Settlement of Accounts (Part A) Video Lecture - Commerce

[Music]
hello friends friends will continue with
resolution of partnership right
dissolution of partnership from right so
I told you that what is dissolution that
we are closing down the partnership
business this can be for any reason one
of the partner has died or it can be
compulsorily by law or it can be by the
mutual agreement between the partners
right so there can be more reasons like
that then we discussed I told you a
story that you move from a rented
accommodation to your own house that is
fully furnished
now the assets that you are having in
the rented accommodation you have to you
decide to sell those assets and from the
money realized you will pay the
liabilities then we discussed about
section 48 of Indian Partnership Act
1932 which gives the order in which the
liabilities are to be paid right this
section says that first of all you have
to pay the Outsiders liabilities then
pay the partners loan then pay the
partners capitals and then if anything
is left that is to be distributed among
partners in their profit sharing ratio
clear this much and in the last lecture
we started with accounting treatment in
the last lecture we started with
accounting treatment of dissolution
right in the accounting treatment we
started with preparing realization
account right
what is the realization account when you
decide when you decide to close down the
business and you have decided to sell
your assets you transfer the assets to
the realization account we transfer
assets and liabilities to realization
account right we haven't sold the assets
here be careful one thing friends when
we are preparing the realization account
we are transferring the assets and
liabilities we haven't sold the assets
and liabilities right we are yet to sell
those assets and liabilities it is just
we have decided that we are closing down
the partnership firm we are dissolving
the partnership firm and we have decided
that we will sail the SS and we will
settle the liabilities of the
partnership firm for that purpose what
we do is we transfer the assets to
realization account we transfer the
liabilities to realization account then
we discussed about the few points to be
remembered while treating the assets the
one thing was and if there is any
provision relating to asset appearing in
the books that provision will also be
transferred to realization account one
was related to provision and the other
was if there are any fictitious SS
appearing in the book fictitious assets
like accumulated losses advertisement
expenditure advertisement suspense
account right if there are any
fictitious assets that are appearing in
the books on the asset side of the
balance sheet then these assets will not
be transferred to realization account
these assets will be transferred to
partners capital accounts clear friends
then talking of liabilities we discuss
that liabilities only outside the
liabilities only outsider liabilities
will be transferred to realization
account liabilities relating to partners
loan and partners capital
will not be transferred to realization
account clear this much right now in
this lecture we'll discuss about one
specific liability that is workmen
compensation workmen compensation
reserve clip we'll talk about workman's
compensation reserve clear friends now
what is this workmen compensation
reserve we have been doing this topic
from the last three chapters change in
proper cheering ratio admission
retirement in all the chapters we have
done this this reserve is created to
meet any future contingencies to meet
any future contingencies related to
workers right you have many workers
working in your factory right you create
this workmen compensation reserve to
meet any future contingencies related to
workers that means in future if any
worker gets injured while working in
your factory then you are liable to be
on his medical expenses is this right in
future if any of the worker gets injured
while he is working in your factory you
are liable to meet his health his
treatment expenses for that purpose what
we do is we create one workmen
compensation reserve right so that in
future if we need to spend on this we
will use this workmen compensation
reserve first then if any other amount
is required that will be taken out of
profits right so in case of any
contingency related
to the workers if any of your worker
gets injured during the working time you
are liable to meet his expenses for this
purpose we create workmen compensation
reserve now how to treat this workmen
compensation reserves in case of
dissolution that is the point whether we
will be transferring this to realization
account now there can be four cases
right case one there is no liability
against workmen compensation result that
means no worker gets injured there is no
liability against workmen compensation
reserve whatever reserve whatever amount
you have set aside as result that is
laying as such there is no liability as
of now on the date of dissolution right
so what will you do is the whole of
workmen compensation reserve workmen
compensation reserve account debit you
will transfer the whole reserve to
partners capital accounts clear you will
transfer all of the reserves to partner
capital accounts because the reserves
are nothing but the part of profits only
clear so we will transfer the whole of
workmen compensation reserve to partners
capital accounts ts2
amount of liability amount of liability
is less than workmen compensation
resolve this was no liability
this is amount of liability is less than
workmen compensation reserve suppose you
have a workmen compensation reserve of
75 thousand right and
during the year you have a liability
that is still the date of dissolution
you have a liability of 20,000 what is
the remaining reserved 55,000 that means
one of your worker got injured during
the working hours and the expenses on in
treatment
were 20,000 now you have to pay him
20,000 there is a liability of 20,000
with regard to workmen compensation so
what will be the journal entry in this
case in this case our journal entry will
be workmen compensation reserve account
debit clear this will be 75,000 to
Realization account in the realization
account will take only the part of
liability and the remaining reserves
will be transferred to partners capital
account 55,000 clear friends so to the
extent of liability we will transfer
workmen compensation to realization
account and whatever balance reserve is
appearing in the balance sheet we will
transfer that to partners capital
accounts clear these two cases no
liability we will transfer the whole of
reserve to partners capital accounts if
amount of liability is less than workmen
compensation reserves then the amount of
liability will be transferred to
realization account and the remaining
will be transferred to partners capital
accounts now third case third cases
amount of liability amount of liability
is equal to workmen compensation reserve
that means if you have a workmen
compensation reserve of 75,000 and
during the year two of your workers got
injured you have a liability to incur
the expenses on their treatment
amounting to seven
five thousand so is there any workmen
compensation reserve remaining nothing
right so what will be the journal entry
if you can see the above also whatever
the amount of liability is we have
transferred it to realization account
now here the liability is equal to
workmen compensation so that means I can
say workmen compensation reserve account
debit to realization account what is
transferred to realization account the
amount of liability that is seventy five
thousand what is the amount of reserve
seventy five thousand so nothing will be
transferred to partners capital accounts
because whatever reserve we have created
the whole has been transferred to
realization account clear now the fourth
case four cases amount of liability
amount of liability is greater than
workmen compensation reserve that means
if you have a workmen compensation
reserve of say seventy five thousand but
your liability during the year towards
the workers comes to ninety thousand
then what will be the journal entry the
journal entry will be whatever reserve
we are having we have to basically close
down first the reserves that is what all
the items that are appearing in the
balance sheet to realization account now
what will be the amount seventy five
thousand or ninety thousand this amount
will be seventy five thousand because we
have to close the reserves first and why
closing the amount of reserve we have is
seventy five thousand only there is a
liability to pay ninety thousand but
what we are doing in the realization
account is we are closing down our
assets and liabilities right so what is
the liability there what is the reserve
standing there that is 75 south
cliff so the whole amount of reserve
will be transferred to realization
account here friends this workmen
compensation reserve is clear so we have
the four cases the first one is there is
no liability against the workmen
compensation reserves in that case the
whole amount of reserve will be
transferred to partners capital accounts
then if the amount of liability is less
than workmen compensation reserves the
amount of liability will be transferred
to realization account and the remaining
reserve will be transferred to partners
capital account clear then amount of
liability is equal to workmen
compensation reserve then the whole
amount of liability and reserve will be
transferred to realization account then
if the amount of liability is greater
than reserve then the whole amount of
reserve will be transferred to
realization account clear friends I hope
this much is clear to you
workmen compensation reserve clear
so what we have done is realization
account we talked of two things assets
and the liabilities clear for assets we
say we transfer the assets to the
realization account as soon as we
realize as soon as we realize that we
are closing down the business and we
have to say lot as such clear and then
the liabilities Outsider liabilities we
will be paying first according to
section 48 of Indian partnership Act
1932 now friends if we talk of
realization account we transfer the
assets and liabilities to realization
account before their sale before the
assets are sold we transfer them to
realization account clear what we
consider is as soon as we say that we
are closing down the partnership firm
and we have to sell the assets we
transfer the assets to realization and
liabilities and liabilities to
realization account we haven't sold the
assets as of now clear now what you have
done is you have transferred your assets
to realization accounts and now is the
time to sell your assets right now what
we say is realization of assets right
what is the first step first step is you
have transferred the assets to
realization account right now from this
realization account you will start you
will start selling your assets
cliff now when you will sell your assess
right there can be three situations a
part assets are sold for cash assets are
sold for cash cliff clear friends now
what will be the journal entry if you
are selling the assets for cash your
cash will come into your pocket I will
say cash account debit now what will be
the credited asset account or the
realization account assets I have
already credited by transferring them to
realization account
I cannot credit the assets again I have
already transferred my assets to
realization account assets I have closed
down closed down forget about the assets
now you have the realization account
only so what I will say is cash to
realization account right here you can
make a note that assets have already
been assets have already been credited
right to realization account so we
cannot credit the asset twice because we
have already credited the assets while
transferring to realization account so
now we will credit the realization
account and not the asset account clear
this first case is clear second case is
so the second case is acid is acid taken
over by a partner one of the partner
decides to take over the acid he says
let give me this asset of the firm and
adjust it from my capital account what
is the capital account that is the
liability that is the payment towards
the partner he says give me this asset
and whatever is the value of asset you
deducted from my capital account so what
you will do is you will debate the
partners capital account and what you
will credit asset account or the
realization account asset account is
already credited when you have
transferred the assets to realization
accounts so here I will say two
realization account clear friends one of
the partner decides to take the assets
while dissolution and he say whatever is
the amount of asset you adjusted from my
capital account because what will the
capital account reflect capital account
reflects the amount that is payable to
the concerned partner and if we debit
the partners capital account the amount
payable to partner will reduce clear
clear friends
now what is the third case the word case
is you give your asset I said to your
creditor and settle his views right now
you are moving from a rented
accommodation to a fully fully furnished
home you have the certain payments to be
made while you are leaving the rented
accommodation right that is what I have
told you you have to make certain
payments when you are leaving the rented
accommodation like you have to pay the
rent to the landlord you have to pay to
your maid now your amount due towards
your maid was rupees four thousand right
your amount due to words you are made
was rupees four thousand what you do is
instead of giving her four thousand you
give her the microwave you ask her to
take the microwave right in the
settlement offers dues of rupees four
thousand this is what we are doing here
we have to pay a creditor a certain
amount instead of giving him the cash we
ask him to take our asset right we do
not sell that asset in the market we ask
our creditor to take that asset in the
settlement office dues clear friends
what will be the entry in this case you
are giving the asset to a creditor your
asset will reduce and your creditors
will also reduce your liabilities will
be debited and SH will be credited you
have already done that in the
realisation account in the normal case
what will be the journal entry the
journal entry will be creditor account
debit to asset account
isn't it this will be your journal entry
but in this case if you see you have
already debited the liability to the
realisation account and you have already
credited the asset to the realisation
account
why will you again debit the liability
again credit the asset because you have
already done that while transferring it
to realization account so in this case
this entry will not be passed
there will be no entry write down the
note here creditors are already debited
and assets are already credited while
transferring them to realization account
clear friends so now we say that in case
we give the asset to the creditors and
we are not selling the asset in the
market in that case there will be no
entry right there is a transfer of asset
to settle the liabilities we have
already debated the creditors we have
already credited the SH while we will do
it twice so there will be no entry in
this case so the three cases are clear
related to realization of assets first
you will transfer the assets to the
realization account as soon as you think
that you are closing down the business
and you have to sell those assets you
have to just transfer those assets to
realization account you close the assets
account cliff then these assets then you
go to the market and
sell those assets clear first of all
what you will do is you will collect all
the assets at one place right that one
place is known as a realization account
then you will take that one place to the
market right you will take one carton
where you have kept all the assets you
will take that carton to the market and
sell the assets that that carton is
known as realization account so if the
assets are sold for cash we will take
the cash and put it in the carton so
cash to realization carton is gone from
us cash coming inside assets taken over
by partner if one of the partner takes
over your carton then we will say
partners capital accounts to realization
account if one of your creditors take
yours Carter and if your mate takes your
microwave right then in that case there
will be no general journal it dear
friends so this is about realization of
assets right now talking of liabilities
in the realization we talk about two
things assets and liabilities
now the second part in this is
settlement of liabilities right in the
realization account what you have done
is you have collected all the
liabilities at one place right now you
are going to settle those liabilities
now on first is payment of liabilities
in cash right payment of liabilities in
cash then we will say realization
account debit to cash or bank account
because the liabilities have already
been debited to realization account now
here we will debate the realization
account second case is if partner agrees
to settle a liability if one of the
partner says that I will pay that
liability right in my that I will pay
that liability then what will be the
journal entry realization account debit
to partners capital accounts absolutely
reverse entry is to what we have done in
assets right if the liabilities are paym
the payment of liabilities is in cash
then the journal entry will be
realization to cash or bank account if
one of the partner agrees to settle a
liability then we will say a realization
account debit to partners capital
accounts clear friends
clear
I hope this much is clear to you first
so first of all what we are doing is we
are transferring our assets and
liabilities to realization account this
is like when you are moving from a
rented accommodation and you know you
have to sell your assets what you do is
you collect all your assets and put it
in one carton that one carton is a
realization account clear then what you
will take is when you go to settle sell
the assets when you go to realize money
from the assets you will take that
carton we will take realization account
forget about the assets then only the
realization account will be debited or
credited right in case of assets and
liabilities clear this much clearance
now one more thing here we have is one
more thing that we are going to discuss
here is we have one more topic that is
unrecorded assets unrecorded assets and
liabilities right what are these this
means assets and liabilities do exist
but
these are not appearing in the books
these are not appearing in the books
clear that is the assets and liabilities
do exist but these are not appearing in
the books now what will be the
accounting treatment of that what will
be the accounting treatment these will
not be directly first point these assets
and liabilities these assets and
liabilities are not transferred to
realization account right then we have
closed down our balance sheet we have
closed down our assets and liabilities
then what we have is what we say is if
anything is realized if any amount if
any amount is realized from these assets
right then the journal entry will be
cash or bank account debit to the
realization account why realization
account because we have already closed
our assets and liabilities account we
have closed our balance sheet so we will
do all the adjustments through
realization account these assets will
directly not be taken to realization
account if there is any amount realized
then the journal entry will be cash
bang - realization 10 third point if any
partner decides to take over these
assets then the journal entry will be
partners capital accounts debit to
realization account clear prints then
fourth case unrecorded liability is paid
then the journal entry will be
realization account debit to cash or
bank account similar to the entries what
we have done in settlement of assets and
liabilities realization of assets and
settlement of liabilities liability
taken by partner then the journal entry
will be realization account debit to
partners capital accounts clear friends
if wild resolution you come there comes
to your notice that you have some
unrecorded assets and liabilities then
what will be the accounting treatment of
those assets and liabilities you forgot
to record some assets and liabilities in
the books now they are not in there in
your books
these are unrecorded si
and liabilities these assets and
liabilities will not be transferred to
realization account first rule second is
if anything is received from the sale of
these assets we will record the entry as
we have done in realization of assets
then all the cases are similar to what
we have done in realization of assets
and settlement of liabilities clear
friends
now I hope you are clear about assets
and liabilities how we are dealing with
assets and how we are dealing with
liabilities right so if you have any
queries just send me an e-mail at ksj
teaching at the rate of gmail.com clear
in the next lecture we will talk about
the dissolution expenses accounting
treatment of dissolution or I can say
realization expenses now what is this
what is the accounting treatment we'll
discuss in the next lecture so that's
all for this lecture friends thank you
so much