In a consolidated balance sheet, minority interest is computed as the outsiders' proportion of the subsidiary's share capital plus their share of:

All its reserves and profits, pre-acquisition and post-acquisition alike

Its post-acquisition profits only

Its pre-acquisition profits only

Neither, since reserves belong wholly to the holding company

Under Section 52 of the Companies Act, 2013, the Securities Premium Account may be applied to:

Issuing fully paid bonus shares to members

Paying a dividend to equity shareholders

Meeting the ordinary trading losses of the year

Paying the managing director's remuneration

On the dissolution of a firm, a partner's loan to the firm is repaid:

After the outside creditors but before the partners' capitals

After the partners' capitals are returned

Only out of the profit on realisation

The going concern concept justifies:

Carrying fixed assets at cost less depreciation rather than at break-up value

Recording only transactions expressible in money

Treating the owner as separate from the business

Providing for all possible losses but no anticipated profits

Accounting Principles, Partnership and Corporate Accounts

Unit 2 opens with the principles every later entry rests on and then works through the two account types the paper returns to most often: the partnership firm as partners come and go, and the company as it issues, forfeits, merges and finally liquidates. Almost nothing here is asked as a definition. The questions are small calculations built on one ratio, one gaining share or one order of payment, and the marks are lost at exactly those points — a sacrificing ratio taken as a new ratio, a capital deficiency shared in the wrong proportion, a preferential payment placed after a secured creditor.

1. Concepts, conventions and the postulates beneath them

Accounting principles divide into concepts, which are the assumptions the records are built on, and conventions, which are the customs that decide how a choice is made when more than one treatment is defensible. The examiner tests the boundary, and the reliable route is to ask whether the statement is an assumption about the entity or a rule about presentation.

The concepts most often asked
Concept	What it assumes	What follows in the books
Business entity	The business is separate from its owner	Capital is a liability of the business to the proprietor
Going concern	The entity will continue for the foreseeable future	Assets are carried at cost less depreciation, not at break-up value
Money measurement	Only what can be expressed in money is recorded	Staff morale and management quality never appear
Accrual	Revenue and cost belong to the period they arise in	Outstanding and prepaid items are adjusted before the accounts close
Matching	Expense is recognised against the revenue it helped earn	Depreciation spreads a capital cost over the years it serves

⚠️ Conservatism is a convention, not a concept

Conservatism or prudence — anticipate no profit and provide for all possible losses — is a convention, and so are consistency, full disclosure and materiality. Going concern, entity, money measurement, accrual, matching, dual aspect, cost, realisation and accounting period are concepts. A question asking you to classify one of the nine is testing exactly this list.

2. Partnership: admission and retirement

A change in the constitution of a firm requires four things to be settled: the new profit-sharing ratio, the treatment of goodwill, the revaluation of assets and liabilities, and the adjustment of reserves. The two ratios are where the marks are.

Sacrificing ratio — old share minus new share, for the existing partners. It is used on admission, because the incoming partner's share is carved out of theirs and the goodwill he brings is credited in this proportion.
Gaining ratio — new share minus old share, for the continuing partners. It is used on retirement or death, because the outgoing partner's share passes to them and they compensate him for goodwill in this proportion.

🧠 Which ratio, in four words

Somebody joins: sacrifice. Somebody leaves: gain. Both are differences between old and new shares, taken in opposite directions, so computing one and using it for the other reverses every figure that depends on it.

Revaluation is kept in a Revaluation Account, and its profit or loss belongs to the OLD partners in the OLD ratio, because the changes in value accrued while they alone were the firm. Accumulated reserves and the balance of the profit and loss account are distributed the same way, for the same reason. Only after that does the new partner's capital enter.

3. Death, dissolution and the insolvency rule

On the death of a partner the executor is entitled to the capital, the share of goodwill, the share of revaluation profit, the share of reserves, and the share of profit from the last balance sheet date to the date of death — the last of which is estimated either on a time basis or on a turnover basis, and the question will say which.

On dissolution, assets are realised and liabilities discharged through a Realisation Account, and Section 48 of the Indian Partnership Act fixes the order in which the proceeds are applied: outside creditors first, then a partner's loan to the firm, then the partners' capital, and only what remains is divided as profit in the profit-sharing ratio.

📖 Garner versus Murray, and why it is not the profit ratio

When a partner is insolvent and cannot make good a debit balance on his capital account, the rule in Garner v Murray (1904) says the deficiency is borne by the solvent partners in the ratio of their CAPITALS standing just before dissolution — not in their profit-sharing ratio. The reasoning is that the loss is a loss of capital rather than a trading loss, so it falls where the capital is. Candidates apply the profit ratio out of habit and lose the whole question, because every figure after it is wrong.

4. Corporate accounting: issue, forfeiture and reissue of shares

Shares may be issued at par or at a premium; issue at a discount is prohibited by Section 53 of the Companies Act, 2013 except for sweat equity. The securities premium is a capital receipt and goes to the Securities Premium Account, whose uses Section 52 restricts — it can be applied to issuing fully paid bonus shares, writing off preliminary expenses, writing off the expenses or discount on an issue of shares or debentures, providing the premium on redemption, and buying back securities. It may never be treated as divisible profit.

When a shareholder fails to pay a call the shares may be forfeited. The share capital account is debited with the amount called up, the calls in arrear are cancelled, and the amount already received is credited to a Share Forfeiture Account. On reissue any discount allowed is debited to that account, and whatever balance survives is a genuine capital profit transferred to the Capital Reserve.

⚠️ Only the surviving balance reaches Capital Reserve

The whole forfeited amount does not go to Capital Reserve. First the loss on reissue — the discount given to the new buyer — is set against it, and only the remainder is transferred. If the reissue discount exceeds the forfeited amount the difference is charged to the Securities Premium Account or to the profit and loss account, and the transfer is nil.

5. Amalgamation, reconstruction and liquidation

Accounting for amalgamation distinguishes two forms, and the distinction decides the whole set of entries. An amalgamation in the nature of a merger requires all five conditions to be satisfied — all assets and liabilities transfer, shareholders holding at least nine-tenths of the face value of equity become shareholders of the transferee, the consideration is discharged in equity shares except for fractions, the same business is intended to be carried on, and book values are taken over without adjustment. Failing any one of them it is an amalgamation in the nature of purchase.

Merger against purchase
Point	Nature of merger	Nature of purchase
Method	Pooling of interests	Purchase method
Assets recorded at	Existing book values	Fair values, or book values as agreed
Reserves of the transferor	Carried forward as they are	Not carried forward, except statutory reserves
Difference on consideration	Adjusted against reserves	Recorded as goodwill or capital reserve

Internal reconstruction differs from all of this because no new company is formed: the existing company reduces its capital under a scheme approved by the tribunal and writes off accumulated losses and overstated assets against a Capital Reduction Account. External reconstruction does form a new company, and is accounted for as an amalgamation in the nature of purchase.

On liquidation the Liquidator's Final Statement of Account applies the realisations in a fixed order: the liquidator's remuneration and the cost of liquidation, then secured creditors to the extent of their security, then preferential creditors, then floating charge holders, then unsecured creditors, then preference shareholders, and last the equity shareholders. The order is asked far more often than the arithmetic.

6. Holding company accounts: the four adjustments

Consolidation asks one question repeatedly: what belongs to the group and what belongs to outsiders. Four adjustments answer it, and every consolidated balance sheet problem is these four applied in order.

Split the subsidiary's reserves and profits into pre-acquisition and post-acquisition. The holding company's share of pre-acquisition profit is capital and is set against the cost of control; its share of post-acquisition profit is revenue and joins the consolidated profit and loss account.
Compute the cost of control, or goodwill. It is what the holding company paid, less its share of the subsidiary's share capital and pre-acquisition reserves. A negative figure is a capital reserve, not negative goodwill on the face of the balance sheet.
Compute the minority interest — the outsiders' proportion of the subsidiary's share capital plus ALL its reserves and profits, pre- and post-acquisition alike, because the distinction only matters to the acquirer.
Eliminate everything internal — mutual owings, and unrealised profit on stock still held within the group, which is removed in full from the stock and charged in the holders' proportions.

🎯 Why minority interest takes pre-acquisition profit too

The pre- and post-acquisition split exists to work out how much of what the holding company paid was for accumulated wealth rather than for future earnings. Minority shareholders did not pay anything on acquisition — they were already there — so for them every rupee of reserve is simply theirs. Applying the split to them is the most common single error in a consolidation question.

Key takeaways

Sacrifice on admission, gain on retirement: both are differences between old and new shares taken in opposite directions, and using one for the other reverses everything downstream.
Revaluation profit and accumulated reserves go to the OLD partners in the OLD ratio, because they accrued while those partners alone were the firm.
Garner v Murray shares an insolvent partner's capital deficiency in the ratio of the solvent partners' CAPITALS, not their profit-sharing ratio — the loss is of capital, not of trade.
Only the forfeiture balance surviving the loss on reissue reaches Capital Reserve, and the merger-versus-purchase test needs all five conditions, not most of them.
In consolidation the pre- and post-acquisition split applies only to the holding company's share; minority interest takes its proportion of every reserve, whenever it arose.

Practice questions (9)

Attempt each one before opening the answer. Every explanation names the tempting wrong option as well as the right one, because that is where marks are lost.

A and B share profits 3:2 and admit C for a one-fifth share, which he takes equally from both. The sacrificing ratio of A and B is:
1. 1:1
2. 3:2
3. 2:3
4. 5:3
Show answer
Answer: A — 1:1
The sacrificing ratio is old share minus new share for each existing partner. The question states that C's one-fifth is taken equally from A and B, so each gives up one-tenth and the sacrifices are equal, making the ratio 1:1. The ratio 3:2 is the old profit-sharing ratio, which would be the sacrificing ratio only if C's share had been carved out in that proportion — the default assumption when the question is silent, but this question is not silent. Reading the old ratio in regardless is the standard error here.
Under the rule in Garner v Murray, the capital deficiency of an insolvent partner is borne by the solvent partners in the ratio of their:
1. Capitals standing just before dissolution
2. Profit-sharing ratio
3. Gaining ratio
4. Sacrificing ratio
Show answer
Answer: A — Capitals standing just before dissolution
Garner v Murray (1904) treats the deficiency as a loss of capital rather than a trading loss, so it is borne where the capital is — in the ratio of the solvent partners' capitals as they stood immediately before dissolution. The profit-sharing ratio is the tempting answer because every other loss in a dissolution, including the loss on realisation, is shared in it, and applying it here destroys every figure that follows. Gaining and sacrificing ratios belong to retirement and admission and have no role in a dissolution at all.
Shares of face value ₹10 on which ₹8 had been received were forfeited and later reissued as fully paid at ₹7 each. The amount transferred to Capital Reserve per share is:
1. ₹5
2. ₹8
3. ₹7
4. ₹3
Show answer
Answer: A — ₹5
The forfeited amount per share is the ₹8 already received. On reissue as fully paid at ₹7 the company allows a discount of ₹3 against the ₹10 face value, and that loss is debited to the Share Forfeiture Account. The balance surviving, ₹8 minus ₹3 equals ₹5, is capital profit and goes to Capital Reserve. Transferring the whole ₹8 ignores the reissue loss, ₹7 is the reissue price rather than any transfer, and ₹3 is the discount itself rather than what remains after it.
In a consolidated balance sheet, minority interest is computed as the outsiders' proportion of the subsidiary's share capital plus their share of:
1. All its reserves and profits, pre-acquisition and post-acquisition alike
2. Its post-acquisition profits only
3. Its pre-acquisition profits only
4. Neither, since reserves belong wholly to the holding company
Show answer
Answer: A — All its reserves and profits, pre-acquisition and post-acquisition alike
The pre- and post-acquisition split exists only to decide how much of the holding company's purchase price bought accumulated wealth rather than future earnings, which is why the holding company's share of pre-acquisition profit is set against the cost of control. Minority shareholders bought nothing on acquisition — they held their shares throughout — so every reserve of the subsidiary belongs to them in their proportion regardless of when it arose. Applying the split to minority interest is the most frequent error in consolidation problems.
Which of the following is a convention rather than a concept of accounting?
1. Conservatism
2. Going concern
3. Accrual
4. Dual aspect
Show answer
Answer: A — Conservatism
Concepts are the assumptions the records rest on — business entity, going concern, money measurement, accounting period, cost, dual aspect, realisation, accrual and matching. Conventions are the customs that decide how to present a matter where more than one treatment is defensible, and the four standard ones are consistency, full disclosure, materiality and conservatism. Conservatism, also called prudence, tells the accountant to anticipate no profit and provide for all possible losses, which is a rule about presentation rather than an assumption about the entity.
For an amalgamation to be treated as one in the nature of a merger, the shareholders holding at least what proportion of the face value of equity of the transferor must become shareholders of the transferee?
1. Nine-tenths
2. Three-fourths
3. One-half
4. The whole of it
Show answer
Answer: A — Nine-tenths
The pooling of interests method applies only when all five conditions are met, and this is the second of them: shareholders holding not less than nine-tenths of the face value of the equity shares of the transferor company become shareholders of the transferee company. Three-fourths is the majority required for a special resolution and is not the test here. Requiring the whole of it would make the treatment unavailable in practice, since dissenting shareholders always exist. Failing any single condition makes it an amalgamation in the nature of purchase.
Under Section 52 of the Companies Act, 2013, the Securities Premium Account may be applied to:
1. Issuing fully paid bonus shares to members
2. Paying a dividend to equity shareholders
3. Meeting the ordinary trading losses of the year
4. Paying the managing director's remuneration
Show answer
Answer: A — Issuing fully paid bonus shares to members
The securities premium is a capital receipt, not a profit earned by trading, so it can never be distributed as dividend or used to absorb ordinary revenue losses. Section 52 restricts it to a short list: issuing fully paid bonus shares, writing off preliminary expenses, writing off the expenses, commission or discount on an issue of shares or debentures, providing for the premium payable on redemption of redeemable preference shares or debentures, and buying back securities under Section 68. Remuneration is an ordinary revenue expense and falls outside that list entirely.
On the dissolution of a firm, a partner's loan to the firm is repaid:
1. After the outside creditors but before the partners' capitals
2. Before the outside creditors
3. After the partners' capitals are returned
4. Only out of the profit on realisation
Show answer
Answer: A — After the outside creditors but before the partners' capitals
Section 48 of the Indian Partnership Act fixes the order in which realisation proceeds are applied: first the debts of the firm to third parties, then any loan advanced by a partner as distinct from his capital, then the partners' capital, and only the residue is divided as profit in the profit-sharing ratio. A partner's loan ranks behind outside creditors because the firm's obligations to strangers come first, but ahead of capital because a loan is a debt while capital is an ownership interest. Confusing the two positions of a partner — lender and owner — is what this question tests.
The going concern concept justifies:
1. Carrying fixed assets at cost less depreciation rather than at break-up value
2. Recording only transactions expressible in money
3. Treating the owner as separate from the business
4. Providing for all possible losses but no anticipated profits
Show answer
Answer: A — Carrying fixed assets at cost less depreciation rather than at break-up value
Going concern assumes the entity will continue operating for the foreseeable future and has neither the intention nor the necessity to liquidate. Because the assets will be used rather than sold, they are carried at historical cost less accumulated depreciation, and depreciation itself only makes sense under this assumption. Recording only monetary transactions is the money measurement concept, separating owner from business is the business entity concept, and providing for all losses while anticipating no profit is the convention of conservatism.