statement of Profit and Loss or an expense account.
The bank entry is written first and the share capital is credited with the full cash figure out of habit. Candidates also confuse Securities Premium with a revenue gain because it is received in cash.
What to do instead
Split every share issue entry on the day it is written: credit Share Capital with face value times number of shares, credit Securities Premium with the excess. Remember Securities Premium is a capital receipt shown under Other Equity and can be used only for the purposes allowed by the Companies Act, such as issuing fully paid bonus shares, writing off preliminary expenses, or buyback, never for paying dividends.
The candidate applies the same interest rate to the full face value of debentures for the whole year even when debentures were issued or redeemed partway through, and writes off the entire discount on issue in the year of issue.
Interest is computed mechanically as face value times coupon rate, and the part-year period is overlooked. Discount on issue is treated like a normal expense because candidates do not link it to the life of the debentures.
What to do instead
For each tranche of debentures, compute interest as face value times rate times months outstanding over twelve, and total the tranches. Write off discount on issue over the life of the debentures, normally in equal annual instalments, charging it to the Statement of Profit and Loss and crediting Debenture Discount Account. Show the unamortised balance as an asset until fully written off.
When preparing the Statement of Profit and Loss and Balance Sheet of a company, the candidate shows proposed dividend as a liability in the current liabilities and treats it as an appropriation, and mixes the current year's profit with reserves without separating them.
Old-style partnership and sole trader formats put drawings and appropriations inside the balance sheet, and older company formats showed proposed dividend as a provision. Candidates carry that habit into the current format, which shows dividend as an appropriation from retained earnings only after it is approved.
What to do instead
Use the Schedule III vertical format: Other Current Liabilities excludes proposed dividend, and the surplus in the Statement of Profit and Loss is shown under Other Equity after appropriations. Prepare the notes for Share Capital, Reserves and Surplus, Long-term Borrowings, and Trade Payables before the main statements so the figures reconcile. Check the balance sheet total against the total of the statement of profit and loss workings.
In comparative and common-size statements, the candidate computes percentage change as current year minus previous year divided by the current year, and computes common-size percentages against total assets for every item in the Statement of Profit and Loss.
The base of a percentage is treated as whichever figure is written last, and the two statement types are not distinguished. Candidates also ignore the sign, so a fall in revenue appears as a positive percentage.
What to do instead
Fix the base rule before computing: comparative change uses the previous year as base, and common-size uses total revenue from operations as base for every income and expense line and total assets as base for every balance sheet line. Compute the base year first and write it at the top of the column. Show falls as negative figures in brackets and state the base used in a note under the statement.
The candidate computes the current ratio by including prepaid expenses and preliminary expenses in current assets, and computes the debt-equity ratio using total liabilities instead of long-term debt divided by shareholders' funds.
Any asset expected to be used within a year looks current, and any outside claim looks like debt. The definitions of quick assets, shareholders' funds and long-term borrowings are not held precisely, so the ratio is arithmetically right but conceptually wrong.
What to do instead
Memorise the exclusion lists: current assets exclude loose tools, prepaid expenses and preliminary expenses for the quick ratio; shareholders' funds include share capital, reserves and surplus less accumulated losses and fictitious assets; long-term debt excludes current liabilities and provisions. Write the formula and the substituted figures side by side so the examiner can see the classification, and cross-check the ratio against the note figures used in the balance sheet.