PSEB SS Accountancy common mistakes
PSEB SS Accountancy · Understand the traps and how to avoid them.
When a new partner is admitted, the candidate records the premium for goodwill as a normal cash receipt credited to the new partner's Capital Account, instead of crediting the sacrificing partners' Capital Accounts in their sacrifice ratio.
The candidate treats goodwill like any other asset contribution and forgets that the incoming partner pays for the share of profits he takes over from existing partners, so the benefit must go to those who gave up that share. The sacrifice ratio is also often wrongly replaced by the old profit-sharing ratio.
What to do instead
Before writing any journal entry, compute sacrifice ratio = old ratio minus new ratio for each old partner. Debit Cash/Bank with the total premium, credit each sacrificing partner's Capital Account with premium multiplied by that partner's sacrifice share. If goodwill is raised and then written off, the write-off must follow the new profit-sharing ratio, not the old one.
On admission, the candidate revalues assets and liabilities but passes the resulting gain or loss through the Revaluation Account directly to the new partner as well as the old partners, or posts it to the Profit and Loss Account.
The candidate does not grasp that revaluation surplus or deficit belongs only to the partners who owned the business before admission, since the new partner did not own the assets when their values changed.
What to do instead
Open a Revaluation Account, record increases and decreases there, and transfer the net balance to the old partners' Capital Accounts in the old profit-sharing ratio only. The incoming partner's account should receive only his capital and his share of goodwill, never a share of pre-admission revaluation.
In the admission, retirement and death chapters, the candidate uses the old profit-sharing ratio to distribute the deceased or retiring partner's share of goodwill and accumulated reserves, or omits the gaining ratio entirely.
The candidate memorises one ratio and applies it everywhere; the gaining ratio and the treatment of goodwill on retirement or death are conceptually weaker areas, and the exam often gives the new ratio without stating the gaining ratio explicitly.
What to do instead
Compute gaining ratio as new ratio minus old ratio (for the remaining partners) whenever a partner retires or dies. Debit the gaining partners and credit the retiring or deceased partner's Capital Account with his share of goodwill. Distribute general reserves and accumulated profits in the old ratio up to the date of change, and adjust the retiring partner's capital account for reserves, revaluation and goodwill before settling the balance.
In partnership fundamentals, the candidate prepares the Profit and Loss Appropriation Account but records partners' salaries, interest on capital and interest on drawings as expenses in the Profit and Loss Account, or forgets to charge interest on drawings before distributing profit.
The candidate confuses the firm's trading profit with the distribution of that profit among partners, and does not see that these items are appropriations of profit, not business expenses.
What to do instead
Keep the Profit and Loss Account purely for business income and expenses. Transfer the net profit to the Profit and Loss Appropriation Account, then debit interest on capital and partners' salaries and credit interest on drawings there, and distribute the residual in the profit-sharing ratio. Remember interest on drawings is income to the firm and is credited to the Appropriation Account.
When a partner retires or dies mid-year, the candidate calculates interest on capital or drawings for a full year and ignores the time factor, and fails to prepare the deceased partner's Executor's Account.
The candidate treats the year-end adjustments as annual fixed amounts and does not link them to the actual period the partner was in the firm, and is unsure where the settled amount goes once the partner is gone.
What to do instead
Apply time apportionment to interest on capital and to the profit share up to the date of retirement or death (using time or turnover basis as stated). Close the retiring or deceased partner's Capital Account by transferring the balance to his Loan Account (retirement) or to the Executor's Account (death), and show the amount payable separately in the balance sheet.
On issue of shares, the candidate credits the full amount received, including securities premium, to Share Capital, and records calls-in-arrears and calls-in-advance in the wrong accounts or nets them off against each other.
The candidate does not separate the face value of the share from the premium, and treats calls-in-arrears as a reduction of called-up capital rather than as an asset to be recovered.
What to do instead
Credit only the face value to Share Capital and credit Securities Premium to a separate reserve account. Show calls-in-arrears as a deduction from called-up capital in the balance sheet (or as an asset until recovered), and show calls-in-advance as a current liability. When shares are forfeited, debit Share Capital with the called-up amount, credit the amount already received, and credit Forfeited Shares Account with the balance.
When debentures are issued at a discount or premium or redeemed at a premium, the candidate records the entire cash figure in the Debentures Account and ignores the Discount on Issue of Debentures or Loss on Issue of Debentures account.
The candidate thinks of the debenture account as a cash record rather than a liability record measured at face value, and does not know that discount or premium on issue and redemption premium are written off over the life of the debentures.
What to do instead
Always credit the Debentures Account with the nominal (face) value. Debit the discount or redemption premium to a separate Discount on Issue of Debentures or Loss on Issue of Debentures Account, show it as an asset and write it off against Securities Premium or Profit and Loss over the debenture period. For redemption at premium, provide for the premium at the time of issue itself.
In Not-for-Profit Organisation accounts, the candidate prepares a single Income and Expenditure Account and mixes capital receipts such as donations for buildings or legacies with revenue subscriptions, or omits the opening and closing balances of the Receipts and Payments Account.
The candidate does not distinguish receipts and payments (cash basis, all receipts) from income and expenditure (accrual basis, revenue only), and does not identify items that are capital in nature or relate to specific funds.
What to do instead
Classify every receipt as revenue or capital before posting. Put subscriptions, donations for general purposes and sale of old sports material into the Income and Expenditure Account; put building donations, life membership fees and legacies into separate funds or capital. Adjust subscriptions for outstanding and advance amounts, and reconcile the closing cash balance in the Receipts and Payments Account with the opening balance plus receipts minus payments.
In company financial statements, the candidate prepares the Statement of Profit and Loss but misclassifies items between the statement and the balance sheet, for example showing proposed dividend or current tax as an appropriation below the profit line, or omitting the note on reserves and surplus.
The candidate is working from older formats and has not internalised the current presentation, where tax is an expense in the Statement of Profit and Loss and dividends are recognised when declared, and where many items must appear as notes rather than on the face of the statements.
What to do instead
Place all revenue expenses, including current and deferred tax, in the Statement of Profit and Loss. Show share capital, reserves and surplus, and long-term borrowings in the Equity and Liabilities section, and note the movement in each reserve separately. Keep the face of the statements to the prescribed line items and disclose sub-classifications in the notes.
The candidate prepares the Revaluation Account and the partners' capital accounts in the wrong order, so that the revaluation profit is distributed before the revaluation entries are completed, or the balance sheet is drawn up without incorporating the revaluation, goodwill and reserve adjustments.
The candidate works entry by entry without a fixed sequence, and the interdependence of revaluation, goodwill and reserves on capital accounts is not mapped out, so one adjustment is double counted or dropped.
What to do instead
Follow a fixed sequence: revalue assets and liabilities, distribute the revaluation result to old partners, adjust goodwill and reserves in the correct ratios, bring in or settle the incoming or outgoing partner's capital, then draw the balance sheet from the adjusted ledger balances. Check that total capital after all adjustments equals the partners' closing balances before balancing the balance sheet.