MP Board Class 12 Accountancy 2026 Question Paper with Solution PDF

Financial statements are formal records prepared at the end of an accounting period to present the financial performance and financial position of a business. They include the Trading Account, Profit and Loss Account, and Balance Sheet. The following are two important characteristics explained in detail:


1. Based on Recorded Facts:

Financial statements are prepared strictly on the basis of recorded accounting transactions. These transactions are first recorded in the journal, posted to the ledger, and then summarized to prepare the final accounts.


This means that financial statements are not based on assumptions or personal opinions. They reflect only those transactions which have documentary evidence such as bills, vouchers, invoices, etc.


Because they are prepared from properly maintained books of accounts, they provide reliable and authentic information about the business. However, they do not consider events or factors that are not recorded in the books.


2. Expressed in Monetary Terms:

Financial statements record only those transactions which can be measured in terms of money. All items are shown in currency (such as Rupees, Dollars, etc.).


For example, purchase of goods, payment of salary, and sales revenue can be recorded because they have a monetary value. However, factors like efficiency of employees, reputation of the business, honesty of management, or customer satisfaction are not shown in financial statements because they cannot be expressed in monetary terms.


Thus, financial statements present quantitative financial information but ignore qualitative aspects of the business.
Quick Tip: In long theory answers, always start with a brief introduction, then explain each point with proper headings and 2–3 supporting lines. This improves presentation and helps in scoring full marks.

Financial statements provide useful information about the financial position and performance of a business. However, they also have certain limitations. Two important limitations are explained below:


1. Based on Historical Data:

Financial statements are prepared on the basis of past transactions recorded in the books of accounts. They show what has already happened in the business and do not provide direct information about future prospects.


Since they are historical in nature, they may not reflect the current market value of assets and liabilities. Changes in price levels, inflation, or market conditions are not properly shown in traditional financial statements.


2. Ignore Qualitative Aspects:

Financial statements include only those transactions which can be expressed in monetary terms. Qualitative factors such as efficiency of management, employee morale, brand reputation, customer satisfaction, and goodwill are either not recorded or not fully reflected.


These non-monetary factors play an important role in the success of a business, but they are not shown clearly in financial statements. Therefore, the complete picture of the business cannot be understood from financial statements alone.
Quick Tip: While writing limitations, explain why financial statements are not perfect. Common points include historical nature, monetary measurement limitation, window dressing, and ignoring price level changes.

Accounting ratios are mathematical relationships between two accounting figures which help in analyzing and interpreting the financial statements of a business. The following are two important objectives of accounting ratios explained in detail:


1. To Analyze Financial Performance:

One of the main objectives of accounting ratios is to evaluate the financial performance of a business. Ratios such as Gross Profit Ratio, Net Profit Ratio, and Return on Capital Employed help in measuring the profitability and operational efficiency of the firm.


By comparing ratios of different years, management can identify trends in income, expenses, and profits. This helps in understanding whether the business is improving or declining over time.


2. To Assess Financial Position and Solvency:

Accounting ratios also help in determining the financial position of a business. Liquidity ratios such as Current Ratio and Quick Ratio show the ability of the firm to meet its short-term obligations.


Similarly, solvency ratios like Debt-Equity Ratio indicate the long-term financial stability of the business. These ratios are useful for creditors, investors, and management to judge the risk involved in the business.
Quick Tip: While writing objectives of accounting ratios, focus on analysis, comparison, decision-making, performance evaluation, and financial position assessment. Always explain each point briefly for better marks.

Accounting ratios help in simplifying and analyzing the information given in financial statements. They convert complex financial data into meaningful relationships which assist various stakeholders in decision-making. Two important benefits are explained below:


1. Helps in Financial Analysis and Interpretation:

Accounting ratios make it easier to understand the financial statements by expressing the relationship between different items in numerical form.


Instead of studying large figures separately, ratios present the data in a simple and summarized manner. This helps management, investors, and creditors to interpret profitability, liquidity, and solvency position effectively.


Thus, ratios improve clarity and provide a better understanding of the financial condition of the business.


2. Facilitates Comparison:

Another important benefit of accounting ratios is that they enable comparison. Ratios can be compared:

(a) Between different years of the same business (intra-firm comparison), and

(b) Between different firms operating in the same industry (inter-firm comparison).


Such comparisons help in identifying strengths and weaknesses of the business and in taking corrective measures wherever necessary.
Quick Tip: When writing benefits of accounting ratios, focus on analysis, comparison, decision-making support, and performance evaluation. Use clear headings and brief explanations for better presentation.

Step 1: Calculate Gross Profit

\[ Gross Profit = Revenue from Operations - Cost of Revenue from Operations \]
\[ = 1,00,000 - 65,000 \]
\[ = ₹ 35,000 \]


Step 2: Calculate Gross Profit Ratio

\[ Gross Profit Ratio = \frac{Gross Profit}{Revenue from Operations} \times 100 \]
\[ = \frac{35,000}{1,00,000} \times 100 \]
\[ = 35% \]


Gross Profit Ratio = 35%
Quick Tip: Gross Profit Ratio measures profitability from core operations. Always first calculate Gross Profit, then divide it by Revenue and multiply by 100.

Step 1: Identify Current Assets and Current Liabilities


Current Assets include:

Cash = ₹ 1,50,000
Stock = ₹ 1,50,000


Current Liabilities include:

Bank Overdraft = ₹ 2,00,000
Outstanding expenses = ₹ 1,00,000



Step 2: Calculate Total Current Assets and Total Current Liabilities

\[ Total Current Assets = 1,50,000 + 1,50,000 = ₹ 3,00,000 \]
\[ Total Current Liabilities = 2,00,000 + 1,00,000 = ₹ 3,00,000 \]


Step 3: Apply Current Ratio Formula

\[ Current Ratio = \frac{Current Assets}{Current Liabilities} = \frac{3,00,000}{3,00,000} = 1 \]

Thus, the Current Ratio is 1:1. Quick Tip: Current Ratio = Current Assets ÷ Current Liabilities. Remember: Current Assets include cash, stock, debtors, etc. Current liabilities include bank overdraft, outstanding expenses, creditors, etc.

(i) Increase in value of Building


Increase in asset is credited to Revaluation Account.


Building A/c \hspace{1.5cm Dr. \hspace{0.5cm ₹ 40,000

\hspace*{2.5cm To Revaluation A/c \hspace{0.5cm ₹ 40,000

(Being increase in value of building on revaluation)



(ii) Decrease in value of Stock


Decrease in asset is debited to Revaluation Account.


Revaluation A/c \hspace{0.5cm Dr. \hspace{0.5cm ₹ 10,000

\hspace*{2.5cm To Stock A/c \hspace{1.5cm ₹ 10,000

(Being decrease in value of stock on revaluation)



(iii) Reduction in Creditors


Decrease in liability is credited to Revaluation Account.


Creditors A/c \hspace{1.2cm Dr. \hspace{0.5cm ₹ 5,000

\hspace*{2.5cm To Revaluation A/c \hspace{0.5cm ₹ 5,000

(Being reduction in creditors on revaluation)
Quick Tip: Increase in Assets → Credit Revaluation A/c
Decrease in Assets → Debit Revaluation A/c
Decrease in Liabilities → Credit Revaluation A/c
Increase in Liabilities → Debit Revaluation A/c

According to Schedule III of the Companies Act, 2013, the balance sheet items are classified under main heads and subheads as follows:


(i) Creditors \ldots\ldots (m)

\begin{tabular{|p{3cm|p{4cm|p{4cm|
\hline
Item & Main Head & Subhead

\hline
Creditors & Current Liabilities & Trade Payables

\hline
\end{tabular


(ii) Patent \ldots\ldots

\begin{tabular{|p{3cm|p{4cm|p{4cm|
\hline
Item & Main Head & Subhead

\hline
Patent & Non-Current Assets & Fixed Assets (Intangible Assets)

\hline
\end{tabular


(iii) Stock \ldots\ldots (d)

\begin{tabular{|p{3cm|p{4cm|p{4cm|
\hline
Item & Main Head & Subhead

\hline
Stock & Current Assets & Inventories

\hline
\end{tabular Quick Tip: Remember the classification: \textbf{Creditors} \(\rightarrow\) Current Liabilities \(\rightarrow\) Trade Payables \textbf{Patent} \(\rightarrow\) Non-Current Assets \(\rightarrow\) Fixed Assets (Intangible Assets) \textbf{Stock} \(\rightarrow\) Current Assets \(\rightarrow\) Inventories As per Schedule III, 'Stock' is now termed as 'Inventories' and 'Creditors' as 'Trade Payables'.

In the absence of a partnership deed (Partnership Agreement), the provisions of the Indian Partnership Act, 1932 are applicable. The following provisions apply:


(i) Profit - Loss distribution


As per the Indian Partnership Act, 1932, in the absence of any agreement:

Profits and losses are to be shared equally among all partners, regardless of their capital contribution or involvement in the business.
This applies even if partners have contributed different amounts of capital or have different roles in the firm.



(ii) Remuneration (of partners)



No partner is entitled to any salary, commission, or other remuneration for taking part in the conduct of the business.
Partners are only entitled to their share of profits as per the profit-sharing ratio.
Even if a partner works extra hours or manages the entire business, they cannot claim any additional remuneration.



(iii) Interest on loan given by a partner



If a partner advances any loan to the firm beyond their capital contribution, they are entitled to interest on such loan.
The rate of interest is 6% per annum.
This interest is to be paid even if the firm incurs losses.
Note: No interest is allowed on partners' capital in the absence of a partnership deed.



(iv) Interest on drawings



In the absence of a partnership deed, no interest is charged on drawings made by partners.
Partners can withdraw any amount from the firm without any interest liability.
However, the partnership deed can specify a rate of interest on drawings if partners agree. Quick Tip: Remember the key provisions in the absence of partnership deed: \textbf{Profit/Loss} \(\rightarrow\) Equal sharing \textbf{Remuneration} \(\rightarrow\) No salary/commission to partners \textbf{Interest on Loan} \(\rightarrow\) 6% p.a. (payable even in losses) \textbf{Interest on Capital} \(\rightarrow\) No interest \textbf{Interest on Drawings} \(\rightarrow\) No interest charged

Partnership Deed (also known as Partnership Agreement) is a written document that contains the terms and conditions of partnership agreed upon by all partners.


Definition:

A partnership deed is a legal document that defines the rights, duties, obligations, and responsibilities of each partner in a partnership firm. It serves as the foundation for the functioning of the partnership business.


Contents of Partnership Deed:


Name of the Firm: The name under which the business will be carried on.

Nature of Business: The type of business activities to be undertaken.

Names and Addresses of Partners: Complete details of all partners.

Capital Contribution: Amount of capital to be contributed by each partner.

Profit and Loss Sharing Ratio: The ratio in which profits and losses will be shared among partners.

Interest on Capital: Rate of interest payable on partners' capital (if any).

Interest on Drawings: Rate of interest to be charged on drawings made by partners (if any).

Salary or Commission to Partners: Remuneration payable to partners for their services.

Interest on Loan: Rate of interest payable on loans advanced by partners to the firm.

Duties and Powers of Partners: Rights, duties, and powers of each partner.

Admission and Retirement: Rules for admission of new partners and retirement of existing partners.

Accounting and Audit: Provisions regarding maintenance of accounts and audit.

Dissolution: Terms and conditions for dissolution of the firm.



Importance of Partnership Deed:


Avoids Disputes: Clearly defines rights and duties, preventing misunderstandings.

Legal Validity: Serves as evidence in case of legal disputes.

Flexibility: Partners can include terms as per their mutual agreement, unlike the rigid provisions of the Indian Partnership Act.

Smooth Functioning: Ensures smooth operation of business with clearly defined roles.

Third Party Confidence: Builds trust among banks, creditors, and other stakeholders.



Types of Partnership Deed:


Oral Partnership Deed: Based on verbal agreement (not recommended as it may lead to disputes).

Written Partnership Deed: Documented agreement signed by all partners (recommended).

Registered Partnership Deed: Written deed registered with the Registrar of Firms (provides additional legal benefits).



Note: In the absence of a partnership deed, the provisions of the Indian Partnership Act, 1932 become applicable, which may not always be favorable to all partners. Quick Tip: \textbf{Partnership Deed = Constitution of Partnership Firm}
Remember: A well-drafted partnership deed prevents future disputes and ensures smooth business operations. It is always advisable to have a written and registered partnership deed.