Bhagya

By going through these Maharashtra State Board Bookkeeping and Accountancy 11th Notes Chapter 1 Introduction to Book Keeping and Accountancy students can recall all the concepts quickly.

Maharashtra State Board 11th Accounts Notes Chapter 1 Introduction to Book Keeping and Accountancy

Introduction-

In the ancient days, in order to satisfy wants, commodities and services were directly exchanged against A other commodities and services. After the introduction of money as a medium of exchange commodities and services were purchased and sold directly for money or money’s worth. Along with civilisation, growth and development of economy, business activities also increased. Later on it became difficult for businessman to remember all the business transactions of the day. Thus, a need was felt to record (i.e. to write) business dealings in a systematic way. This very job of recording or writing the business transactions in a separate book is known as “Book-Keeping”. Book-Keeping records are useful for taking important decisions as to whether the business activities are feasible, profitable and to be continued further or not. The detail information of business and other organisations is also required by the proprietors, managers and other stakeholders like government, customers, employees, researchers, investors to fulfill their different objectives.

Evolution of Accounting:
The system of book keeping was in operation in India, since the time of Chandragupta Maurya. During his regime his minister Kautilya wrote a book called ‘Arthashastra’ in which some references were given regarding the way of recording and maintaining accounting records. This system of recording business transactions in the separate book was known as Deshi Nama.

The person who records the business transactions in the books of accounts is called an ‘Accountant’. In the earlier times of civilisation, accountants were appointed by the wealthy people to keep detailed information of their properties. Accountants used to prepare accounts periodically for the owners of the property. The double entry system of book-keeping was first originated in Italy and developed by Luca De Bargo Pacioli in 1494.

Industrial revolution took place in 18th and 19th century which gave birth to the large scale business organisations such as Partnership firm, Joint stock companies, Cooperative societies, etc. In the large scale business organisations, due to separation of ownership from the management, the need was felt to develop comprehensive accounting information system to provide detail information about the business to the shareholders (owners) and investors.

In the 20th century, a separate branch of accounting called Management Accounting system is discovered and developed to analyses financial information and to provide financial information to the management for decision making.

In the 21st century due to the vast and rapid growth and development in the business activities and business organisations, the individual centric accounting system gradually developed into Social Responsibility Accounting. Thus, in the modern world of business, accounting become the most important aspect of every business organisation.

Meaning And Definition OF Book-Keeping-

(A) Meaning : Book-keeping is an art or system of keeping or maintaining a record of business transactions in a regular and systematic manner. According to R. N. Carter, “Book-keeping is a science and an art of correctly recording in the books of accounts, all those business transactions that result in transfer of money or money’s worth.” In other words, Book-keeping is a science as well as an art of recording pecuniary i.e. financial transactions systematically and in chronological order in a separate set of books.

Book-keeping is a science, because in book-keeping there are a number of well defined rules and principles which we use and follow while recording business transactions. It is a social science because, in book-keeping, we study human behaviour with respect to his earning of money and wealth and spending to satisfy the numerous human wants.

Book-keeping is also considered as an art of recording business transactions, because the writing of accounts in a specific style and format requires education, knowledge, training, skill and experience.
From another point of view, Book-keeping is a continuous process of collecting, analysing, classifying, summarising and recording the different types of business transactions. In brief, book keeping may be defined as “A science as well as an art of collecting, analysing, classifying, summarising and recording all types of business transactions in a significant manner and in terms of money in a separate set of books.

Definition:

• “Book-keeping is a Scientific Method of recording day to day business transactions in words and figures in the books of Accounts so as to show correctly and clearly the financial position of a business.”
• According to J.R. Batliboi, “Book-keeping is an art of recording business dealing in a set of books.”
• Finney and Miller : “Book-keeping is the process of analyzing, classifying and recording transactions in accordance with preconceived plans.”
• L. C. Cropper : “Book-keeping is the art of recording in a suitable form a person’s business dealings, so that, at any time, their nature and effect may be clearly seen.”

Thus, book-keeping involves the following :

• Recording financial business transactions in the main book of accounts called Journal.
• Preparing different accounts in another book of accounts called Ledger. – –
• At the end of the accounting year, balancing all accounts opened and operated in the ledger.
• On the basis of the balance extracted from different accounts, preparing a trial balance for various purposes.

Features of Book-Keeping:

The main features of book-keeping are explained below :

• Book-keeping is process or method of recording business transactions.
• Book-Keeping is a science. This is because the book of accounts is prepared on the basis of some well defined principles and conventions.
• Book-keeping is an art. This is because the preparation of accounts in a specific style and format calls for skill, experience, knowledge and judgement.
• In book keeping only records of monetary (financial) transactions are prepared and maintained.
• Various books of accounts such as journal, subsidiary books, ledger, registers, etc. are prepared to record business transactions.
• The records of business transactions are prepared for specific period of time say one year.
• The records are maintained and preserved for a long period of time. .
• The result of business activities is ascertained on the basis of book-keeping records.

Objectives of Book-Keeping:

The different objectives of book-keeping are given below :

• To keep a complete and accurate records of all financial transactions in a systematic, orderly and logical s, manner.
• To maintain date wise and account wise permanent, correct and complete records of the business transactions . for various purposes.
• Book-Keeping enables the businessman to make permanent record of financial transactions of business
  organisation. This records can be produced in the court of law as an evidence in settlement of any claim or disputes.
• To ascertain the profit earned or loss sustained in the business.
• To know the financial position of the business i.e. capital invested in the business, assets accumulated and acquired and liabilities owed, etc. .
• To know the exact amount due from debtors and the exact amount payable to creditors.
• To know the exact amount of taxes payable to the Government and to do tax planning for the business ventures.
• To detect and prevent errors and frauds committed by others in the business.
• To provide valuable business information to various groups of users.
• To take decisions on significant business matters.
• To know the progress made by the business and to measure the efficiency of business.
• Various laws such as Income Tax, Companies Act, Co-operative Societies Act, Charitable Trust Act, etc. make it mandatory to prepare and maintain books of accounts.

Importance of Book-Keeping :

The importance of book-keeping is explained as follows :

• Record: In this present dynamic world, every day a businessman enters into a number of business transactions with different customers and the nature of each of those transaction is different. It is not possible for a businessman to remember all such transactions, and therefore it is necessary to record these transactions.
• Financial Information: Book-keeping provides valuable and much needed information on profit earned or loss sufferred, balance of assets and liabilities, stock, investments, capital balance, etc.
• Decision making: Owner or top management get valuable information from book keeping records for decision making in the business.
• Controlling: Information obtained from book keeping help the businessman to apply control and check on the expenses and to increase the profitability of the business. Information provided by the accounting system are also of great importance in avoiding wastage and unnecessary expenses. It is also helpful to achieve success in business ventures.
• Evidence: Information recorded in the books of accounts are considered by the court of law as an evidence in settlement of any disputes.
• Comparison: By comparing the financial statements of the past years with the current year and with the financial statements of similar other firms, managements or owners of the business can judge whether the business is making progress or not and accordingly introduce changes in the business planning to increase his profitability.
• Tax Liability: Government authorities can collect taxes like sales tax, income tax and revenue collecting departments can accurately impose and collect taxes from the business firm on the basis of information provided by the books of accounts.

Utility of Book-Keeping :

Utility means usefulness. The utility of book-keeping to different persons and entities is explained as follows : ‘

(1) Businessman or Owner: The businessman or owner who invests his money and assets into his business must know the profitability, financial stability, and solvency of his business concern. This can be ascertained only from the books of accounts. It would not be possible for a businessman to carry-out the business without a systematic record of the business transactions. A businessman can take business decisions more realistically on the basis of the information provided by the books of accounts.

(2) Management: From the Book Keeping records, a manager can provide timely information to the different parties to gain their confidence. Besides this, book keeping records help the management in planning, decision making, controlling and managing the business activities.

(3) Government: On the basis of information provided by the accountant, various departments of the Government will be able to calculate and collect sales tax, income tax and revenues due from business organisations.

(4) Prospective Investors: After studying the book-keeping information, the prospective investors such as
shareholders, debentureholders, creditors, partners can decide whether to invest money into the business or not.

(5) Customers: Book keeping records provide information on the financial capacity and profitability of the business organisations.. This in turn help the customers to find out whether they are being exploited by the businessmen or not.

(6) Creditors & Lenders: Book-keeping has a great utility to creditors and lenders. The creditors get valuable and correct financial informations from the different financial statements published by the business concern. On the basis of such information, they can decide whether to invest further or to extend the credit period or
to recover the amount due from business.

(7) Development: With the help of accounting, businessman can avoid wastages, losses and control the .
expenditure. As a result profitability and revenue earning capacity of the business organisation increase which in turn help the organisation to expand and develop its business.

Difference Between Book-Keeping And Accountancy-

The difference between Book-Keeping and Accountancy is explained as under :

• Meaning: Book keeping refers to the process of recording business transactions in the book of accounts.
  Accountancy refers to the process of summarising and analysing the business transactions and interpreting the effects of those transactions on the business activities.
• Stage: Book-keeping is a first stage of accounting as it involves preliminary work of accountancy. Its work starts immediately after completion of transactions. The work of accountancy starts after the completion of  Book Keeping work. Thus accountancy is the next stage of book-keeping.
• Objectives: The main aim of book-keeping is to provide primary information while the main aim of
  accountancy is to process and interpret profits & losses from the data available in the book-keeping.
• Responsibility: Junior staff or newly recruited staff is responsible for keeping records of business
  transactions. Senior staff is responsible for maintaining accounting records.
• Outcomes: Book-Keeping ultimately results in Journal and Ledger. Accountancy ultimately result in
  preparation of Trading A/c, Profit and Loss A/c and Balance Sheet. .
• Period: Book keeping discloses the day to day details of business transactions whereas accounting gives yearly details of business transactions.
• Scope: Book-keeping is a part and parcel of accountancy and it has a limited and narrow scope whereas accountancy has a vast and unlimited scope.
• Procedure: In book keeping entries for day to day transactions are recorded by following basic principles and rules of double entry book keeping. In accountancy, book keeping information are classified, analysed and summarised to prepare financial statements, reports, ratios etc.
• Principles: To record preliminary information in journal, ledger and subsidiary books elementary knowledge of journalising and posting are required. To prepare accounting statements, reports, final accounts, ratios etc., knowledge of all accounting concepts, principles and conventions are required.

Meaning And Definition Of Accountancy:

Accounting is a broader concept than the concept of Book-Keeping. It refers to the process of summarising and  analysing the business transactions and interpreting the effects of those transactions on the business. The definition of accounting as given by American Accounting Association is stated as follows, “Accounting _ refers to the process of identifying, measuring and communicating economic information to permit informed judgements and decision by the user of accounts.

Kohler’s definition of Accountancy is stated as follows: “Accountancy refers to the entire body of the ‘ theory and process of accounting.”

In brief accounting is a process of recording, classifying, summarising, analysing and interpreting the financial transactions and communicating the results thereof to the users of such information.

Basis (Methods) of Accounting System :

Accounts are recorded and maintained on various basis.

(1) Cash basis: Under this system income is recorded as and when cash is actually received and expenses are
recorded when they are actually paid in cash or by cheque.

Every transaction in which cash comes into the business or cash goes out of the business is recorded with v its specific purpose. Under this system only cash transactions are recorded. Credit transactions as well as barter transactions are not recorded. This method of accounting system is usually followed (Adopted) by the professionals like Doctors, Lawyers, Chartered Accountant, Actors, etc.

(2) Accrual Basis/Mercantile Basis: Under accrual basis or mercantile basis of accounting system, incomes are recorded as and when they accrues or earned and expenses are recorded as and when they are due or become payable. Under this system both the types of transactions viz. cash transactions and credit transactions are recorded. This system records incomes and expenses in the books of accounts as and when they are earned and incurred and not when they are actually received and paid. This system is also called Mercantile basis of accounting.

Example: Professional fees amounted to ₹ 3,000 is due to Chartered Accounting firm as on 31st March 2019, but received by the firm on 1st May, 2019. The accounting year of the firm ends on 31st March every year. As per cash basis, the Chartered Accountant Firm would record professional fees received in the accounting year 2019-20.
As per accrual basis, the Chartered Accountant Firm would record professional fees received in the accounting year 2018-19.

(3) Mixed or Hybrid basis: Under Mixed or Hybrid basis of accounting the principles of both cash basis and accrual basis are followed in recording business transactions. Under this method of accounting system revenues and assets are usually recorded on cash basis and expenses are generally recorded on accrual basis. In brief it is a mixture (combination) of cash basis and accrual basis of accounting. The laws in India do not permit the organisations to use this method of accounting system.

Qualitative Characteristics of Accounting Information –

Qualitative characteristics of Accounting information are explained as follows :

(1) Reliability of Accounting information : The information provided in the financial statements must be reliable. These information must be free from material errors and bias. The information must be presented in good faith. The reliability of the financial statement is dependent on the following points:

• Completeness or verifiability: The information provided in the financial statements is said to be reliable when it is complete within the limits of materiality and cost. Any omission may cause information to be false or misleading on unreliable in terms of its relevance.
• Neutrality: The information given in the financial statements must be neutral in all respect. Such statements or information are not neutral if by selective presentation of information, may affect the decision making power of the users.
• Faithfulness: The transactions and the other events must be represented faithfully in the information. Many times the financial information provided is subject to some risks and they are not faithfully represented.

(2) Relevance of Accounting information: The information given in the financial statements must be relevant to the decision making requirements of the users. The information provided in the financial statements shoqld have quality of relevance when it creates favourable impact on the decision making power of users by helping them to evaluate past, present or future events. The productive and confirm roles of information are related to each other.

The relevance of information is affected by its nature and materiality. Accounting information is said to be material, if its omission from the financial statement affect the decision making for its users.

(3) Understandability of Accounting information : One of the important qualitative characteristics of Accounting information is that the information given in the financial statements should be readily understandable by the users. The information provided should be as simple as possible. It is assumed that the users are having reasonable knowledge of the business and its accounting activities. It is also assumed that the users are having willingness to study the information given in the financial statements. However, information of complex matters should not be excluded simply on the grounds that they are very difficult for certain users to understand.

(4) Comparability of Accounting information: Every user should have enough knowledge and capability to compare the financial statements to identify trends (ups and down) in the financial position and performance of the business unit over the number of years and also of different business units. This is to evaluate their relative financial position, performance and changes in financial position. This qualitative characteristic requires that there should be consistency in choosing accounting policies. Lack of consistency may not allow the early comparability of the financial statements of different periods and different enterprises.

Basic Accounting Terminologies :

(1) Transaction : In common parlance, transaction is a dealing between two or more persons, in which one person gives something to the other and in exchange of that receives something from the other. It is an exchange of goods and services either for cash or for any other goods or services. In other words, it is a business activity which interprets in money terms what business gives and what business receives in that exchange. To complete the transaction at least two persons are required. Purchase of goods, sale of goods, receipt and payment of cash, borrowing and lending, depositing cash into the bank, withdrawal of cash from the bank, etc. are the examples of business transactions.

Business transactions are broadly classified into two categories viz. (a) Monetary transactions and (b) Non¬monetary transactions.

(a) Monetary transactions : The business transactions in which goods and services are directly
or indirectly exchanged for money or money’s worth are called monetary transactions. Business organisations record only monetary transactions in their books of accounts. Monetary transactions “”v are further classified as (i) Cash transactions and (ii) Credit transactions. ,,

(i) Cash transactions: In cash transaction, goods or services are directly exchanged for cash. When
goods or services are purchased for immediate cash payment, it is known as cash transaction, e.g.
goods purchased against immediate cash payment.

(ii) Credit transactions: In credit transaction, goods or services are exchanged for a certain value to be ,
received or paid in the future. In a credit transaction, goods or services are purchased, but payment is
postponed to a future date e.g. Mr. ‘A’ has purchased goods for ₹ 500/- and agrees to pay the amount after a month. It is a credit transaction.

(b) Non-monetary transactions : The business transactions in which goods and services are directly
exchanged for other goods and services are called non-monetary transactions. In this type of transaction,
money does not play any role e.g. purchase of 5 kgs rice in exchange of 1 metre cloth is a non-monetary transaction. It is also called as barter transaction or money less transaction.

(2) Entry : Recording the summary of business transactions in the form of debit and credit in the journal and
in proper form in subsidiary books and ledger is called an entry.

(3) Narration : A brief or short explanation of an entry written just below the entry in a bracket in the
particulars column of journal is called narration. It is started with a word ‘Being’. Narration should be as
short as possible. It should be easy to understand.

(4) Goods : Any commodity or article which is produced or purchased for sale by a trader is called goods. In
other words, any commodity or article in which a trader regularly deals or carries on trade is called goods
for that business or trader.

Goods have the following features, viz.

• Goods may be any commodity or article which has exchange value.
• Goods must be manufactured or purchased by a trader for sale.
• Goods must be stored and exhibited for sale and not for use. For instance, books and literature are goods for publishers or book sellers. Similarly, clothes are goods for a cloth merchant and different kinds of grains stored or kept for sale are goods for a grocer.
• Goods which are stored and not yet sold are the property of the trader.

(5) Capital and Drawings :

(a) Capital: Total amount of cash, goods, assets, etc. invested by the proprietor into his business from
time to time is called capital. In accounting sense, excess of business assets over business liabilities
is described as capital. It is an asset for a proprietor and long term liabilities for the business. It is
received back by the proprietor only on the dissolution of his business. In the form of equation.

Capital = Business Assets – Business Liabilities

Investments into the business, profit earning capacity, withdrawals from the business by the proprietor for
self use, etc. are the main determinants of capital. The amount of capital may be calculated as follows:

(1) Mr. Kamalakar started business with Cash ₹ 1,50,000, Goods worth ₹ 1,40,000. Building valued at
₹ 4,00,000 and Furniture costing ₹ 45,000. Here Mr. Kamalakar’s capital arrived ₹ 7,35,000/-.

(2) Business information of Mr. Ravikant Sharma shows that his business assets are valued at ₹ 15,00,000
and business liabilities are estimated at ₹ 5,00,000. Here Ravikant Sharma’s capital is computed at
₹ 10,00,000/-. [i.e. ₹ 15,00,000-₹ 5,00,000]

(b) Drawings: Word ‘drawings’ is just the opposite to the word ‘capital’ in meaning. Drawings refer to total amount of cash and/or goods withdrawn by the proprietor from the business from time to time for self (personal) use or family use. Drawings are always adjusted with capital. Heavy withdrawals made by a businessman for self use reduces capital in the business. If the businessman controls his drawings, business can be developed further due to less loss of capital. Withdrawals made by a businessman for business purpose is not treated as drawings.

For example, Mr. Ramesh, a cloth merchant, took away 15 metres of cloth for family use on the occasion of the Diwali Festival without paying any thing to the business. The price of cloth per metre is ₹ 250/-. Here, drawings of Ramesh are computed at ₹ 3,750/-.
[i.e. 250 x 15 mts.].

(6) Debtors and Creditors :

(a) Debtors: Debtor refers to a person br an entity from whom money or money’s worth is receivable to a business enterprise. Debt is a total sum of money due from a person with whom the business has dealings. Accordingly, a person from whom such debt is due to a business, is called the debtor. In other words, the debtor is a person who has already taken a loan or services or goods from the business for which he has not yet paid for. A debtor is always under obligation to make payment to a business or a creditor. The following example will make the above ideas clear. Mr. Ashok sold goods worth ₹ 10,000 to Mr. Kishor on the condition that Mr. Kishor will pay that amount of ₹ 10,000 to Mr. Ashok after 2 months. Here, Mr. Kishor is a debtor to Mr. Ashok till he pays the entire amount to Mr. Ashok.

(b) Creditors: A creditor is a person or an entity to whom the business is under obligation to pay a certain
amount of cash. In other words, a person to whom the business owes or is required to pay some amount of cash is called creditor. A creditor is a person who has given a loan or goods or services to the business and for which he has not yet received any amount of cash, or reward. The business is under obligation to pay money to its creditor. For example, Mr. Anil, a businessman borrows money from the Bank of India for one year period for business purpose. Here the Bank of India is a creditor to Mr. Anil, till Mr. Anil clears his loan. .

(c) Bad debts: A sum of money due from other person is called debts. The debts which cannot he recovered from debtors inspite of repeated efforts are called ‘Bad debts’. It is a revenue loss to the business.

(7) Expenditure : An amount spent or incurred by the business organisation on the purchase of goods and
services or for any other consideration received by the business is called expenditure.; e.g. amount spent on purchase of raw material, electricity bill paid, etc.
Business expenditures are classified as (i) Capital expenditure, (ii) Revenue expenditure and (iii) Deferred
Revenue expenditure.

(a) Capital Expenditure: The expenditures which are incurred (1) on acquisition of an asset (2) in putting a new asset in working condition and (3) for acquiring benefits which will last for a long time are called capital expenditures, e.g. purchase of plant and machinery, wages paid for installation or erection charges of machinery, advertisement paid at a stretch for four years, octroi, freight paid on assets, over-hauling charges, etc. are categorised into the capital expenditure.

(b) Revenue Expenditure: The expenditures which are incurred to acquire the benefits which will last for a short period, are called revenue expenditures. It is normal day to day expenditure which do not
. increase profit earning capacity of an organisation, e.g. salaries, rent, interest paid, repairs and renewals, etc. are the examples of revenue expenditures.

(c) Deferred Revenue Expenditure: Heavy expenditure which is incurred in the current year, but benefit of which may be received or accrued to the business in the following two or more years, is called deferred revenue expenditure, e.g. Heavy amount spent on advertisement and publicity is a deferred revenue expenditure.

(8) Cash Discount and Trade Discount:

(a) Discount: An allowance, benefit or reduction in payment in monetary terms given by the trader to buyer or by a creditor to a debtor at the time of sale or repayment is known as discount, e.g. goods costing ₹ 15,000/- sold by a trader to the buyer and accepts ₹ 14,700 in full settlement. Here the difference of t 300 is considered as discount. Discount may be classified into two categories, viz. (a) Trade discount and (b) Cash discount.

(b) Trade Discount: Discount given by the seller to the buyer to increase sales turnover and to enable the buyer to earn a reasonable profit on resale is called Trade discount. It may be given by a manufacturer to a wholesaler or by a wholesaler to a retailer on bulk purchases. Trade discount is calculated on the catalogue price or list price of the goods. Amount of trade discount is deducted from invoice price. It is not shown in the books of accounts.
For instance if goods of ₹ 5,000 are purchased @5% Trade Discount, the value of goods that will be
recorded will be ₹ 4,750. Here Trade Discount = 5000 x \(\frac{5}{100}\) = ₹ 250
Net value of Goods = Catalogue price – Trade discount
= 5,000 – 250 = ₹ 4,750.

(c) Cash Discount: Discount given by the creditor to the debtor on payment of cash is called cash discount. It is the concession given to encourage prompt payment. It is always recorded in the books of accounts, as it is gain to the buyer and loss to the seller.

(9) Solvent and Insolvent:

(a) Solvent: A person who is capable of paying his past and present debts fully from his business and personal property is known as solvent. His financial condition is sound to pay his business debts. Solvency of the businessman increases the goodwill of the business. A solvent person’s property always A exceeds his business debts.
Example: On revaluation of assets and liabilities, it is found that total assets of Sudhakar, a proprietor is ₹ 9,50,000 and his total obligations (debts) are ₹ 2,50,000. Here financial position of Sudhakar is sound as he can easily pay off his total obligations (debts). He is therefore called solvent person.

(b) Insolvent: A person who is unable to pay his debts, is called insolvent. An insolvent person does not
have sufficient assets to pay his debts. His business debts are much larger than his business and personal
assets. He cannot settle the dues of his creditors fully. Insolvency leads to compulsory dissolution of
the business. . .
Example: Total Assets of the proprietor ‘X’ in the business are worth ₹ 2,00,000 whereas his total , liabilities (obligations) are ₹ 3,50,000 and he does not have any personal property to set off business debts. Here in this case ‘X’ is called insolvent, because he cannot pay off all the liabilities of his business.

If the court is satisfied that he cannot pay debts of the business even from his personal property, he will be declared as insolvent by the court of law.

(10) Accounting year : A period of 12 months is called a year. A year which begins with 1st January and ends with 31st December is called the calendar year. Accounts of the business enterprises are usually prepared
for a period of 12 months i.e. one complete year. The year for which the accounts of the business enterprises are prepared is called the accounting year. In India business enterprises may select one of the following periods as its financial year:

• From 1st January to 31st December.
• From 1st April of one year to 31st March of the next year.
• From 1st July of one year to 30th June of the next year.
• From 1st October of one year to 30th September of next year.

Now for Income Tax purpose an accounting year starts on 1st April and end on 31st March of next year.

(11) Trading concern and Not for Profit concern :

(a) Trading Concern: The enterprises which undertake business activities for earning profit are called
trading concerns. They are also called business organisations. They either manufacture or purchase the
goods for resale for a profit. They may be classified as sole trading concern, partnership organisation, company organisation, state enterprises, co-operative societies, etc.

(b) Not for Profit Concerns / Non-trading Concern: The enterprise which undertakes activities
not for earning profit but to provide services to its members or public at large is called ‘Not for profit
concerns’ or ‘Non-profit organisation’, Cricket Club of India, Mahalaxmi Charitable Trust, Educational Institution, etc. Thebe enterprises prepare income and expenditure account to find out whether income
is just sufficient to meet their expenses.

(12) Goodwill: Money value of a business reputation earned by the business over a number of past few years
is called goodwill. It is nothing but the reputation or name established in the market by the business organisation. It is an extra value attached to the business over and above its value. It is an intangible asset of the business.

(13) Profit or Loss ; Income and Revenue :

(a) Profit: Profit means a gain earned by the businessman by undertaking ventures or risks. In accounting terminology, excess of sales revenue over the expenses is called profit.

Symbolically, Profit = Revenue – Expenses.

If a firm sold goods for ₹ 50,000 and all related expenses incurred by the firm during the said period is ₹ 41,000.

Here, in this case profit earned by the firm is arrived at₹ 9,000.
It is calculated as follow:
Sales revenue = ₹ 50,000 and total expenses = ₹ 41,000
Profit = Sales Revenue – Expenses
= 50,000 – 41,000 = ₹ 9,000

(b) Loss: Excess of expenses or expenditures over revenue or income is called loss. Businessmen incur losses on account of several factors like misuse of resources, abnormal wastage, negligence of proprietor, improper planning, competition, lack of innovation, unfavourable policy of the government, etc. Recurring losses lead to compulsory dissolution of the business.

Symbolically, Loss = Expenses – Revenues

If a firm sold goods for ₹ 30,000 and all related expenses incurred by the firm during the said period is ₹ 36,000.
Here, in this case firm incurs the loss of ₹ 6,000.
It is calculated as follow:
Expenses = ₹ 36,000 and Revenue = ₹ 30,000 ,
Loss = Expenses — Revenue
= 36,000 – 30,000 = ₹ 6,000

(c) Income: Revenue received by the business organisation after rendering services or subletting assets is called income. Symbolically:
Income = Amount received after rendering services or renting owned property. If auditorium of the college is subletted to the Bank for ₹ 45,000 per month, the total rent ₹ 5,40,000 in a year becomes an income of the college authorities

(d) Revenue: Income received by the business organisation from its normal business activities especially from the sale of goods and services to the customers is called Revenue.

(14) Assets, Liabilities and Net Worth :

(a) Assets: Property-of any type or description owned and possessed by a person is known as an asset. Assets are not stored for sale but they are kept for the use of the owner. In other words, economic resources which provide benefits to the enterprise are called assets, e.g. furniture, goods, etc.

Assets possess the following features, viz.

• Assets is a property of any type or economic resource which has an exchange value,
• It is belonged to a person or a user,
• It is always stored for use and not for sale.

For example, land and building, furniture and fixtures, bank balance, unsold goods, cash in hand, etc. are called assets. The classification of assets is shown below:

• Fixed Assets are those assets which are held in the business for a long period of time and are generally used for manufacturing goods and services. For example land & building, plant & machinery, motor vehicles, etc. are the fixed assets of an enterprise.
• Current Assets are those assets which are held in the business for a very short period and they are used for maintaining the liquidity of the business. For example, cash in hand, bank balance, stock of goods in hand, amount receivable from debtors, etc. are current assets of the business enterprise.
• Assets like cash, machinery, stock of goods, furniture, etc. are called tangible assets as they can»be seen, touched and felt.
• Assets which cannot be seen, touched and felt, but can be sold and converted into cash are called intangible assets. Use of intangible assets enables its owner to earn income in the form of royalty. For example goodwill, copy rights, patents, trade marks, services of doctors, teachers, bankers, etc. are called intangible assets.
• Assets which neither represent any tangible thing in existence nor have realisable value in the market are called fictitious asset, e.g. preliminary expenses, discount on issue of shares, etc.

(b) Liabilities: Liabilities refer to the total amount of debts or obligations that a business has to pay or fulfill, in future. In other words ‘liabilities’ mean total amount owed by the business to other persons. In short, liabilities represent the total amount payable to outside parties at different dates. For example, bank overdraft, bank loan, sundry creditors, bills payable, capital, loan taken from financial institution, etc. are called business liabilities. Liabilities may be classified as Fixed Liabilities and Current Liabilities.

(i) Fixed Liabilities: Liabilities which are settled or paid only on winding up or dissolution of the organisation are called fixed liabilities. It may be in the form of owner’s capital, share capital, secured loans like debentures, bonds, loans from banks, loans from financial institutions, etc. Fixed liabilities are refunded only after a long period of time. Fixed liabilities constitute long term sources of finance.

(ii) Current Liabilities: Liabilities which are payable within a year are called current liabilities. Short term obligations or debts which are matured within a year or within a operating cycles are called current liabilities. Current liabilities constitute short term sources of finance. They arise in the regular course of business operations. They are usually unsecured. Bank overdraft, Sundry Creditors, Bills Payable, Outstanding expenses payable are considered as current liabilities.

(c) Net Worth: Worth means value or price. Accordingly, net worth refers to the net value of the business enterprise in terms of its assets and liabilities. It implies the excess of assets over liabilities as disclosed by a firm’s balance sheet, i.e. capital owned by a business. In other words, net worth refers to the value of a business enterprise when its liabilities have been deducted from the value of its assets. In terms, of equation,

Net Worth = Market value of total assets shown in the balance sheet – Current liabilities

Example: Suppose, the total assets of the business is ₹ 7,50,000 whereas the total liabilities of the business is ₹ 3,65,000.
Here, net worth of th business is calculated as follows:
Net Worth = Value of Total Assets — Value of Total Liabilities
= 7,50,000 – 3,65,000 = ₹ 3,85,000

(15) Contingent Liabilities : The contingent liabilities are the liabilities whose occurrence depends upon the happening of a certain events which may or may not take place. Such liabilities may or may not occur in the future. These liabilities are shown in the balance sheet on the liabilities side only in the inner column and their description is written in the foot note. These liabilities are not taken in the balance sheet total. They are considered as probable losses of the business enterprise. E.g. demand of worker for compensation of ₹ 20,000 pending before the court of law.

Accounting Principles-

The basic aims of book-keeping and accountancy are to record the business transactions in a summarised form, systematically and in chronological order in the books of accounts and to prepare various accounting statements and report periodically to communicate the result and financial position of the business to the stakeholders or concerned parties. To achieve these aims, accounting is based on universally accepted and scientifically laid down principles. The basic fundamental truth of accounting or rules of conducts or procedures which are universally accepted and followed by the accountants every where without unreasonable likes or dislikes to record business transactions and to prepare accounts are called accounting principles. Through usage, necessity and experience, these accounting principles are gradually developed over a long period of time.

According to the Institute of Chartered Accountants of India (ICAI), accounting conventions, accounting concepts, accounting principles, accounting postulates, etc. are the basic points of agreement on which financial accounting theory and practice are founded.

Accounting principles are also considered as general laws or precedents for taking decisions and actions in the field of business.

Accounting Concepts-

Concept means the general idea which conveys certain meanings. Accordingly accounting concepts imply general notion or abstract ideas on which accounting is based.

Accounting is the language of the business with the help of which financial information are transmitted to the concerned parties of the business. In order to communicate the business information exactly with the same meaning to all interested parties related to the business, accountants have discovered a number of accounting concepts. Accounting concepts are general guidelines for sound accounting practices.

The different accounting concepts are discussed as follows :

(1) Business entity concept : The business entity concept suggests that a business has a separate entity and has an independent legal existence distinct from the person who owns it. Although a business has no body, soul, life and existence, still the law recognises it as a legal person. This accounting concept enables the accountants to record the transactions of the owner or proprietor separately from the transactions of the business. In the absence of such distinction the private affairs of the proprietor would have mixed up with the affairs of the business. As a result, the true and clear picture of the state of affairs of the business would not have been made available. The concept of business entity is applicable to all forms of business organisations such as sole trader, partnership, joint stock companies, co-operative societies, etc.

Illustration: A proprietor Mr. Ashok has spent ₹ 13,000 from business funds on Travelling and Conveyance. This includes a bill for the amount of ₹ 4,500 spent on personal and family travelling. In this case only ₹ 8,500 should be charged to Profit and Loss Account under the heading of Travelling and Conveyapce and ₹ 4,500 should be considered as drawings and each amount of drawings should be deducted from capital of the proprietor.

(2) Money measurement concept: This accounting concept states that in the books of accounts, accountant records only those business transactions which are financial in nature and capable to be expressed in monetary terms. It means the qualitative and quantitative aspects which can not be measured in terms of money, are not recorded in the books of accounts.

In India all the accountants records business transactions in Indian Currency i.e. Rupee (₹).
Illustration: A businessman invested the following properties (Assets) into the business: Building with 5 rooms at the cost of ₹ 40,00,000, Cash ₹ 5,00,000 Furniture costing ₹ 40,000 and raw materials 2 tonnes at the cost of ₹ 80,000. Here the total assets of the business is 40,00,000 + 5,00,000 + 40,000 + 80,000 = ₹ 46,20,000. In the books of accounts, the accountant records assets of ₹ 46,20,000 and Capital at ₹ 46,20,000.

(3) Cost concept: According to this accounting concept, an asset of the business is recorded in the books of account at the price paid to acquire or produce it, i.e. at its cost and not at its current market value. The cost at which assets are acquired and recorded, provides the base for the subsequent accounting for that asset. E.g. if a plot of land is bought for ₹ 2,50,000 by a business, it will be recorded in the books of accounts at ₹ 2,50,000 for further accounting. A year later if its market value increases to ₹ 4,00,000 or even more, then no change will be made in the books of account so to reflect this increase in its value. This concept enables the accountant to depreciate assets correctly and show their correct value in the books of accounts. This concept prevents arbitrary value being put on the assets purchased.

(4) Consistency concept : This accounting convention states that once a particular accounting practice, method or policy is adopted to prepare accounts, statements and reports, it should be continued for years together and should not be changed unless unavoidable circumstances force the enterprise to change it. If the change is unavoidable, the change and its effects should be stated clearly. If consistency is maintained in the accounting practice or procedures over many years, a comparison of two different accounting periods may be made easily to draw meaningful conclusions.

Illustration: It would be improper to depreciate the machinery according to one method of depreciation in one year and to switch over to another method in the next year.

(5) Conservatism : This accounting concept suggests that while preparing accounting statements, planning, policies, strategies and budgets, all possible or anticipated losses must be taken into consideration while unrealised, prospective or anticipated profit should be ignored. This is also known as “the policy of playing a safe game.” It is also called “Principle of prudence.” According to this accounting concept, closing stock is valued at the market price or cost price whichever is lower. Similarly, provision for bad and doubtful debts is also permitted and made every year. If this accounting convention is not applied or followed continuously, it may result into an understatement of incomes, assets and overstatement of liabilities and provisions. Illustration: The closing stock of a factory is valued at cost price ₹ 80,000. However, its market value determined at ₹ 86,000. According to conservatism concept, here closing stock is to be valued at ₹ 80,000 which is lower than it market value ₹ 86,000.

(6) Going concern concept: According to this concept, it is assumed that business will be carried out indefinitely for a long period of time in the future and accordingly business transactions are undertaken and recorded. Hence in this concept it is assumed that the business will continue for a long time. It has continuity of life. It is not to be closed at the end of each year. It is assumed that business is permanent. This Concept is also called continuity concept or permanency concept. Fixed assets like plant and machinery, furniture and fixture, land and building, motor vehicles, etc. are purchased on the assumption that a business is a going concern. This accounting concept enables the accountants to make distinction between the capital expenditure and revenue expenditure. Managerial functions like planning, financing, organising, controlling, etc. are performed in every organisation on the basic assumption that the business is a going concern.

(7) Realisation concept: This accounting concept explains that sale is supposed to be completed when the title and possession of goods are passed from the seller to the buyer and in exchange the payment is received by the seller from the buyer. Revenue or income is considered to be earned on the date on which its actual payment is received. In other words, income realised by selling goods or by rendering services during the accounting year should be considered in the income statement of that accounting year. Since accounting is the historical records of transactions, it records what is actually received and paid. In the case of installment sale or hire purchases, the sales are treated to have been completed only to the extent to which the installment are received. Similarly, in the case of contract account, profit is calculated on the basis of work certified.

Illustration: In business there may be a building whose purchase price i.e. cost is shown at ₹ 2,00,000. Now the market price of that building may be ₹ 10,00,000/-. It does not mean that the profit of ₹ 8,00,000 is realised. Such profit should not be recorded in the books of accounts.

(8) Accrual concept: This accounting concept states that revenue is recognised when they are earned and not when they are received. Similarly-, costs are recognised as soon as they are incurred and not when they are paid. This accounting concept enables the accountants to measure the income for a particular period by calculating the difference between the revenue recognised in that period and expenses incurred to earn that revenue. Accrual accounting is a basic accounting concept used in preparation of Trading Account, Profit and Loss Account and the Balance Sheet.

Illustration: A firm has deposited ₹ 5,00,000 with the Bank in Fixed deposit carrying interest @ 12% p.a. on 1st July, 2010 for 5 years. Bank is required to pay interest on maturity along with principal amount, i.e. on 30th June, 2015.

As per the principle of accrual, interest for 9 months i.e. from 1st July 2010 to 31st March, 2011 of ₹ 45,000 is to be shown as “interest accrued” on the credit side of Profit and Loss A/c as on 31st March, 2011. i.e. in the accounting year 2010-11, although interest is not received in cash.

Dual aspect concept: This accounting concept explains that every business transaction has two aspects viz. (i) acquisition or increase in asset of the business and (ii) creation or increase in claims against business. Assets refer to the valuable things owned by the business. Capital refers to the proprietor’s contribution to the business to provide fund to undertake activities. Capital is the owner’s claim against the business, e.g. a capital of ₹ 5,00,000 received in cash by the business from the proprietor has dual aspects viz. business has cash i.e. asset of ₹ 5,00,000 and the proprietor has a claim of ₹ 5,00,000 against the business entity called capital. If you put the same idea in the form of equation, we can state,
Capital (₹ 5,00,000) = Assets (₹ 5,00,000)

A month later, the business has borrowed ₹ 2,00,000 from the bank to meet its increasing requirement. Now, the asset of the business has increased by ₹ 2,00,000 on the one hand and a claim against the business has also increased by ₹ 2,00,000. We can state the above situation in an equation form as follows:
Capital (₹ 5,00,000) + Liabilities (Bank Loan ₹ 2,00,000)
= Assets 7,00,000 (₹ 5,00,000 + ₹ 2,00,000)
The above equation can be restated by interchanging the terms as follows:
Capital (₹ 5,00,000) = Assets (₹ 7,00,000) – Liabilities (₹ 2,00,000)
OR
Liabilities (₹ 2,00,000) = Assets (₹ 7,00,000) – Capital (₹ 5,00,000)
Thus, the accounting system called double entry book-keeping system is set up to record dual aspects of every business transaction in the books of accounts.

(10) Disclosure : According to concept of full disclosure, accounting must disclose all the material facts and information so that interested parties after reading such accounting report can get a clear view of the state of affairs of the business. Accounting statements must be prepared honestly and they should be free from any bias or prejudice. The statements of accounts so prepared by the accountants must neither hide any material information nor exaggerate any facts. Disclosure does not mean leaking out the business secrecy, but to disclose all the significant information and fact keeping in view various accounting assumptions. This accounting concept is more relevant to the joint stock company where there is a divorce between ownership and management. The management of the company must prepare financial statements and reports of the functioning of the company periodically and these statements must disclose the true and fair view of the state of affairs of the company.

(11) Materiality : The term ‘material’ means ‘relatively important’. Accounting information is said to be material, if its omission from the financial statement affects the decision making for its users. According to convention of materiality, accountants must disclose all material facts and information which highlights the financial position and profitability of the business organisation. However, materiality will differ or change with nature, size and tradition of the business. What is material for one organisation may be immaterial
for another organisation.

(12) Matching Cost Concept : This concept suggests that while determining the exact or accurate profit or income, we have to compare or match the revenue of the business with the cost that is incurred to earn that revenue. In other words, only relevant cost or expenses of the period are required to be deducted from the relevant revenue of that year. For instance if in the accounting year 2011-12, the revenue of ₹ 18,00,000 is earned, by way of sales, this entire revenue is not the profit. In order to calculate the profit, we have to deduct cost of goods sold from the sales revenue. In the above example, if the cost of goods sold is ₹ 15,00,000, then the gross profit would be ₹ 3,00,000. The gross profit here is ascertained by comparing and matching the sales revenue with the cost of goods sold.

Importance of Accounting Concepts :

• With the help of accounting concepts accountant can easily prepare reliable financial statements such as cash flow statement, fund flow statement, trading A/c, profit and loss A/c etc. They add the reliability to the financial statements.
• Accounting statements are helpful to keep and maintain uniformity in presentation of financial statement. Uniformity is helpful for comparison of financial statements of two or more business entries and also different periods.
• Accounting concepts provide acceptable basis of measurement.
• They are helpful to provide proper information ahout the business to various interested parties.
• They provide valid and appropriate assumptions for preparation of financial statements and reports.

Accounting Standards (AS) and International Financial Reporting Standard (IFRS)-

(A) Accounting Standards:

(1) Meaning: Accounting standards may be defined as, “Codified Generally Accepted Accounting Principles (GAAP), uniform accounting rules and guidelines to prepare financial statements of different business units in a uniform manner for easy comparison and disclosures of business information to the users.” Standard of Accounting are recommended by the Institute of Chartered Accountants of India (ICAI) and prescribed by the Central Government in consultation with the National Advisory Committee on Accounting Standards (NACAS). Accounting Standards are written policy document covering the different aspects such as recognition, measurement, treatment and presentation.

Kohler States, “Accounting Standards are codes of conduct imposed by customs, law or professional bodies for the benefit of public accountants and accountants generally.”

(2) Need for accounting standards:

• To promote better understanding of financial statements. Accounting standards reduce confusion about the accounting treatments used to prepare financial statements.
• To facilitate accountants to follow uniform procedures and practices.
• To enable or help the organisation to make meaningful comparison of financial statements of different companies situated at different places.
• To standardise the diverse accounting policies and practices with a view to eliminate the non-comparability of financial statements and add the reliability to the financial statements.
• To fulfil and complete the legal requirements more effectively.

(B) International Financial Reporting Standards (IFRS):
International Financial Reporting Standards (IFRS) are prepared and issued by the International Accounting Standard Board (IASB). IFRS is a set of International Accounting Standards which explain and show how different types of financial transactions and other events should be shown or reported in the financial statements. IFRS are prepared and issued to develop Accounting Standards that would be acceptable world wide and to improve financial reporting internationally.

(C) Accounting Standards in India :
In India, the Council of Institute of Chartered Accountants of India (ICAI) has issued accounting standards. Accounting Standards Board (ASB) was constituted by ICAI on 218t April 1977. ASB recognised the need for Accounting Standards in India and by considering the applicable laws, custom, usage, business environment and International Accounting Standards,framed Accounting Standards to be followed in India. The council of Institute of Chartered Accountants of India has so far issued 31 Accounting Standards. Some of those

By going through these Maharashtra State Board Book Keeping & Accountancy Notes 12th Chapter 6 Dissolution of Partnership Firm students can recall all the concepts quickly.

Maharashtra State Board 12th Accounts Notes Chapter 6 Dissolution of Partnership Firm

Introduction, Meaning and Definition of Dissolution of Partnership Firm-

Introduction : The term ‘dissolve’ means ‘to come to an end or bring to an end.’ Accordingly ‘dissolution’ means termination of a formal or legal relationship such as a business, marriage, etc. There is a difference between the dissolution of partnership and dissolution of partnership firm. Dissolution of partnership refers to severing or discontinuing the relation or connection by one or more partners with other partners without breaking or putting an end to business activities of the partnership firm. In this case, business activities of the firm are continued by remaining partners. Dissolution of partnership firm implies complete closure or breakdown of relations among all the partners and stoppage of all business or trading activities of the firm. Dissolution of partnership firm is a broader concept which also includes dissolution of partnership. Dissolution of partnership is a narrow concept. It does not include dissolution of partnership firm.

Meaning and Definitipn of Dissolution of Partnership Firm : Dissolution of a partnership firm is the end or closure or termination of the firm by break-up of the relation among the partners. In such a case, there is a stoppage of all trading activities. Dissolution has broader meaning in legal terms. A word ‘DISSOLUTION’ comes from the Latin word ‘DISSOLUTION’. According to the provisions of the Partnership Act, 1932, (Section 39) “the dissolution of partnership between all the partners of a firm is called the dissolution of the firm”.

In other words, dissolution of a partnership firm means complete closure of relation among all the partners. In such a case the firm ceases to exist.

Circumstances / Reasons for Dissolution of Partnership Firm –

A partnership firm may be dissolved in various ways. They are as follows :
(A) Dissolution of partnership without court order : A partnership firm may be dissolved :

• When all partners or all partners except one decide to dissolve the firm, or the firm may be dissolved in accordance with an agreement signed previously or initially by all the partners.
• When the period for which the partnership was formed has come to an end.
• When the specific venture or object for which partnership was formed is completed.
• When all partners or all the partners except one are declared insolvent.
• When the business of the firm is declared as illegal or unlawful.
• When the partnership is at will and one of the partners has given a 14 days’ notice in writing to all other partners to dissolve the firm.

(B) Dissolution by court order : The partnership firm will be dissolved by the court if any one of the
partners files a suit i.e. legal application in the court of law. Under the following circumstances the court orders to dissolve the partnership firm :

• When a partner becomes unsound mind / insane or permanently incapable of performing his
  duties.
• When a partner is guilty of misconduct which affects the business of the firm.
• When a partner frequently breaks or violates the partnership agreement.
• Where a partner transfers his interest in the firm to an outsider without obtaining consent of other partners.
• When the business- of the firm cannot be carried on except at a loss.
• Any other reason considered by court as just and equitable.

Difference between Dissolution of Partnership and Dissolution of Firm-

Base of Comparision	Dissolution of Partnership	Dissolution of Firm
Meaning	Complete dissolution may or may not imply.	Complete dissolution of partnership is implied.
Nature	Nature of dissolution of partnership is not compulsory.	Nature & dissolution of firm is voluntary or not compulsory.
Continuation of Business	Business activities may continue and reconstitution of partnership takes place.	Business activities completely stopped/ discontinued.
Requirement	Revaluation of assets and liabilities takes place for the further procedure of reconstituion of partnership.	Realisation of assets and Liabilities takes place as no question of any reconstitution of partnership.
Final Closure of books	Final closure of books in not mandatory.	Final closure of books is mandatory.
Court order	Dissolution of partnership may not affected by court order.	A court order can affect dissolution of firm.

Effects of Dissolution of Partnership Firm –
The effects of dissolution of partnership firm are stated as follows :

• All trading or business activities are closed down.
• All assets of the firm are sold out.
• All liabilities of the firm are paid off or discharged according to the preference of payment.
• If any surplus left, it will be divided among the partners in their profit sharing ratio.

Accounting treatment / Settlement of accounts on Dissolution of Firm –

In order to meet outside liabilities, the partnership firm raises funds by selling its assets. According to the provisions made under Section 48 of Partnership Act, 1932, the liabilities are paid as per the order given below:

• Payment of realisation expenses incurred while selling various assets.
• Repayment of loans and payment to creditors, outstanding expenses, Bank overdraft, Bills payable, Bank loans, Loans from other financial institutions, etc.
• Repayment of loans obtained from partners.
• Repayment of capital balances of partners to the extent possible.
• If any surplus left, it will be divided among the partners in their profit sharing ratio.

Accounting Procedure –

The accounting procedure adopted for dissolution of partnership may be
classified under the following two types :
(A) Simple Dissolution and (B) Dissolution Under Insolvency Situation.

(A) Simple Dissolution : When all partners remain solvent and firm is dissolved due to any reason it is called simple dissolution. On dissolution of the firm the following ledger accounts are opened to record various transactions, viz. (a) Realisation A/c (b) Partners’ Capital A/cs (c) Partners’ Current A/cs (under fixed capital method) (d) Cash or Bank A/c.

(a) Realisation Account : An account which is opened and operated at the time of dissolution by the partnership firm to record the entries of taking over and sale of assets and taking over and payment of liabilities of the firm and to find out profit or loss on realisation of assets and liabilities is called Realisation A/c. After recording all the entries relating realisation of assets and liabilities, this account is closed and balanced. The debit balance of Realisation A/c indicates loss incurred on realisation of assets and liabilities. The credit balance on Realisation A/c shows profit earned on realisation of assets and liabilities. The balance shown by Realisation A/c is transferred to all partners’ Capital Accounts or Current Accounts.

(b) Partners’ Capital Accounts : Capital balances of all partners shown in the last Balance Sheet are transferred to Capital Account of each partner on credit side as ”By Balance b/d”. Usually Partners’ Capital Account show debit balances.

(c) Partners’ Current Accounts : If fixed capital method is followed by the firm, along with Capital Account a Current Account for each partner is opened. Current Account may either show debit balance or credit balance. Entries relating to taken over of assets, payment of liabilities, transfer of Profit and Loss A/c balance, transfer realisation profit or loss, etc. are passed through Current Accounts. At the end, Current Accounts are closed and balances appearing in those accounts are transferred to respective Partners’ Capital Accounts.

(d) Partner’s Loan Account : When partner Loan Account has credit balance, it is not transferred to Credit side of Realisation Account but amount is paid off after paying all third parties due. If Partner Loan Account has debit balance, Partner’s Loan should be debited to Partners’ Capital / Current Account directly.

(e) Cash Account or Bank Account : On the dissolution of partnership firm, Cash A/c or Bank A/c is opened and balance of cash or bank shown in the last Balance Sheet is transferred to this account on debit side as “To Balance b/d.” In case of Bank Overdraft, the balance is shown on the credit side of Bank A/c as “By Balance b/d”, if Bank A/c is opened and operated. In that case cash balance is transferred to Bank A/c on debit side by passing the entry :

All the receipts and payments are recorded in this Account. At the end this Account gets automatically closed.

Accounting entries to close : Under simple dissolution, the accounting procedure may be divided into three stages viz. (A) Transfer Stage, (B) Realisation or Disposal Stage and (C) Distribution Stage.

(A) Transfer Stage : In this stage all the assets except cash balance, bank balance and Profit and Loss A/c (debit) balance, are transferred at book value to debit side of Realisation A/c and all the liabilities except partner’s loan, capitals, reserves, Profit and Loss A/c (Credit) balance are transferred at book value to credit side of Realisation A/c.

Pro forma journal entries :

(1) Transfer of assets : (except cash and bank balance and Profit and Loss A/c debit balance) :

(Being the assets transferred at book values)

(2) Transfer of third party liabilities :

(Being third party liabilities transferred at book values)

(3) Transfer of provisions against assets :

(Being various provisions made to assets transferred to Realisation A/c)

(4) Transfer of accumulated profit and reserves :

(Being accumulated loss and deferred expenses not yet written off transferred to all Partners’ Capital/Current A/cs in their profit sharing ratio)

(5) Transfer of accumulated loss appearing on the assets side of Balance Sheet:

Note : (i) Balance of Cash A/c and Bank A/c and Partner’s Loan A/c should not be transferred to Realisation A/c. In such cases separate A/c for Cash or Bank and Partner’s Loan should be opened and balance shown in the last balance sheet should be transferred to those accounts, (ii) In case of sundry debtors, gross amount of debtors before deducting R.D.D. should be transferred to debit side of Realisation A/c and R.D.D. amount should be transferred to credit side of Realisation A/c.

(B) Realisation or Disposal Stage : In this stage all assets including unrecorded assets are sold out i.e. realised into cash. Assets may be taken over by any partner after adjusting the agreed amount to its Capital/Current A/c. From the collected sales proceeds (cash) liabilities and dissolution expenses are paid. Partner’s loan is also paid off in this stage.

Pro forma journal entries :

(1) Sale of recorded/unrecorded assets :

(Being assets sold and cash received)

(2) Taken over or recorded as well as unrecorded assets by a partner :

(Being assets taken over by a partner)

Note: Against the due amount to creditor, when asset is taken over by a creditor in part or in full payment due, due amount is to be decreased to that extent and balance amount will be paid to him. Here entry for the net payment is mandatory while entry for asset taken over by the creditor is not required.

(3) (a) Payment of recorded as well as unrecorded liabilities by the firm :

(b) Payment of recorded and unrecorded liabilities by a partner :

Note : If nothing is mentioned about the payment of liability, then it is paid at book value.

(4) (a) Payment of realisation expenses :

(b) Payment of realisation expenses by a partner :

(5) Payment of commission given to a partner for realising assets of the firm :

(6) Payment of contingent liability by a firm :

(7) Payment of partners’ loan :

(C) Distribution Stage : In this stage Realisation A/c is closed and balanced. The debit balance i.e. loss or credit balance i.e. profit is transferred to Partners’ Capital or Current Accounts in their profit sharing ratio. Then Current Accounts of the partners are closed and balance appearing thereon is transferred to Capital Accounts of the partners. At the end Capital Accounts of all partners are closed by making payments to or receiving cash from the partners.

Pro forma journal entries :

Treatment of unrecorded (undisclosed) assets and liabilities : On the date of dissolution in the books of accounts, some assets and liabilities are not recorded, so entries of like this assets and liabiliies are not transferred to Realisation account. But entries for like this unrecorded assets and liabilities are recorded in the books when they are realised or paid. Related entries are as follow:

Treatment of Goodwill on Dissolution : When goodwill appears in the books, like other assets, it will be transferred to debit side of Realisation A/c, like all other assets. If goodwill is not appear in the books, wheatever sale amount is received, it will be debited to Cash / Bank A/c and credited to Realisation A/c.

(1) When Goodwill Account appears in the Balance Sheet:

(i) Transfer of Goodwill to Realisation Account:

(ii) When Goodwill is realised on dissolution:

(2) When Goodwill Account does not appear in the Balance Sheet:
Here, no entry for transfer of goodwill require.

(i) When Goodwill is realised on dissolution :

(ii) When partner purchases Goodwill:

Pro forma of Ledger Accounts :

(1) Realisation Account :

(2) Partners’ Capital Accounts : (A) If Fixed Capital Method is followed by the firm :

It is assumed that opening balance of Current A/cs of A and B showed credit balances and that of C showed a debit balance.

(B) If Fluctuating Capital Method is followed by the firm :

(3) Cash/Bank A/c :

(B) Dissolution Under Insolvency Situation : A person whose liabilities exceed his assets is called an insolvent person. A partner whose capital account shows debit balance and who is not in a position to repay the amount of debit balance on his capital account to the firm is called an insolvent partner. In other words, a partner who is unable to meet his capital deficiency even from his private property is called an insolvent partner. A partner who is in a position to meet his capital deficiency is called a solvent partner. The debit balance of capital account of an insolvent partner which he cannot pay is called his capital deficiency. The capital deficiency of insolvent partner represents a loss to the firm. The capital deficiency of insolvent partner is to be borne by solvent partners in their profit sharing ratio.

Accounting procedure under Fixed Capital Method :

(1) Transfer of balance on insolvent partner’s Current A/c to his Capital A/c :

(Being insolvent partner’s deficiency in Current A/c transferred to his Capital A/c)

(2) Amount recovered from insolvent partner’s estate :

(Being cash recovered from the estate of insolvent partner)

(3) Transfer of deficiency on insolvent Partner’s Capital A/c to solvent Partners’ Current Accounts :

(Being insolvent partners’ capital deficiency transferred to solvent partner Current A/c in their profit sharing ratio)

(4) Transfer of balance on solvent Partners’ Current A/cs to their Capital A/cs :

(Being balance on Current A/cs transferred to Capital A/cs)

(5) Final settlement of solvent Partners’ Capital dues :

(Being amount paid to solvent partners in final settlement)

Accounting procedure under Fluctuating Capital Method : Under this method all the adjustments are made through Capital Accounts of the partners.

Transfer of capital deficiency of insolvent partner to solvent partners’ Capital A/cs :

(Being insolvent partners’ capital deficeincy transferred to solvent Partners’ Capital A/cs in their profit sharing ratio)

When all partners are insolvent: If all the partners of a firm become insolvent, it is clear that their capital deficiencies will have to be borne by the outside creditors, who will not be able to recover their claims in full but will get only a part of their dues in terms of a dividend of so many paise in the rupee. The available cash in the firm is first used to pay dissolution expenses. The balance amount is paid to creditors proportionately in the ratio of their respective balances.

Accounting treatment before making distribution of insolvent partners’ capital deficiency :

• Transfer only assets to Realisation A/c at their book values to its debit side.
• Outsiders liabilities should not be transferred to Realisation A/c. Open each liability’s A/c separately.
• Adjust the loss on realisation to Partners’ Current A/cs or Partners’ Capital A/cs as the case may be.
• Close the Partners’ Current A/cs and also the Partners’ Loan A/cs by transferring the balances
  of such accounts to the capital accounts of the respective partners.
• Record the amount of cash recovered from the partners by debiting Cash/Bank A/c and
  crediting related Partners’ Capital A/cs.
• Close the Partner’s Capital A/cs and transfer the capital deficiency of each partner to a separate
  account called ‘Deficiency A/c’.
• Distribute the available cash (i.e. opening balance of cash + cash received on sale of assets + cash received from private estate of partners) to various creditors in the proportion of their dues.
• Close the Various Liabilities A/cs by transferring unpaid balances to ‘Deficiency A/c’.
• Ultimately ‘Deficiency A/c’ is suppose to tally.

By going through these Maharashtra State Board Book Keeping & Accountancy Notes 12th Chapter 9 Analysis of Financial Statements students can recall all the concepts quickly.

Maharashtra State Board 12th Accounts Notes Chapter 9 Analysis of Financial Statements

Meaning, Objective and Limitations of Financial Statement Analysis-

Meaning: The statements which are prepared by the business enterprises periodically to ascertain or measure the profitability, operational efficiency, solvency, growth of the business concern and judge the financial strength and status are called financial statements. These statements furnish a complete picture of the firm’s financial conditions and managerial performance. The financial statements are prepared by the profit concerns as well as ‘non-profit’ concerns usually at the end of the financial year. The financial statements of the business enterprises for an accounting period consist of the following :

(1) Balance Sheet/A position statement (2) Profit and Loss A/c/An Income statement.
Financial statement analysis is a study of financial relationship among the various financial items (factors) and the trend revealed in the financial statements. Thus, analysis of financial statements involves collection and a methodical classification of the data given in the financial statement and a comparison of various figures with each other. Financial statement analysis involves two aspects viz.

• Analysis of data which means methodical classification of financial statements and
• Interpretation of data which means explanation of meaning and significance of data. These two aspects are complementary to each other.

Objectives:

• To help in planning:An analysis of financial statements facilitates the business enterprises to understand its financial strength and soundness for future planning.
• To assist in estimating the earnings of business: Analysis of financial statements assist in knowing the earning is satisfactory or reasonable return on its investments is there or not. It also gives the idea of profitability of entire organisation and of every department.
• To assist in investment making decision: Investors are always eager to know liquidity of the business, ability of repayment of loan and its interest on borrowings which depends on the solvency and profitability of business organisation.
• To help management in assessing the efficiency of the organisation: Analysis of financial statements helps the business organisations to know the operational efficiency of its management. It also help to judge whether financial policies adopted by the management are appropriate or not.
• To provide financial information about economic resources: From the accounting data information and financial statements one can know the economic resources of the company.
• To provide information about changes in net resources arising out of business activities: From the financial statements one can know the net resources like payment of salary, wages, bonus and incomes sources.
• To disclose other information that is relevant to the need of the users of the financial statements: Financial statements also disclose other information which may useful to the government, employees, creditors, investors, etc.

Limitations : Analysis of financial statements depends upon the data and information provided by the
organisation.

(1) Qualitative information are ignored : The financial statements consider only the monetary aspects which can be measured. These statements ignores the qualitative, aspects such as development of team of loyal and efficient workers, harmony, reputation, prestige and efficiency of management competition, etc. There are some of the important matters which need to be considered for the business prospects.

(2) Historical cost: The information provided by the financial statements are historical in nature. This is because it considers and uses historical cost and book values of assets. It altogether fails to consider the changes that take place in price level.

(3) Based on ‘accounting concepts and conventions : Financial statements are prepared on the basis of certain accounting concepts and convention, so financial position as disclosed by these statements may not be realistic and their analysis cannot be much useful in practical life.

(4) Influenced by personal judgement : In the analysis of financial statement, many items are left for the personal judgement of an accountant. For instance, selection of method of depreciation, inventory valuation, writing off deffered revenue expenditure, etc. The soundness and reliability of such judgement depend on the competence, experience, ability and honesty of an accountant. However, convention of consistency acts as a controlling factor on making indiscreet personal decisions.

(5) Being uncomparable: Differences in date of preparation, nature of business, age of business, method of accounting, monopolistic market, etc. make the financial statement uncomparable.

(6) Static statement: Financial statements represents absolute figure which are static in nature and do not present the process by which the figures are arrived.

(7) Affected by window dressings : Sometimes management try to show excellent picture of business through financial statements which is not actually acceptable, e.g. To show excellent profit, sales figures may be taken at increased value, closing stock may be overvalued, last moment purchase not disclosed, etc. This is known as window dressing.

From the above discussion one can say that financial statements should not be taken as true indicator of financial strength and weakness of the business and do not take any serious decision based on it.

Analysis of Financial Statements :

Balance Sheet: The Balance Sheet required to be arranged in vertical format which is suitable for further analysis. Its format is given below :

Income Statement: The Profit and Loss Account need to be arranged in a vertical format which is suitable for further analysis. It is also called as Vertical income statement. Its format is given below:

Tools for Financial Statement Analysis : The financial statements provide only figures of assets, liabilities, expenses, revenues, profit or loss of the business. For decision making only presentation and ascertainment of the figures are not sufficient. In order to make decision making easier and meaningful, analysis of financial statement is required. For analysis of financial statement various tools such as (i) Comparative Financial Statements, (ii) Common Size Statements, (iii) Cash Flow Analysis, (iv) Ratio Analysis are used.

(A) Comparative Financial Statements : The financial statements which contain the figures of two or more consecutive accounting periods to give comparative views of the financial performance and position of a business enterprise are called Comparative Financial Statements. In these statements, the figures for two or more successive years are placed side by side to facilitate comparison. Accordingly, horizontal or comparative analysis means a process of calculating in absolute figures or in percentage form, the changes from the comparative statements.
For this purpose following two statements are required : (1) Comparative Balance Sheet and
(2) Comparative Income Statement.

(1) Comparative Balance Sheet : The comparative Balance Sheet contains the figures of liabilities and assets of the current year and the previous years to facilitate easy comparison. Such comparative statements indicate the trend (increase or decrease) of the changes in the financial performance and position of the business enterprises.

Methods of preparing Comparative Balance Sheet:
Comparative Balance Sheet is prepared by comparing the individual items of Assets and Liabilities and finding out absolute and percentage increase or decrease in them.

Steps to prepare Comparative Balance Sheet:

• Enter the details of Assets and Liabilities in the first column.
• In the column number 2 and column number 3 enter the figures of previous year and current year Balance Sheet respectively.
• In column number 4 enter the absolute changes i.e. ‘Increase’ or ‘Decrease’ by comparing the figures of column 2 and column 3.
  Absolute change = Current year – Previous year.
• Record the percentage changes in fifth column.
  Percentage change = \(\frac{\text { Absolute change }}{\text { Amount of previous year }}\) x 100

Example No. 1 : Balance Sheet of ‘X’ Ltd. Co. for the year ending 31st March, 2019 and 31st March, 2020 is given below:

You are required to prepare Comparative Balance Sheet of ‘X’ Ltd. Co. as on 31st March, 2019 and 31st March, 2020.
Solution:
Comparative Balance Sheet of ‘X’ Ltd. Co. as on 31st March, 2019 and 31st March, 2020.

2) Comparative Income Statement: A comparative income statement i.e. Profit and Loss Account contains the figures of expenses and incomes of the current year and the previous year for easy comparision.
Comparative income statement shows increase or decrease in various Trading and Profit and Loss Account.

Steps to prepare comparative income statement:

• Record the amount of Income and Expenditure in first column.
• Record the figures of previous year income statement in second column.
• Record the figures of current year income statement in third column.
• Record the absolute changes i.e. diffrence between current year and previous year in fourth column.
• Absolute change = Current year – Previous year.
• Record the percentage changes in fifth column.

Percentage change = \(\frac{\text { Absolute change }}{\text { Amount of previous year }} \times 100\)

Example No. 2: Income Statement of ‘X’ Ltd. Co. for the year ending 31st March, 2019 and 31st March, 2020 is given below:

You are required to prepare Comparative Income Statement of X Ltd. Co. for the year ended 31st
March, 2019 and 31st March, 2020.
Solution:
Comparative Income Statement of ‘X’ Ltd. Co. for the year ended 31st March, 2019 and 31st March, 2020:

(B) Common Size Statement : Common Size Statement is a type of financial analysis in which the financial statements of the same period are compared and figures of each item are converted into percentage of some common figure or base. In this analysis, the income statement and position statement of two consecutive years of the same organisation or income and position statements of two similar units for the same period are used to draw useful conclusions.

For common size statement analysis, in Income statement usually the sales figure is taken as base, i.e. 100. All the other figures are converted into percentage form to sales. In position statement, the total assets and the total liabilities are taken as base, i.e. 100 each. All the figures on the respective sides are expressed in percentage to the total assets and the total liabilities respectively to draw meaningful conclusions.

Steps to prepare common size statements :

• Write absolute figures of each item of Balance Sheet or of Income Statement for two consecutive years.
• Select (choose) common base (as 100), e.g. in case of income statement sales figure as 100.
• Work out percentage of each item for two periods.

Example No. 3 : Balance Sheet of ‘Y’ Ltd. Co. for the year ending 31st March, 2019 and 31st March,
2020 is given below:

You are required to prepare common size statements for the year ending 31st March, 2019 and 31st March, 2020.
Solution :
Common size statements for the year ending 31st March, 2019 and 31st March, 2020

Working Notes :

Example No. 4 :
Income statements for the year ending 31st March, 2019 and 31st March, 2020 are given below:

Solution:
Common Size Statement for the year ending 31st March, 2019 and 31st March, 2020:

Working Notes :

Here base or aggregate is net sales. In the year ending 31 -03-2019 Net sales ? 10,00,000 is taken as base i.e. 100 % and in the ending 31 – 03 – 2020 Net sales ? 12,00,000 is taken as base i.e. 100 %.
For 31 – 03 – 2019 % of cost of goods sold = \(\frac{\text { Cost of goods sold }}{\text { Net sales }}\) x 100 = \(\frac{5,80,000}{10,00,000}\) x 100 = 58%
For 31 – 03 – 2020 % of cost of goods sold = \(\frac{6,20,000}{12,00,000}\) x 100 = 51.67 %

Benefits or advantages of common size statements :

(1) Common size statements are very useful for comparing the profitability. It gives the different trends in different items of Balance Sheet and Income statement.
(2) It is also useful for inter firm comparison i.e. comparison of income and position statements of two similar units in the organisation for the same period.

(C) Cash Flow Analysis : A statement which shows the inflows (receipts) and outflows (payments) of cash and cash equivalents of a business enterprise over a financial year, is called a cash flow statement. It indicates the different sources from which the cash comes into the business and the different uses to which the cash has been put. It helps the management in assessing the potential of the business enterprise in paying short-term loans. It is prepared month-wise to ascertain the cash available for various business purposes.

Steps to Prepare Cash Flow Statement : In Cash Flow Statenient its ‘inflow’ and outflow of Cash and Cash equivalents are grouped into:

• Cash flow from operating activities
• Cash flow from Investing activities
• Cash flow from financing activities
  This is shown In the following diagram (chart):

Importance of cash flow statement:

• Useful in short-term financial planning and decision making: Cash flow statement provide information on uses of cash and cash equivalents for particular period. It is useful to prepare short-term financial planning and decision making on different areas.
• Helps in analysis of liquidity position : Cash flow statement may be prepared on monthly or quarterly basis. It helps to understand liquidity of the firm in better way. Such analysis of liquidity is useful to bank and financial institutions as it show ability of firm to repay Loans.
• Helps in efficient cash management: Cash flow statement provides information on surplus or defect of cash. If there is surplus, management makes arrangement for its investment and for deficit if any it arranges for short-term credit or loan.
• Helps in comparative study of cash flow statement and cash budget: Cash flow statement and cash budget are compared and cause of difference between them are analysed and necessary corrective measures are taken by the firm to generate or use cash.
• Helps in study of receipts and payments of cash : Cash flow statement gives information of the speed at which cash is collected from debtors, stock and other current assets and the speed at which current liabilities like creditors, Bank overdraft, etc. are paid off. This helps management to find true position of cash in future.
• Helpful in dividend declaration and payment of dividend : From cash flow statement, management ascertains the position of cash for payment of dividend.
• Tools of planning for projecting future investments and financial plans: Cash flow statement is useful to the management for projecting future investing and financial plans for the business.

Presentation of Cash Flow Statement : As per AS – 3 format for presentation of cash from statement
by classifying business transactions of a specific period into three categories viz. Operating, Investing
and Financing is as follows :

Uses of Cash Flow Statement:

• Cash flow statement facilitates the business organisation to know the liquidity position of the business.
• It helps to understand how net profit has increased even though cash balance is decreased.
• It also helps to know how cash balance has increased even though firm incurred net loss.
• It facilitates the business firm to know how the requirements of working capital were met by the fund raised through current operations.
• It helps to know the external sources of raising finance to meet needs of finance.
• It helps the firm to understand whether the firm sells its non-current assets or not.

Meaning, Objectives and Classification of Accounting Ratios-

(1) Meaning : A relationship between two numbers or quantities, when expressed either in number, fraction, proportion or in percentage is called ratio. Accounting ratio expresses the relationship between two accounting figures and measures the ability i.e. financial strength of the business enterprise to pay its liabilities and judge its earning capacity. The use of different types of accounting ratios to evaluate the financial performance of the business enterprise, is called the ratio analysis.

Example : If total sales is ₹ 5,15,500, Sales returns is ₹ 5,500 and Gross profit is ₹ 1,27,500, calculate
Gross Profit ratio.
Solution :
Net sales = Total sales – Sales returns
= 5,15,500-5,500 = ₹ 5,10,000
Gross Profit ratio = \(\frac{\text { Cross profit }}{\text { Net sales }}\) x 100 = \(\frac{1,27,500}{5,10,000}\) x 100 = 25 %
Net sales 5,10,000

(2) Objectives : The objectives of ratios are explained as follows :

• It facilitates easy comparative analysis of profitability, liquidity and solvency of the business.
• It is helpful to know the changes that take place in the business.
• It helps in decision making in vital areas such as operating, investing and financing. It shows how far it is helpful to improve the performance.
• It is helpful to make different types of comparisons like (i) Intra firm comparison i.e. comparison within the firm over number of years and (ii) Inter firm comparison i.e. comparison between two firms when specific standard for the firms or industry is established.

(3) Classification : The classification of ratio is shown in the following chart :

Introduction to Ratios-

(1) Current Ratio : The ratio of current assets to the current liabilities is called Current ratio. This ratio measures the ability of the business enterprise to fulfil the current obligations. It is one of the indicators which judges the financial position of a business enterprise. The current ratio between 2 : 1 to 3 : 1 is considered more satisfactory or ideal. The ratio of 2: 1 indicates that the current assets are twice the current liabilities. The formula for calculating the current ratio is given below:
Current ratio = \(\frac{\text { Current assets }}{\text { Current liabilitles }}\)

(Where the current assets include cash and bank balance, loose tools, bills receivable, sundry debtors, stock of inventories, i.e. raw-materials, semi-finished and finished goods, prepaid expenses, marketable securities, short-term loans and advances given, incomes accrued, disposable investments, etc.

The current liabilities include sundry creditors, bills payable, bank overdraft, dividend and taxes payable, outstanding expenses, debentures payable within a year, short-term loan taken, provision for taxation, proposed and unclaimed dividend, income pre-received i.e. income received in advance, etc.)

(2) Liquid Ratio (Quick Ratio or Acid Test Ratio) : The ratio of quick assets to current libilities is called Quick ratio or Acid test ratio. The assets which can be converted into cash immediately, or at a short notice are called Quick assets. All current assets except stock and prepaid expenses are considered as quick assets. Quick ratio of 1 : 1 is considered as an ideal ratio. It measures the liquidity position of business enterprise.

The formula for calculating liquid ratio is given below :
Liquid or Acid test ratio = \(\frac{\text { Quick assets }}{\text { Current liabilities }}\)
(Where Liquid or Quick assets = Cash + Bankbalance + Debtors + Bills receivable + Marketable securities)
Quick Ratio = \(\frac{\text { Quick assets }}{\text { Quick liabilities }}\)
(Where Quick liabilities = Current liabilities Less Bank overdraft, Advance received and Cash credit.) .

(3) Gross Profit (Turnover) Ratio : Gross profit ratio indicates the relation of the gross profit to the net sales. It is expressed in the percentage form. It is calculated to measure the efficiency of the production department. It is calculated by using the following formula :
Gross Profit ratio = \(\frac{\text { Gross profit }}{\text { Net sales }}\) x 100

[Where

• Gross profit = Net sales – Cost of the goods sold.
• Net sales = Total sales – Sales returns.
• Cost of Goods sold = Opening stock + Purchases + Direct expense – Closing stock]

It shows the gross margin on commodity sold. Higher gross profit ratio shows good position of business.

(4) Operating Profit Ratio : Operating profit ratio measures the relationship between operating profit and net sales.
Operating Profit ratio = \(\frac{\text { Operating Profit }}{\text { Net Sales }}\) x 100

Where Operating Profit = Gross Profit – Operating Expenses.
Net sales = Sales – Return – Allowances
Expenses may be categorised into two parts viz. (i) Operating expenses and (ii) Non-operating expenses.

Operating Expenses: Expenses which are incurred by the business enterprises for routine operation of the business are called operating expenses. They include office expenses, administrative expenses, selling and distribution expenses, etc. When such expenses are deducted from gross profit, we get operating profit.

Non-operating Expenses : Non-operating expenses include depreciation charged on fixed assets, loss incurred on sale of fixed asset or investment, loss by fire, goodwill written off, discount on issue of shares and debentures, preliminary expenses, etc. ‘

(5) Net Profit Ratio : The net profit ratio shows the relationship between the net profit and the net sales. It is expressed in percentage form. This ratio is helpful to measure the over-all efficiency of the business enterprise. The formula to calculate the net profit ratio is given below:

• Net Profit Ratio = \(\frac{\text { Net profit }}{\text { Net sales }}\) x 100
• Net Profit Ratio = \(\frac{\text { Net Profit Before Tax }}{\text { Net sales }}\) x 100
• Net Profit Ratio = \(\frac{\text { Net Profit After Tax }}{\text { Net sales }}\) x 100
  (Where Net profit = Gross profit + Non-operating incomes – Operating expenses – Non-operating expenses.)

Non-operating income includes income from non-trading activities, e.g. interest received, dividend received, any compensation received, refund of tax, profit on sale of fixed assets and investments. For calculating this ratio, Net profit may be taken either before tax paid or net profit after tax paid. The main aim of this ratio is to understand return on investment.

Operating Ratio: The ratio which expresses the relationship between total operating costs and net sales is called operating ratio. This ratio is expressed in percentage form.

Operating Ratio = \(\frac{\text { Cost of Goods Sold + Operating Expenses }}{\text { Net sales }}\) x 100
Where Cost of goods sold = Opening stock + Purchases + Wages – Closing stock

Operating Expenses = Office and Administrative expenses + Selling and distribution
expenses + Finance expenses (excluding interest on Loans and debentures)
Net sales = Sales-Returns-Allowances.

(6) Return On Investment (ROI) : This ratio indicates the relationship between the profit before interest and tax and total investment of the business enterprise. This ratio is computed to measure the over-all efficiency or profitability of the business enterprise. This ratio is computed by using the following formula :

Return On Investment ratio= \(\frac{\text { Profit before interest, tax and dividend }}{\text { Capital employed }} \times 100\)
Where Capital investment or Capital employed = Equity share capital + Preference share capital + Reserve and Surplus + Debenture capital + Other-long term loan. OR We can use the following formula to calculate capital employed
Capital employed = Fixed assets + Current assets – Current liabilities.
This ratio indicates the ability of the company to generate the profit per rupee of capital employed.

(7) Return On Capital Employed (ROCE) i This ratio indicates the relationship between Net profit before interest and tax and Net capital employed by the proprietor. In case of the company net capital employed refers to shareholders’ capital, i.e. the funds supplied by equity shareholders and Preference shareholders. It is computed by using the following formula :
Return On Capital Employed = \(\frac{\text Net profit before interest and tax }{ Net capital employed or equity }}\)
Net Capital Employed = Total assets – Current liabilities
= Fixed assets + Current assets – Current liabilities.
This ratio indicates whether shareholders’ fund is efficiently used or not. As far as possible Return On Capital Employed ratio should be higher than Return On Investment ratio.

By going through these Maharashtra State Board Book Keeping & Accountancy Notes 12th Chapter 5 Reconstitution of Partnership (Death of Partner) students can recall all the concepts quickly.

Maharashtra State Board 12th Accounts Notes Chapter 5 Reconstitution of Partnership (Death of Partner)

Meaning-

Death means the permanent end of all functions of life in an organism. Accordingly when a partner dies, he no more remains as partner of a firm. On death of a partner, he ceases to be partner of a firm on natural grounds. Thus, death of a partner is equivalent to compulsory retirement. The surviving partners may continue the business if partnership firm makes provisions in partnership deed. On the death of a partner, total amount due to deceased partner is transferred to his Legal Heir’s Account or Legal Representative’s Account or Executor’s Account. Surviving partners make arrangement to make payment of deceased partner’s dues with his legal representative who is entitled to interest at 6 % p.a. on the amount due from the date of death to the date of payment. On death of a partner, profit sharing ratio of the surviving partners get increased because profit sharing ratio of deceased partner gets divided and received by surviving partners.

New Profit Sharing Ratio-

New profit sharing ratio is a ratio in which the continuing partners share the future profit or loss of the firm after the death of a partner.

Gain (Benefit) Ratio-

Profit sharing ratio which is acquired by the continuing or surviving partners on account of death of a partner is called Gain Ratio or Benefit Ratio. Gain ratio is calculated by using the following formula : Gain ratio = New ratio – Old ratio. Usually gain ratio is used by the firm to write off goodwill raised only to the extent of deceased partner’s share.

Revaluation of Assets and Liabilities-

At the time of death of a partner, all the assets and liabilities of the partnership firm are usually revalued and changes in their values are effected through a Profit and Loss Adjustment Account or Revaluation A/c. A reduction in the values of assets and an increase in the values of liabilities are debited to this Account while an increase in the values of assets and a reduction in the values of liabilities are credited to this Account. Tp transfer the deceased partner’s share in profit or loss made on revaluation of assets and liabilities, the following journal entries are passed :

(a) Transfer of profit on revaluation :

(Being share of deceased partner in revaluation profit transferred to his Capital A/c)

(b) Transfer of loss on revaluation :

(Being share of deceased partner in revaluation loss transferred to his Capital A/c)

Note : Please note that journal entries for revaluation of assets and liabilities are the same as those for admission of a partner. For pro forma journal entries and ledger accounts for revaluation of assets and liabilities, refer to Chapter 3 on Admission of a Partner in this book.

Amount due to deceased partner’s executor-

In order to ascertain the total amount payable to the deceased partner’s executor the following counting items are considered :

(1) Capital balance : Capital balance of the deceased partner shown in the last Balance Sheet is required to the transferred to Capital Account of the deceased partner on credit side as ‘By Balance b/d’.

(2) Interest op capital : If there is a provision in the partnership deed to pay interest on Partners’ Capital, the interest bmegpital for the period beginning from the date of the last Balance Sheet to the date of death of a partner is calculated at specified rate and transferred to his Capital Account by recording the following journal entries :

(3) Transfer of the deceased partner’s share in general reserve, undistributed profits and unadjusted losses : If there are any items like Reserve Fund/General Reserve/undistributed profits or unadjusted losses shown in the last Balance Sheet, then the share of the deceased partner in those items should be calculated and transferred to his Capital Account by recording the following journal entries :

(a) Transfer of general reserve and undistributed profits :

(Being share of deceased partner in general reserve and undistributed profit transferred)

(b) Transfer of unadjusted losses :

(Being share of deceased partner in unadjusted losses transferred)

(4) Share of goodwill : On the death of a partner, goodwill of the firm is to be valued as per the terms and conditions contained in the partnership agreement of the partnership firm and accordingly the share of the deceased partner can be ascertained. The share of goodwill of the deceased partner is transferred to his Capital Account by passing the following journal entry :

(Being share of deceased partner in goodwill transferred to his Capital A/c)

(5) Salary due to a deceased partner : If there is a provision in the partnership deed to pay salary to partners, salary payable for the period from last Balance Sheet to the date of death of a partner is calculated and then transferred to the deceased Partner’s Capital Account by recording the following journal entry :

(Being salary due to deceased partner transferred to his Capital A/c)

(6) Drawings of the partner : Deceased partner’s drawings for a period from the date of last Balance
Sheet till the date of his death are to be calculated and transferred to his Capital Account by recording the following journal entry :

(Being drawings of the deceased partner adjusted to his Capital A/c)

(7) Interest on Drawings : If there is a provision in the partnership deed to charge interest on partner’s drawings, the interest on drawings for the period beginning from the date of last balance sheet to the date of death is calculated at specified rate and transferred to his Capital Account by recording the following journal entry :

(Being interest due on drawings adjusted to Capital A/c)

(8) Share of the deceased partner in the accrued profits of the firm i.e. profits accrued to firm from the date of last Balance Sheet to the date of death of a partner : The accrued profit of the firm from the date of the last Balance Sheet to the date of death of a partner may be calculated either on the basis of the last year’s profit or the average of the profits for last two to five years. Deceased partner’s share for a period from the date of the last Balance Sheet to the date of death, in the accrued profit of the firm can be calculated by using the following formula :

Deceased partner’s share in accrued profit = Deceased partner’s profit sharing ratio x proportionate period for which he was in the firm during the accounting year of death x Average accrued profit of last year’s profit.
To transfer this share of profit to the Deceased Partner’s Capital A/c the following journal entry is to be passed :

(9) Share in revaluation of Assets and Liabilities :
For this, refer to Brief Overview point no. 5.4 of this Chapter.

Settlement of amount due-

After recording all the above entries, the total amount due to a deceased partner is calculated and then it is to be transferred to the Deceased Partner’s Executor’s A/c or Legal Heir’s A/c. To effect this transfer, the following journal entry is recorded in the books of the firm :

If any payment is made to Deceased Partner’s Executor/Legal Heir, then the following journal entry is passed :

The balance left in Deceased Partner’s Executor’s A/c/Legal Heir’s A/c is then treated as Deceased Partner’s Executor’s / Legal Heir’s Loan.

Accounting treatment-

Deceased Partner’s Capital Account:
In order to ascertain the amount due to a deceased partner’s executor or legal heirs or legal representative, his Capital Account is prepared. It is shown below :

By going through these Maharashtra State Board 12th Science Biology Notes Chapter 15 Biodiversity, Conservation and Environmental Issues students can recall all the concepts quickly.

Maharashtra State Board 12th Biology Notes Chapter 15 Biodiversity, Conservation, and Environmental Issues

Introduction-

• Biodiversity: A variety of life that includes a vast array of species from microorganisms, viruses, algae, fungi, plants and animals present in different habitats on the earth is called biodiversity.
• Diversity is seen in shape, colour, form, mode of nutrition, habitats, reproduction, motility, duration of the life cycle, life span, etc. All of these adaptations help in the survival of species and hence diverse forms are seen.
• The term Biodiversity was coined by Walter Rosen in 1982.
• Edward Wilson popularised the term. He described it as combined diversity at different levels of biological organisation.
• Definition of biodiversity: Biodiversity is the part of nature that includes differences in the genes among individuals of a species, variety of animal and plant species in different habitats, regions, countries and the world which form different types of ecosystems within a defined area.
• Biodiversity was developed for 3.5 billion years when the evolution took place gradually.

Levels of biodiversity-

• Various levels at which diversity can be seen ranging from molecular to ecosystem levels. The three main levels, which form a hierarchy and interrelation: Genetic diversity, species diversity (community), and ecosystem diversity (Ecological diversity).
• Genetic diversity: Also called intraspecific diversity. The diversity present in the number and types of genes and chromosomes present in different species and variations in them and their alleles in the same species is called genetic diversity. Subspecies and races are also examples of genetic diversity.
• Species diversity: Also called interspecific diversity. The diversity in the number of species of plants and animals which are present in a particular region is called species diversity. Species diversity decides species richness (variety of species) and species evenness (number of individuals of different species).
• Ecological or ecosystem diversity: The diversity of different types of ecosystems and habitats
  within a given geographical area is called ecological or ecosystem diversity. E.g. Deserts, rain forests, deciduous forests, estuaries, wetlands, grasslands are different ecosystems with diverse features.

Patterns of biodiversity-

• Latitudinal and altitudinal gradient and species-area relationship are the two patterns of diversity.
• Latitudinal species diversity: There is greater species richness at a lower latitude which steadily declines towards the poles. This is called as distribution of diversity along the latitudes.
• The overall stability of tropical regions, lesser annual climatic changes, availability of plenty of sunlight, lesser drastic disturbances like periodic glaciations, lesser migrations causing reduced gene flow, normal temperature, and higher annual rainfall are all the factors that cause more diversity in these regions.
• Altitudinal species diversity: The diversity is more at lower altitudes, but at higher altitudes, it declines due to change in climatic conditions and drastic seasonal variations.
• Species area relationship: The number of species present in any area is directly proportional to the size of this area. Species richness increases with an increase in the area up to a certain limit this was observed by Alexander wan Humboldt.
• Importance of species diversity to the ecosystem: A stable community has fairly constant average biomass production over a particular time period. It withstands the disturbance and recovers quickly and also resists the invasive species.
• Productivity stability hypothesis (David Tillman): Rich diversity leads to lesser variation in the production of biomass over a particular time period.
• Rivet Popper hypothesis (Paul Ehrlich): Relationship between diversity and wellbeing of the ecosystem is not linear. When key species are lost there is a threat in a very short span of time which affects the food chain, food web, energy flow, and natural cycles resulting in an imbalance of the ecosystem.

Biodiversity current scenario-

• According to the IUCN data (2004), over 1.5 million species have been documented so far but still lot more are yet to be studied.
• Most of the temperate species have been studied but tropical species are yet to be explored.
• Robert May estimated that there are 7 million species on the earth.
• India has 8.1% of total global biodiversity. India is one of the 12 mega diversity countries. On total Indian land area which is 2.4% of the world, there are about 45000 plant species and 90000 animal varieties. 22% of global natural wealth has been recorded so far.
• But due to rapid deforestation and reclamation, many species and varieties could be lost forever before they are documented.

Loss of biodiversity-

1. Imbalance in the ecosystem occurs if biodiversity is lost. Extinction of species means a threat to biodiversity.
2. Three types of extinctions are :

• Natural extinction: Occurring due to natural causes such as forest fires, earthquakes, volcanic eruptions, etc.
• Mass extinction: Great impact causing major loss of species.
• Manmade or Anthropogenic extinction: Habitat destruction, hunting, settlement, overexploitation, reclamation are man-made causes of extinction.

3. There were five mass extinctions during different stages of the history of Earth.
4. The sixth extinction is taking place now which is a hundred to a thousand times faster than that
occurred in pre-human times.50% of diversity is said to be lost and this loss of biodiversity can alter environmental processes such as plant productivity and disease cycles.

5. Causes of biodiversity losses :
(1) Four major causes of biodiversity loss, known as an evil quartet.

• Habitat loss and fragmentation
• Overexploitation
• Alien species invasion
• Co-extinctions

(2) Extinct species: The species which are totally eliminated from the Earth.
E.g. Dinosaurs

(3) Endangered species: The species having dwindling numbers.

(4) The international union for conservation of nature and natural resources (IUCN) maintains a red data Book or red list to record the conservation status of plant and animal species.

(5) Categories of species according to IUCN:

• Extinct (EX)
• Extinct in the wild (EW)
• Critically endangered (CR)
• Endangered (EN)
• Vulnerable (VU)
• Near threatened (NT)
• Least concern (LC)
• Data deficient (DD)
• Not evaluated (NE)

Conservation and biodiversity-

1. Protection, upliftment, and scientific management of biodiversity so that it can remain at optimum level and give us sustainable benefits is called conservation of biodiversity.
2. Reasons for conservation of biodiversity :

(1) Narrowly utilitarian reasons: Humans obtain benefits from biodiversity in the form of resources for food, cloth, shelter industrial products, aesthetic products, ornaments, artifacts, and medicines.
Bioprospecting is done for systematically searching the new sources of chemical compounds, genes, microorganisms, and other valuable products that we could obtain from nature.

(2) Broadly utilitarian reasons: Oxygen supply, seed dispersal, pollination, extra aspects that nature gives us free.

(3) Ethical reasons: Humans share the earth with all the other diverse life forms and all of them have equal rights to survive. Therefore, ethically we should not finish them for our prospective economic use.

3. Conservation of biodiversity :

(1) In situ conservation :

• The protection of an organism in its natural surrounding or habitat is called in situ conservation.
• 34 biodiversity hotspots having high species richness and high density are strategically protected under in situ conservation in India.
• Traditionally used varieties for farming and horticulture are also conserved by this method.
• The Western Ghats, Indo-Burma, and Eastern Himalayas are 3 of world’s biodiversity hotspots located in India.
• In India, there Eire 14 biosphere reserves, 90 national parks, 448 wildlife sanctuaries, sacred groves are also typed of in situ conservation in which flora and fauna are protected in the name of God.
• Sacred groves are found in Khasi and Jaintia hills in Meghalaya, in Western Ghats of Maharashtra (especially Sindhudurg district), and Karnataka, Aravalli hills of Rajasthan and Bastar, Chanda and Sarguja areas in Madhya Pradesh.

(2) Ex-situ conservation :

• Critically endangered species are protected in captivity, which is called ex-situ conservation.
• An ex-situ conservation, living beings are protected in wildlife safari parks, zoological parks, botanical gardens, etc.
• Seed banks, tissue culture, cryopreservation, etc. are modern techniques that are used in this conservation method.

Biological Diversity Act 2002-

1. Earth Summit, held at Rio de Janeiro came out with the Convention on Biological Diversity (CBD-1992).
2. Indian Government has passed Biological Diversity Act (BD Act) in the year 2002 in compliance with CBD.
3. It gives framework for the sustainable management and conservation of our country’s natural resources. The law excludes value added products and human genetic material.
4. The main objectives for proposing this act are

• Regulation of access to Indian biological resources.
• Scientific cataloguing of traditional knowledge about ethnobiological materials.

5. There is three tier system in India, comprising of

• National Biodiversity Authority (NBA) at the national level
• State Biodiversity Boards (SBBs) at the state level
• Biodiversity Management Committees (BMCs) at the local level.

Environmental issues-

1. To protect and improve the quality of our environment, Indian Government has passed the Environment Protection Act in 1986.
2. Reasons for rampant loss of natural resources :

• Exponential growth of human population
• Industrial development
• Uncontrolled exploitation of nature
• Utilization and production of synthetic materials
• Construction activities
• Resultant pollution

3. Types of pollution :

• Air pollution, Noise pollution, Water pollution, Radioactive pollution, Soil pollution are different types of pollution.
• Pollutant: Substance that causes pollution is called a pollutant.

4. Air pollution :

(1) Unfavourable alteration in air quality causing damage to the respiratory system is called air pollution.
(2) Duration of exposure, concentration of pollutant and type of organism decide the severity of damage caused by air pollution.
(3) In plants, yield of crops are affected. Premature death of plants is another effect of air pollution.
(4) Major cause of air pollution is automobile traffic.

(5) Types of air pollutants : Two main types -> Particulate and Gaseous pollutants.

• Particles of less than 2.5 micrometres in diameter are extremely harmful to humans.
• Gaseous pollutants : CO, CO₂, SO₂, NO, NO₂, etc.

(6) Control measures for air pollution : For controlling emissions of gases and particulate pollutants which are released through vehicles and industries following devices are used :

• Electrostatic precipitator
• Exhaust gas scrubbers
• Catalytic converters

(7) Noise pollution :

• Noise is considered as an air pollutant which causes psychological and physiological changes in human beings.
• Sound level can damage the ear drum causing permanent hearing loss. Other problems that noise causes are sleeplessness, increased heartbeat, altered breathing, psychological stress, interference in learning etc.
• Sources of noise pollution : Machines, transportation, construction sites and industry.
• Using sound absorbing material can cause reduction in noise pollution.

5. Water pollution :

• Most of the water pollution is manmade.
• Smelling water having many pathogens, heavy metals and oils is called polluted water.
• Water Prevention and Control of Pollution Act 1974 to safeguard the water resources.
• Domestic sewage and Industrial effluents cause water pollution.
• (5) Domestic sewage contains biodegradable organic matter which can be removed by treatment.
• BOD or biochemical oxygen demand is a measure to estimate biodegradable organic matter present in the polluted water.  It is defined as the amount of dissolved oxygen required by microorganisms for decomposing the organic matter present in water which is expressed in milligram of oxygen per litre (mg/L) of water.
• Algal bloom : Excessive growth of free floating planktonic blue green algae causes algal bloom. It releases toxins in the water causing death of inhabitant fish. –
• Water hyacinth (Eichhornia crassipes) : Commonly called Terror of Bengal’ is an invasive species which grows excessively in water bodies and cause nuisance.
• Natural eutrophication : Ageing of lake over a very long period due to nutrient enrichment of water is called natural eutrophication.
• Cultural or accelerated eutrophication: Pollutants passing in the water body due to human activities cause cultural eutrophication in which there is accelerated aging process for the water body.
• Biological magnification or biomagnification : Accumulation of certain pollutant in the tissues of organisms and their increasing concentrations along the food chain is called biomagnification. E.g. DDT and mercury show biomagnification.

6. Thermal pollution : When the temperature of water is raised due to human activities, it causes thermal pollution. E.g. Effluents from thermal and nuclear power plants. Sensitive organisms are killed due to raised temperature, thus thermal pollution causes loss of flora and fauna.

7. Ecosan or Ecological sanitation :

• Use of excreta as agricultural manure in a safe and reusable manner is called ecological sanitation.
• Principle of recovery and recycling of nutrients is practised in this way.
• Ecosan is a closed system toilet which requires no water and is an alternative to leach pit toilet.
• Through such toilets composted organic manure is formed.

8. Reverse osmosis : Sewage water is reused after performing reverse osmosis.
It solves the problem of water scarcity and treatment of sewage water.

9. Rainwater harvesting : By harvesting rainwater, scarcity of water can be solved. For new constructions now it is mandatory to have provision for RWH.

10. Solid waste management :

(1) Everything that is disposed into the trash is called solid wastes.

(2) Municipal wastes : Wastes from homes, offices, stores, schools, hospitals, etc. together are called Municipal wastes. Municipality collects and disposes the same. It may contain paper, food wastes, plastics, glass, metals, rubber, leather, textile, etc.

(3) One of the ways to dispose the solid waste is to burn them. Volume of the waste is reduced by burning but burning creates air pollution.

(4) Sanitary landfills : Dumping the trash in open can attract rats and flies causing open dumps as the breeding ground for these pests. Therefore, sanitary landfills are created. At sanitary landfill sites, the wastes are compacted and buried in trenches. Everyday newer trash is added to landfills.

(5) However, this method is not a fool proof solution for the waste management as in large metro cities amount of trash is increasing day by day and hence such landfills are falling short. There is also seepage of dangerous chemicals from the sanitary landfills which results into the pollution of underground water reserves.

(6) Therefore, every human being should be sensitized towards the environmental issues. Common man should have ecological conscience to reduce the non-biodegradable trash.

(7) The solid wastes are categorized into three types :

(1) Bio-degradable
(2) Recyclable
(3) Non-biodegradable.

(8) The generated garbage should be sorted prior to disposal. The matter that could be reused or recycled should not be thrown into trash but to be given to kabadiwallahs and rag¬pickers.

(9) The biodegradable materials undergo natural breakdown. Therefore they can be buried deep down in the ground in pits.

(10) The non-biodegradable material should be reduced at source to curb the garbage generation. Packaging material, plastics, polybags, etc. which are used to a greater extent in modern times cause environmental pollution. Use of eco-friendly packaging and reduction in plastic has been advocated by the State Governments.

(11) Biomedical wastes : Hazardous wastes generated by hospitals contain disinfectants, harmful chemicals and disease-causing pathogenic microorganisms. Therefore such wastes should be carefully handled, treated and then disposed. For disposal of harmful biomedical wastes the incinerators are used.

(12) Electronic wastes (e-wastes) :

• e-wastes are any material of electronic origin, such as irreparable computers, mobile phones, CDs, floppies, batteries, etc.
• e-wastes are managed by burying them in landfills or they are incinerated.
• e-wastes generated in the developed world are exported to developing countries for further recycling and disposal.
• In China, India and Pakistan, metals like copper, iron, silicon, nickel and gold are recovered from e-wastes during recycling process.
• Developed countries, have facilities for recycling of e-wastes. But it involves manual participation and this exposes the workers to toxic substances present in e-wastes. For treating e-wastes, recycling is the only control measure. But it has to be done in an eco-friendly r manner.

11. Anti-plastic notifications : Government of Maharashtra has banned used of plastic by notification (23rd June 2018). This is a mission to make ‘Plastic Free Maharashtra’.

Greenhouse effect and Global warming-

1. Greenhouse effect :

• The greenhouse effect is the phenomenon that occurs naturally on the earth.
• The average temperature at surface of earth is increased due to greenhouse effect. If it would
  not have been there, the temperature of the earth would have been -18 °C. But due to the greenhouse now it is at the average 15 °C. This was called a good greenhouse effect.
• But in recent years the excessive greenhouse effect is causing generalized global warming and climate change.
• Infrared radiations are trapped due to atmospheric gases such as carbon dioxide, methane, etc. These gases absorb a major fraction of it and re-radiate the heat energy back to the earth’s surface. This exchange of heat goes in a cyclic manner.
• Carbon dioxide and methane are main greenhouse gases; additionally, chloroflorocarbons (CFC), Nitrous oxide (N₂O) and water vapours add to this effect.

2. Global warming :

(1) Due to air pollution and increased burning of fuels there is an increase in the proportion of greenhouse gases. The loss of forests and tree cover also adds to the increased CO₂ concentration. All this has led to global warming.
(2) In the last 100 years there is an increase in the Earth’s temperature by about 0.6 °C. Especially in last three decades the climate change is severe. Problems like El Nino effect; melting of polar ice caps, Alps and Himalayas, etc. and increasing sea level leading to coastal submergence are all due to global warming.

3. Measures to reduce greenhouse effect and Global warming : Reduction in use of fossil fuel, improving efficiency

Ozone depletion-

1. In the upper stratosphere strata there is ozone layer. It is continuously formed by action of ultraviolet radiations on molecular oxygen. Molecular oxygen also degrades back into ozone in the stratosphere. Ozone layer absorbs ultraviolet radiation from the sun and protects the flora and fauna from deleterious effects of radiation.

2. Living organisms are affected due to UV radiation because it causes damage to their DNA and proteins by breaking the chemical bonds within DNA and proteins.
3. The unit for measuring thickness of ozone is Dobson unit (DU).

4. A balance between production and degradation of ozone in the stratosphere is lately disturbed due to excessive proportion of chlorofluorocarbons (CFCs) in the atmosphere.

5. Chlorofluorocarbons are used in refrigerators. When released they move upward and reach stratosphere. The ultraviolet rays in stratosphere, react with CFC and release Cl- atoms. Ozone is degraded by Cl “atoms.

6. This later causes ozone depletion or formation of ozone hole as it is clearly seen over the Antarctic region.

7. Deleterious effects of Ozone depletion :

• Aging of skin.
• Damage to skin cells causing skin cancers.
• Inflammation of cornea of human eye causing snow-blindness cataract.
• Permanent damage to the cornea.
• UV-B radiation cause damage to DNA and mutations.

8. Montreal Protocol : An international treaty signed at Montreal (Canada) in 1987 (effective in 1989) to control the deleterious emission of ozone depleting substances like CFCs.

Deforestation –

1. Converting forested land into barren land is called deforestation.
2. Tropical forests are reduced by about 40% whereas temperate forests are lessened by 1% in the temperate region.
3. India is facing severe deforestation. There was 30% of forests in Indian land in early twentieth century. Now it has reduced to 19.4%.
4. It is recommended by National Forest Policy (1988) of India that the hilly area should have 67% while the plain area should have 33% forest cover.
5. Causes of deforestation :

• Unplanned human activities.
• Creation of agricultural land by cutting down forests.
• For the timber and firewood, trees are felled and forests are cleared.
• Clearing forests for cattle ranching.
• Slash and burn agriculture or Jhum cultivation in the north-eastern parts of India.
• Severe deforestation is caused due to increasing human population and repeated cultivation that resulted into shortening of recovery phase.

6. Consequences of deforestation :

Enhanced carbon dioxide concentration.

• Carbon held in the biomass is lost with deforestation.
• Loss of biodiversity due to habitat destruction.
• Disturbance in the hydrologic cycle.
• Soil erosion.
• Desertification.

7. Reforestation : Restoring a forest that once existed is called reforestation.
There can be a natural reforestation or it can be due to human efforts by planting trees. However, when it is due to human efforts the natural biodiversity may be lost.

8. Environmental heroes : Reforestation undertaken by these two environmentalists.

• Saalumara Thimmakka. (Karnataka)
• Moirangthem Loiya (Manipur).

9. Case study of people’s participation in conservation of forests : Following examples show people’s participation in the conservation of forests :

(1) In 1731, Amrita Devi had sacrificed her life to save trees along with other people of Bishnoi’s community. It was the example of sacrificing lives for the cause of saving trees and environment.
Amrita Devi Bishnoi Wildlife Protection Award for individuals or communities from rural areas has been installed by the Government of India.

(2) Chipko Movement is people’s participation for the protection of trees. This happened in 1974 in Garhwal region of Himalayas. Chipko movement has now spread world-wide in which people hug the trees and save it from the axe of tree-cutters.

(3) Joint Forest Management (JFM) has been introduced by the Government of India in 1980s for working with the local communities for protection and management of the forests. It is an attempt to conserve forests in a sustainable matter.

Mission Harit Maharashtra-

• Government of Maharashtra has decided to plant 50 crore trees, district-wise in 4 years, starting from in the year 2016.
• National Forest Policy (NFP) aims at maintaining 33% forest cover in India. This decision of government is in tune with NFP
• Helpline number 1926 called ‘Hello Forest’ has been set up to provide information regarding plantation, protection and for mass awareness.
• Mobile application called ‘My Plants’ to record details of the plantation such as numbers, species and location.
• Japanese Miyawaki method of plantation has been adapted in districts like, Beed, Hingoli, Pune, Jalgaon, Aurangabad, etc.

Know your conservatonist;

• Seed mother of Maharashtra, Rahibai Popere, from Ahmednagar district, runs seed bank for 54 crops and 116 varieties.
• Crops include wild varieties of brinjal, guava, mango, spinach, methi, millets, pulses, hyacinth beans and peas.
• Farmers and students are also trained by her for seed selection, enhancement of soil fertility, pest management and control.
• She is on BBC list of ‘100 women, 2018, along with 3 more Indian women.

By going through these Maharashtra State Board 12th Science Biology Notes Chapter 14 Ecosystems and Energy Flow students can recall all the concepts quickly.

Maharashtra State Board 12th Biology Notes Chapter 14 Ecosystems and Energy Flow

Introduction-

• Self-regulatory and self -sustaining structural and functional unit of biosphere.
• Consists of biotic and abiotic components.
• The term ecosystem was coined by Tansley.
• Ecosystems are of variable sizes from small pond to large ocean.
• Global ecosystem means entire biosphere.
• Two basic categories :
  (1) Terrestrial (forest, grassland, desert)
  (2) Aquatic (lakes, rivers, wetlands, estuaries)
• Also classified as natural ecosystem which is not based on any human inputs and artificial ecosystem which is dependent on man for constant inputs of energy or material.
• Dynamics of ecosystem : Input of ecosystem means productivity, transfer of energy in ecosystem is by a food chain, food web and nutrient cycling and output of ecosystem means degradation and energy loss.

Ecosystem-

1. Structure and function :

(1) Physical structure of ecosystem means the interaction of biotic and abiotic components in that ecosystem.

(2) Species composition of an ecosystem is understood by identification and enumeration of resident plant and animal species.

(3) Spatial pattern is the variation in ecosystem due to space. This is of two types, viz. stratification and zonation.

• Stratification : Vertical distribution of species of plants and animals at different levels. E.g. Trees, herbs, shrubs among plant species. Epipelagic, meso pelagic, bathypelagic and benthic among aquatic communities.
• Zonation : Horizontal distribution of plants and animals either on land or in water. E.g. Zonation in aquatic system : intertidal, littoral, sublittoral zones.
  Zonation in wetlands : Sub tidal channels, mudflats, Low marsh, high marsh

2. Functional aspects of ecosystem : Productivity, Decomposition, Nutrient cycling and Energy flow are the four functional aspects of any ecosystem.

(1) Productivity :

• Conversion of inorganic substances into organic material using solar energy by the autotrophs is called productivity. Consumption of autotrophs by heterotrophs.
• Solar energy is a must for any ecosystem for sustenance.
• Rate of generation of biomass in an ecosystem expressed as gram/sq. metre/ day.
• Gross primary productivity (GPP) : Rate of production of organic matter by photosynthesis.
• Net primary productivity (NPP) : Net
  Primary Productivity = Gross primary productivity – respiratory losses.
• NPP is available biomass which heterotrophs can use.
• Annual NPP of whole biosphere = 170 billion tons dry weight of organic matter. Ocean productivity = 55 billion tons.

Factors on which GPP depends :

• Resident plant species
• Availability of nutrients
• Photosynthetic capacity of plants
• Type of ecosystem

Secondary productivity : Rate of formation of new organic matter by consumers. This is available energy which is transferred to next trophic level.

(2) Decomposition :

• Breakdown of complex organic material and forming inorganic minerals from the dead matter is called decomposition.
• Detritus is raw material which is decomposed.

Factors regulating decomposition :

• Enough oxygen availability as it is an oxygen-requiring process.
• Chemical composition of detritus.
• Climatic factors.
• If detritus is rich in lignin and chitin the rate of decomposition rate is slower. If the detritus is rich in nitrogen and sugars the rate is faster.
• Most important factors for decomposition are temperature and soil moisture. These factors affect activities of soil microbes. In warm and moist environment decomposition is faster whereas in low temperature and in absence of oxygen, the decomposition is inhibited.

(3) Nutrient cycling : Storage and transport of nutrients.

(4) Energy flow : Flow of energy from producer to consumer in unidirectional way. Dissipation and loss of heat during energy flow is inevitable.

Energy flow –

1. The ultimate source of energy for all the globed ecosystems is sun. However, in deep sea hydrothermal ecosystem solar energy does not reach.
2.  Less than 50% of solar radiation that falls on the earth’s surface is photosynthetically active radiation (PAR). Only 2-10 % of PAR sustains the entire living world.
3. Plants and autotrophic bacteria fix solar radiant energy into complex carbohydrates while using simple inorganic materials. Plants thus are the producers that supply the energy in the form of food to consumers.
4. There is always unidirectional flow of energy ; from the sun to autotrophic producers and : then to heterotrophic consumers.
5. Second Law of thermodynamics operates for the ecosystems too. The universal tendency towards increasing disorderliness is always counteracted by producers and consumers.
6. Organisms in the ecosystem need a constant : supply of energy to survive and synthesise the : required molecules.
7. Major primary producers are herbaceous and woody plants in a terrestrial ecosystem. In an aquatic ecosystem primary producers are phytoplankton and algae.
8. Food chain/Food web : The chain or web formed due to interdependency among various organisms of the ecosystem is known as food chain.
9. Energy that is trapped into an organism keeps on flowing. Producers trap the energy and pass it further to a consumer. If the producer dies, the death of organism starts the detritus food chain/web.
10. All animals directly or indirectly depend on : plants to obtain their food. They cannot synthesise their own food so they are called ; heterotrophs or consumers.
11. Primary consumers : Consumers feeding directly on the producers are called primary consumers. For example, Herbivorous animals. Insects, birds and some mammals are herbivores or primary consumers in the terrestrial ecosystem and molluscs are primary consumers in aquatic ecosystem.
12. Secondary consumers : The animals consuming other animals are secondary consumers. For example, Carnivores. Primary carnivores are secondary consumers. Secondary consumers feed on primary consumers.
13. Tertiary consumers : Animals feeding on secondary consumers are called tertiary consumers.
    For example, in the food chain “Plant matter → Insect → Frog → Snake”, insect is primary consumer, frog is secondary consumer and snake is the tertiary consumer.
14. Food chains are of two types : Grazing food chain and detritus food chain.

(1) A simple grazing food chain (GFC) is shown as follows :

(2) The detritus food chain (DFC) is made up of decomposers. It starts with dead and decaying matter. Examples of decomposers are fungi and bacteria. Decomposers are also called heterotrophic saprotrophs. (sapro : to decompose). By degrading dead organic matter or detritus, decomposers meet their nutritional and energy requirements. Digestive enzymes of saprotrophs breakdown dead and waste materials into simple inorganic materials before their absorption which are subsequently absorbed by them.

(3) In an aquatic ecosystem energy flow occurs only through grazing food chains whereas in a terrestrial ecosystem, majority of energy flow occurs through the detritus food chain.

(4) There are interconnections between detritus i food chain and grazing food chain at some levels. Some organisms of DFC serve as prey & to the GFC animals. Some animals like cockroaches, crows, pig and mam, etc. are omnivores.

(5) The natural interconnection of food chains is called a food web.

15. Diagrammatic representations of trophic levels in an ecosystem

• At each successive trophic level, the amount of energy available goes on reducing. The trophic levels in any food chain transfer the energy when it is functioned.
• ‘10% Law’ of R. Lindermann, 1942 : The law states that ‘only 10% of the energy is transferred to each trophic level as net energy, from the previous trophic level’.
• Food chains are never in isolation, but are always interconnected to form food web for maintaining the stability of an ecosystem.

Ecological Pyramids-

1. Ecological pyramid is the expression drawn to indicate number, biomass or energy in an ecosystem.

2. The broad base and narrow apex of a pyramid rightly expresses the food or energy relationship within different trophic level. The producers or the first trophic level is shown as a base of each pyramid while the apex represents tertiary or top level consumer.

3. The three types of ecological pyramids are :

• Pyramid of number
• Pyramid of biomass and
• Pyramid of energy.

4. The calculations of energy content, biomass, or number include all organisms at that trophic level. Some organisms may occupy more than one trophic level simultaneously, e.g. A primary consumer sparrow can become secondary consumer when it feeds on insects. The trophic level thus represents a functional level and not a species as such.

5. All the pyramids, of number, of energy and biomass are upright in most of the ecosystems, i.e., producers always outnumber the consumers. Similarly biomass is more for producers than that of the herbivores. Herbivores or primary consumers outnumber carnivores. Energy at a higher trophic level is always less than energy at the lower trophic level.

6. Exceptions to pyramid structure :

• The pyramid of biomass in sea is also generally inverted as the biomass of fishes far exceeds that of phytoplankton.
• Many insects and birds thriving on a single huge tree will also show inverted pyramid of numbers.

7. When energy flows from a lower trophic level to the next trophic level, some energy is always lost as heat at each step. Therefore the pyramid of energy is always upright. It is never inverted. In the energy pyramid, the amount of energy in a given time and per unit area is shown by each bar.

8. Limitations of the ecological pyramids :

• Ecological pyramids do not take into account the same species belonging to two or more trophic levels.
• They are based on simple food chain. In nature simple food chains do not exist but all the trophic relationships are in the form of food web.
• Saprophytes play a major and vital role in the ecosystem but they are not shown in ecological pyramids.

9. C. Elton in 1927 developed the concept of ecological pyramids.

Nutrient cycles-

1. Nutrient cycling : Nutrient cycling or biogeochemical cycle is the movement of nutrient elements through various components of ecosystem.
2. Two types of nutrient cycles :

• Gaseous (nitrogen, oxygen and carbon) having reservoir in atmosphere.
• Sedimentary (Phosphorus, Sulphur) having Earth’s crust as reservoir.

3. Carbon Cycle : (Gaseous cycle)

• Five basic processes running the carbon cycle : Photos ynthesis, respiration, decomposition, sedimentation and combustion.
• Main component of all organic compounds in protoplasm is carbon.
• 49% of dry weight of organisms is carbon.
• Out of total global carbon, 71% carbon is present in oceans.
• Atmospheric Carbon dioxide regulation is done by oceanic reservoir.
• Long term storage places or sinks : Carbon which is a part of rocks and fossil fuels is called long tern storage of carbon.
• The fossil fuels from this sink when burnt, releases carbon dioxide into atmosphere.
• Elemental carbon found in seawater, atmosphere, – limestone, coal, soil and in living beings.
• Moment of carbon dioxide from atmosphere to plants is through photosynthesis.
• Carbon dioxide given out through plants and animals during respiration.
• Carbon also moves along the food chains.
• Carbon dioxide is released into atmosphere by decomposers during decomposition! process of organic matter on land and in oceans.
• Burning of fossil fuels in industries and for vehicular traffic releases carbon dioxide.
• 5.5 billion tonnes of carbon released in atmosphere, of these 3.3 billion tonnes stay in atmosphere and rest dissolves in seawater and gets deposited as calcium or magnesium carbonate compounds used for forming marine animals’ shells.
• Forest fires, volcanic activities are other natural sources releasing carbon dioxide.
• Anthropogenic activities such as deforestation and excessive burning of fossil fuel has tremendously increased amount of carbon dioxide in atmosphere.

4. Phosphorus cycle : (Sedimentary cycle)

• Phosphorus cyclically moves through hydrosphere, lithosphere and biosphere.
• It is a major constituent of biological
  membranes, nucleic acids and cellular energy transfer systems. .
• Animals require large quantities of phosphorus to make shells, bones, hooves and teeth.
• The natural reservoirs are rocks containing phosphates.
• Weathering of rocks release minute amounts of phosphates in soil solution which is needed by plants.
• Herbivores and other animals get phosphorus through plants.
• Decomposition of waste products and the dead organisms by phosphate-solubilizing bacteria release phosphorus.
• Phosphorus is always in short supply, thus acts as a limiting factor for the plant growth.
• Eutrophication : Eutrophication is the sudden influx of phosphorus in water bodies due to agricultural runoff or industrial effluents which are rich in phosphate content.
• Eutrophication causes overgrowth of algae which kills or harms the aquatic life

Ecological succession-

1. Ecological succession : The gradual and fairly predictable change in the species composition of a given area is called ecological succession. It is a community response to the environment over time.

2. All communities constantly change their composition and structure in accordance with the changing environmental conditions. This change is orderly and sequential, parallel with the changes in the physical environment.

3. Climax community : Community that is in near equilibrium with the environment after the ecological succession.
The change is sequential and environmentally regulated in climax community.

4. Process of succession involves following sequential steps :

• Nudation
• Invasion
• Ecesis
• Aggregation
• Competition and co-action
• Reaction and stabilization.

Learn This As Well :
1916, Frederic Clements published a descriptive theory of succession which is called classical ecological theory. His theory of succession had a powerful influence on ecological thought. He has given following phases of succession :

• Nudation : Nudation is disturbance. Succession begins with the development of a bare site.
• Migration : The tiny seeds or propagules arrive during this phase.
• Ecesis : Ecesis is the establishment and initial growth of vegetation.
• Competition : When vegetation becomes well-formed and established, it grows and competes with other species for space, light and nutrients.
• Reaction : Autogenic changes such as the build-up of humus affect the habitat, and one plant community replaces another during this phase.
• Stabilization : The community which is better, becomes stable forming a Climax community.

5. Some populations become more numerous, whereas some populations decline and even disappear during the succession. Newer species also colonise the areas.

6. Sere : Sere is the entire sequence of communities that successively change in a given area. Serai stages or serai communities are the individual transitional communities in this sere.

7. Following changes take place in the successive serai stages :

• Change in the diversity of species of organisms,
• Increase in the number of species and organisms,
• Increase in the total biomass.

8. Similar succession is said to have taken place in past over millions of years forming the present day global communities. Succession and evolution were the parallel processes in the past and also at the present.

9. Succession is of two types, viz. Primary succession and secondary succession.

Primary succession : It is the process that starts where no living organisms are there, e.g. bare rock, newly cooled lava, newly created pond or reservoir. The primary succession is very slow process of establishment of a new biotic community. Factors such as soil, climatic conditions, etc. The natural processes that take place for thousands of years till the new community is established.

Secondary succession : It occurs in areas where all life forms were lost that existed before. It begins in places like abandoned farmlands, burned or cut forests, lands that have been flooded, etc. Secondary succession is faster as some abiotic factors such as soil or sediment are already present there.

10. Ecological succession usually focuses on changes in vegetation. But when the vegetation changes, it in turn affects various types of animals as animals are dependent on plants for their food and shelter.

11. Therefore, with process of succession the numbers and types of animals and decomposers also show change.

12. Natural or human induced disturbances (fire, deforestation, etc.), in a normal succession pattern can convert a particular serai stage of succession to an earlier stage or create new conditions that encourage some species and eliminate other species.

13. Succession of Plants :

• Succession of plants can be of hydrarch (in wet areas) or xerarch (in very dry areas) based on the nature of the habitat.
• In hydrarch succession, successional series progress from hydric to the mesic conditions.
• In xerarch succession, successional series progress from xeric to mesic conditions.
• Both hydrarch and xerarch successions lead to mesic (medium water) conditions but neither too xeric nor too hydric.

14. Pioneer species : The species that initially invade a barren area is called pioneer species.

Ecosystem Services-

1. Ecosystem services: Ecosystem services are the products of ecosystem and processes which comprise of economic, environmental, aesthetic goods and services.
2. Millennium ecosystem assessment report 2005 as given definition of ecosystem services as follows ecosystem services is dcfincd as benefits which are obtained by people from ecosystem.
3. There are four types of ecosystem services:

4. Main important ecological services on earth without which life would not have been possible:

• FIxation of atmospheric CO₂ and release of O₂, by photosynthesis and intake of oxygen and release
  of CO₂ in respiration.
• Pollination of plants brought about by wind, water or other blotic agencies.
• MaintaIning biodiversity.

By going through these Maharashtra State Board 12th Science Biology Notes Chapter 13 Organisms and Populations students can recall all the concepts quickly.

Maharashtra State Board 12th Biology Notes Chapter 13 Organisms and Populations

Introduction-

• Ecology : Ecology is a study of the interactions : among organisms and between the organisms and their physical (abiotic) environment.
• E. Haeckel introduced this term. Reiter used the term ecology for the first time.
• Four sequential levels with increasing complexity of ecological (biological) organizations are organism, Populations, Communities and Biomes.
• Organism : Individual which is the basic unit of ecological hierarchy is called organism.
• Population : Organisms of same kind inhabiting a geographical area is called population.
• Community : Several populations of different species in a particular area makes a community.
• Land biome : A large regional terrestrial unit : delimited by a specific climatic zone with typical major vegetation and associated fauna.

Organisms and the environment-

1. In ecology organismic level consists of its physiology, ways of adaptation to the surrounding environment, survival techniques and propagation, etc.

The rotation of earth along with its tilted axis, cause seasons. Due to seasons there are rain and snow which demarcate the major biomes of the earth. E.g. desert, tropical rain forest, temperate forest, coniferous forest, grassland, tundra, etc. are six major terrestrial biomes.

Biomes → Habitats → Biotic components. E.g. plants, pathogens, parasites and predators.

3. Ethology : Study of behaviour of animals in relation to their environment is ethology. The term was coined by Hilaire. Term popularised by W. M. Wheeler.

4. Bionomics : The study of relation between. organisms to their environment is called bionomics. Lankester (1890) coined this term.

5. Environmental biology (Modern ecology) : Study of functional or physiological interrelationships between the organism and their surroundings. G. L. Clarke (1964) and Odum (1969) introduced this term.

6. Biosphere : All the ecosystems on earth constitute biosphere.

7. Habitat and Niche :

• Habitat : Place or area where a particular  species lives is called habitat.
• Factors deciding presence of organisms in a particular habitat : Sunlight, average : rainfall, annual temperatures, type of soil, topographic factors, etc.
• Types of habitats : Arboreal, terrestrial, aerial, aquatic, etc.
• Microhabitat : Small part of the habitat which forms immediate surrounding of an organism.
• Niche : The functional role played by an organism in its environment is called niche. Term given by J. Grinnell. Niche includes various aspects of the life of an organism like diet, shelter, and its link with physical and biological environment.
• Habitat is a postal address while niche is the profession of organism.

(7) Types of niche :

Major Abiotic Factors –

1. Key abiotic factors : Ambient temperature, availability of water, light and type of soil.

(1) Temperature :

(i) Ecologically relevant environmental factors showing seasonal variations.

• Progressive decrease of the temperature from the equator towards the poles and from plains to the mountain tops.
• In polar areas and at high altitude : below zero °C.
• Tropical deserts : more than 50 °C in summer.
• In thermal springs : 80 to 100 °C.
• In deep sea hydrothermal vents : about 400 °C.

(ii) Distribution of animals and plant species is mainly dependent on the ambient temperature. Animals are geographically distributed according to their levels of thermal tolerance.

(iii) Temperature can affect the kinetics of enzymes in the body and thus alter the basal metabolism, organism’s activity and other physiological functions.

(iv) Eurythermal : Organisms that can tolerate and thrive in a wide range of temperature fluctuations are called eurythermal.

(v) Stenothermal : Organisms restricted to a narrow range of temperatures are called stenothermal.

(2) Water :

• Water is the second most important factor influencing the life of organisms.
• Life on earth originated in water and can sustain only due to water.
• Availability of water changes according to geographical regions. It also decides the productivity and distribution of plants.
• Even for aquatic organisms the chemical composition and pH of water are important qualities.

Salinity or the Salt concentration : Unit of salinity is parts per thousand. (%o)

• Inland waters : Salinity is less than 5%o.
• Sea : 30 – 35 %o
• Hypersaline lagoons : 100%o
• Euryhaline : Organisms that can tolerate wide range of salinities.
• Stenohaline : Organisms that Eire restricted to a narrow range of salinity.
• Many freshwater animals cannot live for long in sea water and vice versa because of the osmotic problems they would face.

(3) Light :

• Sunlight is the ultimate source of energy. Photosynthesis depends upon the availability of sunlight. Hence for autotrophs it is a very essential abiotic factor.
• Species of herbs and shrubs growing in forests are adapted to photosynthesis even under very low light conditions because they are constantly under a canopy of tall trees.
• Flowering of plants is dependent on sunlight to meet their photoperiodic requirement of the plants.
• In animals the diurnal and seasonal rhythms are dependent on the sunlight. Foraging, reproductive and migratory activities of animals depend upon photoperiod.
• The availability of light on land is closely linked with that of temperature since the sun is the source for both.
• In oceanic depths (> 500m) the environment is perpetually dark and its inhabitants are well adapted to this dark life. They are carnivorous.

(4) Soil :

• Climate of a place determines the nature and properties of the soil.
• The weathering process, type of soil (sedimentary or transported), pattern of soil development, soil composition, grain size differs from place to place. Therefore, the soil characteristics are also varied.
• The percolation and water holding capacity of the soils depend upon the soil composition, aggregation of particles and grain size.
• The vegetation in many areas is dependent upon soil parameters such as pH, mineral composition and topography. Based on these characteristics the vegetation and the faunal pattern is seen.
• The sediment-characteristics in the aquatic environment, determine the type of resident benthic animals.

2. Types of organisms according to abiotic factors : The abiotic factors change due to diurnal and seasonal variations. For survival, organisms adapt to these variations in the following four ways. By these mechanisms they maintain homeostasis or steady internal state.

Adaptation-

1. Adaptations enable the organism to survive and reproduce in its habitat.
2. Adaptations are of following types :

(1) Physiological adaptations : Thermoregulation and Osmoregulation.
(2) Behavioural adaptations :

• Migration
• Hibernation and aestivation
• Behavioural responses to cope with variations in their environment.
• Desert lizards → bask in the sun and absorb heat when temperature is cold. → move into shade → when the ambient temperature is more.
• Burrowing into the sand for escaping heat.

(3) Morphological adaptations :

• Desert plants : Thick cuticle on leaf surfaces, sunken stomata → minimizing loss of water through transpiration. CAM → Crassulacean acid metabolism pathway of photosynthesis. Modified leaves to spines, flattened green stems performing photosynthesis.
• Mammals from cold climate region : Shorter snout, ears, tail and limbs to minimize the loss of body heat (Allen’s Rule).
• Aquatic polar mammals → thick layer of blubber below their skin → insulator → minimize loss of body heat.

Population-

1. Population : Group of organisms in a well- defined geographical area which shares or competes for similar resources and which potentially interbreed with each other is called population. At the population level natural selection operates and desired traits are evolved.

2. Population ecology : An important area of ecology that links ecology to population dynamics, genetics and evolution.

3. Population attributes : Basic physical characteristics of population are called population attributes.

(1) Natality : Birth rate of a population.

• Crude birth rate : Used for calculating population size (number of births per 1000 population/year).
• Specific birth rate : Used when a specific criterion such as age has to be considered.
• Absolute Natality : The number of births under ideal conditions when there is no competition and resources such as food and water, etc. are abundant.
• Realized Natality: The number of births when environmental pressures are operating on the population.

(2) Mortality : Death rate of a population.

• Absolute Mortality : Number of deaths under ideal conditions when there is no competition and resources, like food and water are abundant.
• Realized Mortality : Number of deaths when environmental pressures are operating on the population.
  Absolute mortality will always be less than realized mortality.

(3) Sex ratio : The ratio of the number of individuals of one sex to that of the other sex is sex ratio. Birth, death, immigration and emigration, etc. affect sex ratio.

Evolutionary stable strategy (ESS) : The males and females of a population should be in a ratio of 1 : 1.

(4) Age distribution and Age pyramid : Age pyramid is the figure plotted for a population to show age distribution. Age distribution is done in following way : Pre-reproductive (0-14 years), Reproductive (15-44 years) and Post-reproductive (45-85+ years).

(5) Population size or population density (N) : Population density is the number of individuals present per unit space in given time. Population’s status in the habitat indicate population size. The biomass is also more meaningful measure of the population size.

(6) Population Growth : The size of a population keeps changing with time, depending on various factors including food, predation pressure and adverse weather.

Density of population in a habitat during a given period, fluctuates due to changes in four basic processes : (i) New births (ii) Immigration (iii) Deaths (iv) Emigration.
Of these new births and immigration increase the population growth while deaths and emigration decrease population growth.

(7) Immigration (I) : Number of individuals of the same species that enter the habitat from elsewhere during specific time period under consideration.

(8) Emigration (E) : It is the number of individuals of the population who leave the habitat during specific time period.

So, if N is the population density at time ‘t’, then its density at time ‘t + 1′ can be calculated
as, Nt + 1 = Nt + [(B + I) – (D + E)]

4. Growth Models :

• Exponential growth.
• Logistic growth
• Verhulst-Pearl Logistic Growth : A plot of N in relation to time (t) results in a sigmoid curve. This type of population growth is called Verhulst-Pearl Logistic Growth.
• Since resources for growth of most animal populations are finite and become limiting sooner or later, the logistic growth model is considered as a more realistic one.

Population Interactions-

1. Interactions are of two types in the living species :

• Intraspecific : Interaction existing between organisms of same species’ population.
• Interspecific : Interaction between members of different species.

2. Classification of population interactions :

(3) Gause’s ‘Competitive Exclusion Principle’ :

• This principle states that two closely related species competing for the same resources cannot co-exist indefinitely and the competitively inferior one will be eliminated eventually.
• The Gause’s principle may be true if resources are limiting, but not otherwise. More recent studies do not support such gross generalisations about competition.

Important information :

• Instrument used to measure the height of forest trees is called hypsometer.
• World Environment day : 5th June
• World Population day : 11th July
• World Earth day : 22nd April
• World Ozone day : 16th September

By going through these Maharashtra State Board Organisation of Commerce and Management 11th Notes Chapter 8 Introduction to Management students can recall all the concepts quickly.

Maharashtra State Board Organisation of Commerce and Management 11th Notes Chapter 8 Introduction to Management

Management-
Managerial → Derived from Italian words

• Manus – hand
• agere – to act

Meaning and Definition:

• Mary Parker Follet: “ Management is an art of getting things done through others”.
• Henry Fayol : “ To manage is to forecast and plan, to organize, to command, to co-ordinate and to control”.
• Fedrick Winslow Taylor : “ Management is knowing exactly what is to be done and seeing that it is done in the best possible manner*’.
• George Terry : “Management is the process consisting of planning, organizing, actuating and controlling, performed to determine and accomplish the objectives by the use of people and resources. ”

Characteristics of Management-

1. Management is Dynamic
2. Management is Inborn Quality
3. Management is a Social Process
4. Management is a Continuous Process
5. Management is Different from Ownership
6. Management is Intangible
7. Management is Situational
8. Management is Goal Oriented
9. Management is Universal
10. Management is a Group Activity

Level of Management-

• Top – Board of Directors, President, Chief Executive Officer, Managing Directors, etc.
• Middle – Functional Managers i.e. Finance Manage, Production Manager, Sales Manager, etc.
• Lower – Superintendents, Supervisors, Foremen, etc

Functions of Top Level Management-

1. Long term objectives
2. Frame the plans and policies
3. Implementation of policies
4. Create various epartments and positions
5. Appoint head, or Incharge, managers to carry out activities
6. Evaluate the performance of various departments.
7. Implementation of policies Functions of Middle Level Management

Functions of Middle Level Management-

1. link between top and lower level management
2. understand plans and policies framed by top management
3. prepare action plan according to the goals to achieve
4. assign duties and responsibilities to the staff
5. to train the staff for carrying out activities
6. appoint lower level staff
7. give timely report to top level management and co-ordinate departmental activities

Functions of Lower Level Management-

1. work as per instructions from middle level management /In charge
2. assign work to the subordinates
3. give instructions to subordinates
4. direct the subordinate (if necessary)
5. solve the Problems and disputes of subordinates.
6. look after repairs and maintenance of machinery, tools and equipments, etc.
7. conduct quality check of the product or service from time to time.

Management as an Art

• “Art is the bringing about a desired result through the application of skills”

Relation Between Art And Management

1. Personal Skills: Solve the resource problems by individual way
2. Creativity: Ability to find new ideas, according to changes in business situation.
3. Regular Practice: Use of different techniques and skills to deal with different people, different situations, different organizations.
4. Personal Abilities: Ability to co-ordinates the activities and guide people.

Management as a Science-

• Science refers to a systematically organized body of knowledge based on proper findings and
  exact principles and is capable of verification.

Relation Between Science And Management

1. Systematic body of Knowledge: Management Principles are based on experiments conducted through management theories and approaches
2. Use of Scientific Method of Observation: Management uses systematic methods of data collections, verification, analysis, interpretation and on this basis taking decisions.
3. Cause and Effect relationship: Management theories are also based on Cause and Effect relationship
4. Universal Applicability of Principles: Principles of Management are universal applied in any condition and situation

Management as a Profession-
A profession may be defined as an occupation backed by specialised knowledge and training and to which entry is regulated by a representative body and duly recognized by the society.

Relation between profession and Management

1. Formal Education: Formal management diploma or degree with training from management from school to work professionally
2. Code of Conduct: Managers have to follow code of conduct based on customs and traditions
3. Expertise: Manager is an expert in practicing his or her knowledge and skill
4. Registration: Managers can take the membership of Chambers of Commerce
5. Restricted Entry: No such compulsion for a manager

Word Meaning:

ancient – in early time; essential – necessary; indispensable – necessary; never ending – endless; creative
– having good imagination; optimum – maximise; techniques – method; exhaustive – complete; character – nature / personality; universal – in general; adaptation – accept tq change; procurement – to obtain; dynamic
– constant change; evaluation – to assess / to judge; static – fixed; forecast – to predict; systematic – in order / well arranged; vision – planning about future goals; utilization – effective use of something; mission – assignment; synchronization – activity of two or more things at same time; evaluate – to assess; purposeful – determined; implementation – to execute; guidance – to instruct / to direct; supervisory – to direct someone; intangible – not physically seen or touched; inherent – built in; continuity – in progression / without a break; context – with reference to topic; innovativeness – new ideas; qualitative – relating with quality; inborn – from birth; backed by – supported; skill – capability; regulated – to control; consistent – stable; practice – to use; organized – arranged in proper way; irrespective – no matter what; findings – to discover; formal education – process of education completed in school and colleges; verification – to find validity of something; stimulate – to encourage; principles – essential; functions – results; theories – judgement / beliefs; approaches – method; conclusions – opinion / judgement; analysis – to investigate / to inspect; interpretation – to review; motivate – to inspire; quantitative – related with numbers.

By going through these Maharashtra State Board 12th Science Biology Notes Chapter 12 Biotechnology students can recall all the concepts quickly.

Maharashtra State Board 12th Biology Notes Chapter 12 Biotechnology

Biotechnology-

1. Biotechnology is defined as ‘the development and utilization of biological forms, products or processes for obtaining maximum benefits to man and other forms of life.
2. The term biotechnology was first used by Karl Ereky in 1919 to describe a process for the large-scale production of pigs.
3. According to OECD (Organization for Economic Cooperation and Development, 1981) -‘Biotechnology is the application of scientific and engineering principles to the processing of materials by biological agents to provide goods and service to the human welfare’.
4. Two phases of the development of biotechnology in terms of its growth :

• Traditional or old biotechnology: Based on fermentation technology using microorganisms as in the preparation of curd, ghee, soma, vinegar, yogurt, cheese making, winemaking, etc.
• Modern or new biotechnology: Based on –
  • The use of rDNA technology, polymerase chain reaction (PCR), microarrays, cell culture, cell fusion, and bioprocessing to develop specific products.
  • Ownership of technology and its socio-political impact.

Principles and Processes of Biotechnology-

1. Two core techniques of modem biotechnology :

(1) Genetic engineering :

(a) Manipulation of genetic material towards the desired end and in a directed and predetermined way, using in vitro process.

(b) Definition of genetic engineering (By Smith): ‘The formation of a new combination of heritable material by the insertion of nucleic acid molecule produced by whatever means outside the cells, into any virus, bacterial plasmid or another vector system so as to allow their incorporation into a host organism in which they do not occur naturally but in which they are capable of continued propagation.

(c) Genetic engineering is also called recombinant DNA technology or gene cloning, as it involves alterations in DNA.

(2) Chemical engineering: Maintaining a sterile environment for manufacturing of useful products like vaccines, antibodies, enzymes, organic acids, vitamins, therapeutics, etc.

2. Different techniques and instruments (devices) for gene cloning/r-DNA technology :

(1) The techniques used in rDNA technology, on the basis of molecular weight: Gel
permeation, osmotic pressure, ion-exchange chromatography, spectroscopy, mass spectrometry, electrophoresis, etc.

(2) Electrophoresis :

• It is used for the separation of charged molecules like DNA, RNA, and proteins, by application of an electric field.
• Different types of electrophoresis: Agarose gel electrophoresis, PAGE, SDA PAGE.

(3) Polymerase chain reaction (PCR) :

• It was discovered by Kary Mullis in 1985.
• Uses of PCR : In vitro gene cloning or gene multiplication to produce a billion copies of the desired segment of DNA or RNA, with high accuracy and specificity, in few hours.
• Requirements of PCR : Thermal cycler, DNA containing the desired segment to be amplified, deoxyribonuclueoside triphosphates (dNTPs), excess of two primer molecules, heat stable DNA polymerase and appropriate quantities of Mg⁺⁺ ions.
• Three essential steps : Denaturation, annealing of primer and extension of primer.

3. Biological tools for gene cloning/r-DNA technology :
(1) Enzymes :

• Lysozymes, Nucleases (exonucleases, endonucleases, restriction endonucleases), DNA ligases, DNA polymerases, alkaline phosphatases, reverse transcriptases, etc.
• Nucleases : They cut the phosphodiester bonds of polynucleotide chains.
• Types of nucleases :
  • Exonucleases : They cut nucleotides from the ends of DNA strands.
  • Endonucleases : They cut DNA from within.

Restriction endonucleases or restriction enzymes :

• They are the molecular scissors which recognize and cut the phosphodiester back bone of DNA on both strands, at highly specific sequences.
• The 4 to 8 nucleotide long sites recognized by them are called recognition sequences or recognition sites.
• Types of restriction enzyme :
  • Type I : They fuction simultaneously as endonuclease and methylase e.g. EcoKI.
  • Type II : They have separate cleaving and methylation activities e.g. EcoRI, Bgll. They cut DNA at specific sites within the palindrome.
  • Type III : They cut DNA at specific non-palindromic sequences e.g. Hpal, MboII.
• Restriction cutting may result in DNA fragments with blunt ends or cohesive or sticky ends or staggered ends (having short, single stranded projections).

Table : Source and recognition sequences of various restriction enzymes :

(2) Cloning vectors (vehicle DNA) :

• Vectors are DNA molecules that carry a foreign DNA segment and replicate inside the host cell.
• Examples of vectors : Plasmids (e.g. Ti plasmid of Agrobacterium tumejaciens, pBR 322, pUC), bacteriophages (e.g. M13, lambda virus), cosmid, phagemids, BAC (bacterial artificial chromosome), YAC (yeast artificial chromosome), transposons, baculoviruses and MACs (mammalian artificial chromosomes).

(3) Competent host: e.g. bacteria like Bacillus Haemophilus, Helicobacter pyroli and E. coli.

Methodology for r-DNA technology-

1. The steps involved in gene cloning :

• Isolation of DNA (gene) from the donor organism.
• Insertion of desired foreign gene into a cloning vector (vehicle DNA).
• Transfer of r-DNA into suitable competent host or cloning organism.
• Selection of the transformed host cell.
• Multiplication of transformed host cell.
• Expression of the gene to obtain desired product.

2. Gene library :

(1) Gene library is a collection of different DNA sequences from an organism where each sequence has been cloned into a vector for ease of purification, storage and analysis.

(2) Types of gene library :

• Genomic library : It is a collection Of clones that represent the complete genome of an organism.
• c-DNA library : It is a collection of clones containing cDNAs inserted into suitable vectors like phages or

Applications of Biotechnology-

1. Healthcare Biotechnology :

(1) It involves unique, targeted and personalized therapeutic and diagnostic solutions for organ transplant, stem cell technology, genetic counselling, forensic medicine, gene probes, genetic fingerprinting and karyotyping.
(2) Human insulin production using r-DNA technology.
(3) Vaccine production :

• Recombinant vaccines, naked DNA vaccines, viral vector vaccines and plant- derived vaccines are found to be most effective against various diseases.
• Modern diagnostic test kits include rickettsial, bacterial and viral vaccines along with radio-labelled biological therapeutics for imaging and analysis.
• Oral Vaccines.

Proteins produced by r-DNA technology	Disorders
Factor VIII	Haemophilia A
Factor IX	Haemophilia B
Erythropoeitin	Anaemia
Tissue plasminogen activator (TPA), Urokinase	Blood clots
Platelet derived growth factor	Atherosclerosis
Hepatitis B vaccine	Hepatitis B
Interleukin-1 -receptor	Asthma
a Antitrypsin	Emphysema
Interferons, Tumour necrosis factor, interleukins, macrophage activating factor	Cancer
Insulin	Diabetes
Relaxin	Parturition

2. Agriculture :

(1) Application of biotechnology in agriculture : Genetically modified organisms, Bt Cotton, pest resistant plants, improvement in the agricultural productivity.
(2) Applications of tissue culture :

• Micropropagation i.e. large-scale propagation of plants in very short durations.
• Storage of germplasm and maintaining clone of plants which produce recalcitrant seeds or highly variable seeds. Recalcitrant seeds are those whose survival and viability gets affected because of dehydration and freezing.

3. Gene therapy :

(1) Gene therapy is the treatment of genetic disorders by replacing, Elitering , or supplementing a gene that is absent or abnormal Eind whose absence or abnormality is responsible for the disease.

(2) Genes can be delivered by three ways, viz. Ex vivo delivery, in vivo delivery and use of virosomes (Liposome + inactivated HIV) and bionic chips.

(3) Forms of gene therapy :

• Germ line gene therapy and
• Somatic cell gene therapy.

4. Genetically Modified Organisms (GMOs) :

(1) Genetically modified orgEinisms are those whose genetic material has been artificially manipulated in a laboratory through genetic engineering to create combinations of plant, animal, baetericil and virals genes that do not occur in nature or through traditional crossbreeding methods.

(2) Transgenic Plants : Transgenic plants have been developed for :

• Insect pest resistance : e.g. Bt cotton and Transgenic tobacco.
• Biofortification : Improvement in quantity and quality of vitamin, proteins, oil and iron.

• Tolerance to abiotic stresse and herbicides.
• Resistance to various diseases.
• Improvement in post-harvest characteristics : e.g. Flavr savr tomatoes.

(3) Plants are potential factories or bioreactors for :

• Biochemicals (starch, sugar, lipids and proteins) and biopharmaceuticals (hormones, antibodies, vaccines, drugs or enzymes) isolated from transgenic plants.
• Fine chemicals, perfumes and adhesive compounds.
• Industrial lubricants.
• Biodegradable plastic.
• ‘Renewable’ energy crops to replace fossil fuels.
• ‘Superglue’
• Edible vaccines

(4) Transgenic animals : Transgenic animals are the animals in which there has been a deliberate modification of the genome and such animlas are used in various fields such as medical research, toxicology, molecular biology and in pharmaceutical industry.

• Transgenic mice : Used in cancer research.
• Transgenic fish : Developed for increased cold tolerance and improved growth.

Transgenic farm animals :

(i) The main objectives for developing transgenic animals are to improve quality and quantity of milk, meat and wool, to increase egg production, to develop disease resistant animals, production of low-cost pharmaceuticals and biologicals.

(ii) Transgenic farm animals include transgenic cattle (developed for food production and human therapeutic production), transgenic sheep (developed for production of better quality and quantity of wool and meat. They are also used as bioreactors), transgenic pigs (developed for improved meat production, as bioreactors and they are useful in human transplants – xenotransplantation) and transgenic chicken (developed for having traits like lower levels of fat and cholesterol, high protein containing eggs, in vivo resistance to viral and coccidial diseases, better feed efficiency and better meat quality).

Bioethics-

Ethics deals with the matters related to socially acceptable moral duty, conduct and judgement. It helps to regulate the behaviour of community by certain set of standards.

1. Bioethics helps to study moral vision, decision and policies of human behaviour in relation to biological phenomena or events.
2. It deals with wide range of reactions on new developments like :

• r-DNA technology, cloning, transgenics and gene therapy.
• In vitro fertilization, sperm bank, prenatal genetic selection and eugenics.
• Euthanasia, death, maintaining those who are in comatose state.
• Use of animals causes great sufferings to them.
• Violation of integration of species caused due to transgenosis.
• Transfer of human genes into animals and vice versa.
• Indiscriminate use of biotechnology poses risk to the environment, health and biodiversity.

3. Bioethical concerns related to GMO :

• The effects on non-target organisms,
• Insect resistance crops,
• Gene flow
• The loss of diversity as well as the issue on
• Modification process disrupting the natural process of biological entities.

4. Ethics in biotechnology also includes the general subject of what should and should not be done in using recombinant DNA techniques.

Effects of Biotechnology on the Environment-

1. Herbicide Use and Resistance :

• Unintended hybrid strains of weeds and other plants can develop resistance to these herbicides through cross-pollination, thus negating the potential benefit of the herbicide.
• E.g. Crops of Round Up-ready soybeans have already been implemented into agricultural practices, possibly conferring Round Up resistance to neighbouring plants.

2. Effects on Untargeted Species :

• Bt corn has adverse effects on untargeted species like Monarch butterfly.
• GM plants can also have unintentional effects on neutral or even beneficial species.

Effects of Biotechnology on Human Health-

• Allergies : e.g. Transgenic soyBean containing a gene from the Brazil nut to increase the production of methionine, has caused allergic reactions in those with known nut allergies (Biotech SoyBeans).
• Long-Term Effects : GMO technology is a recent development and its long-term effects on health cannot be anticipated now.
• New Proteins : Proteins which were never ingested before, can have potential effects which are not yet known.
• Food Additives : The use of GMOs may create antibiotic and vaccine-resistant strains of diseases.
• The Indian Government has set up the Genetic Engineering Approval Committee (GEAC) to make decisions regarding the validity of research involving GMOs and addresses the safety of GMOs introduced for public use.

Biopatent and Biopiracy-

Patent is a special right granted to the inventor by the government.
A patent consists of three parts – grant (agreement with the inventor), specification (subject matter of invention) and claims (scope of invention to be protected).

1. Biopatent :

• Biopatent is a biological patent awarded for strains of microorganisms, cell lines, genetically modified strains, DNA sequences, biotechnological processes, product processes, product and product applications.
• Biopatent allows the patent holder to exclude others from making, using, selling or importing protected invention for a limited period of time.
• First biopatent : Genetically engineered bacterium ‘Pseudomonas’ used for clearing oils spills.

2. Biopiracy:

(1) Biopiracy is defined as ‘theft of various natural products and then selling them by getting patent without giving any benefits or compensation back to the host country’.
(2) It is unauthorized misappropriation of any biological resource and indigenous knowledge.
(3) Examples of Biopiracy :

• Patenting of Neem (Azadirachta indica)
• Patenting of Basmati
• Patenting of Haldi (Turmeric)

By going through these Maharashtra State Board Book Keeping & Accountancy Notes 12th Chapter 3 Reconstitution of Partnership (Admission of Partner) students can recall all the concepts quickly.

Maharashtra State Board 12th Accounts Notes Chapter 3 Reconstitution of Partnership (Admission of Partner)

Meaning of Reconstitution of Partnership-

To reconstitute means to form or create it again. Accordingly reconstitution of partnership means to change the earlier relationship and form a new relationship between or among the partners. It refers to the change in the form of partnership due to making of new agreement by the partners. Such reconstitution of partnership takes place on account of admission of a new partner or retirement or death of existing partner.

Different forms of reconstitution : The different forms of reconstitution of partnership are stated
below :

(1) Change in profit-sharing of existing partner : Sometimes due to certain circumstances, existing partners may decide to change their profit and loss ratio. If one of the partners purchases certain profit sharing ratio from another partner, the old partnership deed may get terminated and new agreement comes into force stating the new profit sharing ratio.

(2) Admission of a new partner : If need arises a new person may be admitted into the partnership firm with the consent of all the existing partners. On admission, new partner becomes a new owner of the firm. He is required to bring in his share of capital and goodwill and is entitled to share in future profit. Hence, partnership agreement changes.

(3) Retirement of existing partner : On account of old age, continuing ill health or by sweet will an existing partner may retire from the partnership firm. He is called outgoing partner. Partnership firm is required to pay all his dues on retirement. The profit sharing ratio of continuing partners increases due to reduction in the number of partners.

(4) Death of partner : When a partner dies, he no more remains as partner of a firm. On natural ground he ceases to be partner of a firm. On death of a partner, the profit sharing ratio of continuing partners get changed and old partnership agreement gets terminated.

Admission of a Partner-

As per the Section 31(1) of the Partnership Act, 1932, if need arises, with the consent of all the i
existing partners a new person can be admitted in the partnership firm. Such a partner is called incoming
partner. :

Meaning and Need of admission of a partner:

Meaning : Admission of a partner refers to a process in which a new person is taken into the existing partnership firm as a partner as per certain terms and conditions of partnership deed.
On admission, a new partner brings in cash for his share of capital and goodwill, skill, services, experience, etc. into the existing partnership business and in exchange he gets certain share in future profit of the firm and right in the assets of the firm.

Need : The need of admission of a partner is stated as follows :

• To increase the capital resources of the firm and :
• To secure the advantages of the new person’s skill, experience and business connections to develop efficiency of the business.

Capital brought in by new partner : At the time of admission, new partner is required to bring .
in cash or/and other assets, if any, as his capital, to get rights in the assets and definite share in the future profit of the firm.

When a new partner brings in cash towards his share of capital, the following journal entry is passed :

In case a new partner brings in other assets towards his capital the following journal entry is ;
passed :

New profit sharing ratio : In all cases of admission of a partner, the new partner gets the agreed share in the future of profit whereas all the old partners together get the remaining share. As a result profit sharing ratio of existing (old) partners changes and newly constituted firm is required to calculate new profit sharing ratio for all the partners including new partner. Such new ratio is used by the firm to write off goodwill and to make adjustments in Capital Accounts of the Partners.

New Ratio is calculated by using following formula :
Assume that total profit be 1, The Balance of 1 = (1 – share given to new partner).
New Ratio = (Balance of 1) x Old Ratio.
If sacrifice ratio of old partners is given along with old ratio, the new ratio can be calculated as
→ New Ratio = Old Ratio – Sacrifice Ratio.

Sacrifice ratio : Sacrifice ratio is the ratio in which two or more old partners surrender or give up their shares in the future profit in favour of a new partner of the firm. Sacrifice ratio is calculated by using the following formula :
Sacrifice Ratio = Old Ratio-New Ratio

Meaning of Goodwill-

It is often observed that some business firms are in a position to earn higher profit in comparison to other firms dealing in the similar line of products. This extra earning capacity of a business firm is called goodwill. In other words, Goodwill is the monetary value of the reputation of a firm as measured in terms of its expected future profits. In the words of Lord Macnaghten, Goodwill is “the benefits and advantages of the good name, reputation and connections of the business.

According to Institute of Chartered Accountants of India, Goodwill is “an intangible asset
arising from business connection or reputation or trade name of an enterprise. ” Goodwill is built up slowly and gradually by a business concern through great efforts over a long period of time.
The factors on which the value of goodwill depends are : (1) monopoly enjoyed by the business (2) its continued prosperity (3) its reputation, location and connections with leading parties (4) its trade mark, brand name and patents (5) its high profit earning capacity and (6) good and cordial relations with all including customers, employees etc.

Goodwill is an intangible asset because its existence cannot be verified by our senses. It is an asset that cannot be expected to realise or converted into cash unless it is sold along with the business. Goodwill is valued and recorded in the books of accounts by the partnership firm on the following occasions : (1) Sale or purchase of a firm as a going concern (2) Admission of a partner (3) Retirement or death of a partner (4) Change in the profit and loss ratio of the partners.

Methods of Valuation of Goodwill : As prescribed in the syllabus, the value of goodwill as on a ,
particular date is ascertained by using any one of the following methods : ‘
(A) Average Profit Method and (B) Super Profit Method.

(A) Average Profit Method : Under this method, goodwill is valued at certain number of years’ .
purchases of the average profit of the firm. To compute the value of Goodwill as per this ,
method the following formulae are used :

1. Total Profits = Profits of the given number of years-losses, if any.
2. Average Profit = \(\frac{Total Profits of given no. of years}{No. of years given}\)
3. Goodwill = Averge Profit x No. of years’ purchases

Steps to calculate goodwill : Following steps are required to be taken for calculating goodwill :

1. Calculate total profit by giving plus sign to profits and minus sign to losses.
2. Calculate average profit by dividing total profit by given number of years.
3. Calculate the value of goodwill by multiplying average profit by given number of years’ purchases.

(B) Super Profit Method : Under this method, goodwill is valued at certain number of years’ •; purchases of the super profit of the partnership firm. In order to understand the formulae used for computing the value of goodwill under super profit method, the following concepts need to be understood :

(1) Super Profit : Super profit is the profit earned by the business concern over and above the normal profit or return earned on capital exmployed. Super profit is calculated by using the following formula :
Super Profit = Average Profit – Normal Profit.

(Normal Profit or Normal Return on Capital Employed : Normal profit or normal return on capital employed refers to a reasonable profit earned by a business concern to survive in the industry after meeting all its business expenses.
It is ascertained by using the following formula :
Normal Profit or Normal Return on Capital Employed = Capital Employed x Normal Rate of Return.)

(2) Capital Employed : Capital employed is the total amount of capital used by the business concern to run and maintain its business activities. Capital employed is made of fixed assets other than goodwill plus current assets minus current liabilities.

(3) Normal Rate of Return : Normal rate of return is the return or profit normally expected on the capital employed by considering the returns or profit actually earned by other firms in the same industry. This is the average rate of return or profit earned in the industry. Normal rate of return depends on the nature of business and element of risk involved therein.

(4) Goodwill: Super Profit x Number of years’ purchases.

Accounting Treatment of Goodwill: As new partner gets certain share in future profit of the firm from old partners who sacrifice their profit sharing ratio in favour of him, for which they (old partners) must be compensated for such a loss. Therefore, new partner is required to bring in certain amount for goodwill in addition to the amount to be brought in by him towards his share of capital. At the time of admission, goodwill may be given treatment in one of the following two methods, viz.
(A) Premium Method and (B) Valuation Method.

(A) Premium Method : Under premium method following possible cases are considered : Journal entries are shown as follows :

(i) When a new partner brings his share of goodwill in cash which is retained in the business :

(ii) When a new partner brings Goodwill In cash but it is withdrawn by the old partners:

(iii) When a new partner pays amount of Goodwill to old partners privately :
No accounting entry is to be passed in the books of the partnership firm as amount of goodwill is paid privately by a new partner to old partners, business firm as such is not at all benefited and therefore, there is no necessity of recording any entry for goodwill in the books of a partnership firm.

(B) Valuation Method : if the new partner does not bring in his share of goodwill in cash, a new Goodwill A/c may be opened and it may be treated in the following manner :

(i) If goodwill does not appear in the books of accounts :

(ii) If goodwill already appears In the books of accounts:

(a) If on revaluation, the revised value of goodwill Is found to be lower than Its existing value which already appears In the books : (Entry is to be passcd only for difference in the value of goodwill)

(b) If on revaluation, the revised value of goodwill is found to be greater than Its existing value which already appears in the books : (Entry is to be passed only for difference In the value of goodwill)

Revaluation of Assets and Liabilities : Just before the admission of a new partner, it is usual practice to revalue the assets and liabilities of the existing firm. The profit or loss which arises due to changes in their values is shared by the old partners alone. To record such changes in the values of assets and liabilities, a separate account is opened and operated. Such an account is called “Profit and Loss Adjustment A/c” or “Revaluation A/c”. It is a nominal account showing the expenses or losses on the debit side and incomes or gains on the credit side.

A decrease in the value of the assets and an increase in the amount of the liabilities are shown on the debit side of this account, while an increase in the assets or a decrease in the liabilities are shown on the credit side of this account. So also this account is debited for recording an outstanding expense and creating a provision for bad and doubtful debts and credited for recording incomes receivables, prepaid expenses and creating a provision for discount on creditors. Any balance of this account is then transferred to old partners’ capital/current accounts in their old profit sharing ratio.

Debit balance of Profit and Loss Adjustment A/c or Revaluation A/c indicates loss incurred on revaluation of assets and liabilities, while credit balance of this account shows profit earned on revaluation of assets and liabilities.

(a) Pro Forma journal entries on revaluation of assets and liabilities are given below :

(b) Pro Forma Profit and Loss Adjustment Account/Revaluation Account :

Adjustment of Accumulated Profits and Losses:
(1) Different type of Reserve Funds : Every year part of the profit, kept aside in a separate account by the partners to meet the loss, if any that may arise due to unforeseen contingencies like flood, fire, theft, sudden fall in prices of firm’s products, etc. is called as General Reserve. The credit balance in General Reserve, Reserve Fund, Workmen’s Compensation Fund, Investment Fluctuation Fund, Joint Policy Reserve, etc., are created out of past profit, the balance of the those reserves entirely belong to old partners and therefore new partner has no right to get any share in those reserves. Hence on admission of a new partner, entire balance in the above mentioned reserves is required to be transferred to old partners’ capital accounts or current accounts in their old profit sharing ratio. The following journal entry is required to be passed for transfer of balance in various reserves :

(2) Accumulated Profit/Loss : Every year part of the profit, which remains undistributed among the old partners, is carried forward to next year. Such undistributed profit accumulated over many years is shown in the Balance Sheet on liabilities side under the heading “Profit and Loss A/c”. Similarly, part of the losses unadjusted among the partners is carried forward to next year. Such unadjusted losses if any, accumulated over many years are shown on the Assets side of the Balance Sheet under the heading “Profit and Loss A/c”. At the time of admission of a new partner, entire balance of such accumulated profits or losses is transferred to old partners’ capital/current accounts in their old profit sharing ratio. The following entries are required to be passed for transfer of accumulated profit/losses :
(a) Transfer of accumulated profit:

(b) Transfer of accumulated loss :

Adjustment of Capitals: At any time when the partners so desire (and especially after admission of a new partner), they may make their capitals proportionate to their new profit ratio either through their Current or Loan A/cs or by actually bringing in or withdrawing cash.

The capital accounts of all the partners are usually adjusted by taking new partner’s capital as the base and then adjust the capital of other partners. Adjusted new capital balance of each old partner is then compared with his actual capital balance to find out deficit or surplus of capital. Ultimately, the deficit or surplus of capital of partners is adjusted either through partners’ current account or his loan account or through cash.
The following journal entries are passed for adjustment of partners’ capitals as mentioned above :