LEARNING OBJECTIVES:
After studying this chapter the
student will be confident to:
Ø Understand and explain the meaning of
partnership
Ø Understand the characteristics of Partnership
Ø Explain the meaning and contents of
partnership deed.
Ø Apply their provisions of Partnership
Act,1932 in the absence of partnership deed.
Ø Prepare partners’ Fixed and fluctuating
capital Accounts.
Ø Calculate interest on Capital and Drawings.
Ø Distribute profit among partners and prepare
Profit and Loss Appropriation A/c.
Ø Make the accounting treatment of past
adjustment.
SALIENT POINTS:
v Partnership deed : It is a document which
contains the terms and conditions of Partnership agreement either oral or
written.
v Profit and Loss Appropriation Account : After
the preparation of Profit and Loss account, entries pertaining to Interest on
Capital, Drawings , Salaries among the partners are shown separately in a newly
opened Profit and Loss Appropriation Account.
v Rules applicable in the absence of
Partnership Deed :
a) Profit sharing ratio will be
equal
b) No Interest on Capital and
Drawings
c) No Remuneration or Salary to
the partners.
d) Interest on Loan advanced by
the partner @6% p.a.
v Fixed and Fluctuating Capital Accounts :
When the Capitals are fixed, the
Current account of the partners will be maintained.
1 and 3 Mark Questions
Q1 Define partnership.
When two or more
persons enter into an agreement to carry on business and share its profit and
losses, it is a case of partnership. The
Indian partnership Act, 1031, defines Partnership as follows :
"Partnership is the relation between persons and
who have agreed to share the profits of a business carried on by all or any of
them acting for all.
Q.2 What do you understand by 'partners',
'firm' and 'firms' name ?
The persons who have entered in
to a Partnership with one another are individually called 'Partners' and
collectively 'a firm' and the name under which the business is carried is
called 'the firm's name'.
Q.3 Write any four main features of partnership.
Essential elements or main features of Partnership:
i) Two or more
persons: Partnership is an association of two or more persons.
ii) Agreement:
The Partnership is established by an agreement either oral or in writing.
iii) Lawful
Business: A Partnership formed for the purpose of carrying a business, it must
be a legal business.
iv) Profit sharing:
Profit of the firm is share by the partners in an agreed ration, if the ratio
is not agreed then equally. Profit also includes loss.
Q.4 What is the minimum and maximum number of partners in all partnership?
There should be at
least two persons to form a Partnership.
The maximum number of Partners in a firm carrying an banking business
should not exceed ten and in any other business should not exceed ten and in
any other business it should not exceed twenty.
Q.5 What is the status of
partnership from an accounting viewpoint?
From an accounting
viewpoint, partnership is a separate business entity. From legal viewpoints, however, a
Partnership, like a sole proprietorship, is not separate from the owners.
Q.6 What is meant by
partnership deed?
Partnership deed is
a written agreement containing the terms and conditions agreed by the Partners.
Q.7 State any four contents
of a partnership deed.
i) The date of formation and the duration of
the Partnership
ii) Name and
address of the Partners
iii) Name of the firm.
iv) Interest on Partners capital and drawings
v) Ratio in which profit or losses shall be
shared
Q.8 In the absence of a
partnership deed, how are mutual relations of partners governed?
Ans. In the absence of
Partnership deed, mutual relations are governed by the Partnership Act, 1932.
Q.9 Give any two reason in
favour of having a partnership deed.
Ans. i) In case of any dispute or
doubt, Partnership deed is the guiding document.
ii) It can specify the duties and powers of each
Partner.
Q.10 State the provision of
'Indian partnership Act 1932' relating
to sharing of profits in absence of any provision in the partnership deed.
In the absence of any
provision in the Partnership deed, profit or losses are share by the Partners
equally.
Q.11 Why is it important to
have a partnership deed in writing ?
Partnership deed is
important Since it is a document defining relationship of among Partners, thus
is a assistance in settlement of disputes, if any and also avoid possible
disputes : it is a good evidence in the court.
Q.12 What do you understand by
fixed capital of partners?
Partners' capital is said
to be fixed when the capital of Partners remain unaltered except in the case
where further capital is introduced or capital is withdrawn permanently.
Q.13 What do you understand by
fluctuating capital of partners ?
Partners capital is said to be fluctuating when capital alters with every
transaction in the capital account. For example, drawing, credit of interest,
etc
Q.14 Give two circumstances in
which the fixed capital of partners may change.
Two circumstances in
which the fixed capital of Partners may change are :
i) When additional capital is introduced by the
Partners.
ii) When a part of the capital is permanently
withdrawn by the Partners.
Q.15 List the items that may
appear on the debit side and credit side of a partner's fluctuating capital
account.
On debit side :
Drawing, interest on drawing, share of loss, closing credit balance of the
capital.
On credit side : Opening
credit balance of capital, additional capital introduced, share of profit,
interest on capital, salary to a Partner, commission to a Partner.
Q.16 How will you show the
following in case the capitals are
i) Fixed and ii) Fluctuating
. a) Additional capital introduced
b) Drawings
c) Withdrawal of capital
d) Interest on capital and
e) Interest on loan by a partners ?
i) In case, capitals are fixed :
a) on credit side of capital (b) on debit
side of current A/c (c) on debit side of capital A/c (d) on credit side of current A/c (e) on
credit side of loan from partner's A/c
Q.17 If the partners capital
accounts are fixed, where will you record the following items :
i) Salary to a partners
ii) Drawing by a partners
iii) Interest on capital and
iv) Share of profit earned by a partner ?
Ans.17 i) Credit side of Partner's current A/c
ii) Debit side of Partner's current A/c
iii) Credit side of Partners current A/c
iv) Credit side of Partners current A/c
Q.18 How would you calculate
interest on drawings of equal amounts drawn on the Last day of every month ?
Ans.18 When a partners draws a
fixed amount at the beginning of each month, interest on total drawing would be
on the amount withdraw for 6.5 months at the agreed rate of interest per
annum. Apply the following
formula.
Interest on drawing =
total drawing x
Q.19 How would you calculate
interest on drawing of equal amounts drawn on the last day of every month ?
Ans. When
drawing of fixed amounts are made at regular monthly intervals on the day of
every month, Interest would be charged on the amount withdrawn at the agreed
rate of interest for 5.5 months. Apply
the following formula. :
Interest on drawing =
Total drawing x
Q.20 How would you calculate
interest on drawing of equal amount drawn in the middle of every month ?
Q.21 Ramesh, a partner in the
firm has advanced a loan of a Rs. 1,00,000 to the firm and has demanded on
interest @ 9% per annum. The partnership
deed is silent on the matter. How will
you deal with it ?
Ans. Since the Partnership
deed is silent on payment of interest, the provisions of the Partnership Act,
1932 will apply. Accordingly, Ramesh is
entitled to interest @ 6% p.a.
Q.22 The partnership deed
provides that Anjali, the partner will get Rs. 10,000 per month as salary. But, the remaining partners object to
it. How will this matter be resolved?
Ans.22 No, he is not entitled to
the salary because it is not so, Provided in the Partnership deed and according
to the Partnership act, 1932 if the Partnership deed does not provided for
payment of salary to Partners, he will not be entitled to it.
Q.23 Distinction between Profit and loss and profit and loss
appropriation account :
Ans.23
PROBLEMS BASED ON FUNDAMENTALS
Q. 1 A, B and c
were partners in a firm having no partnership agreement. A,B and C
contributed Rs.2,00,000, Rs.3,00,000 and 1,00,000 respectively. A and B desire
that the profits should be divided in the ratio of capital contribution. C does
not agree to this. How will the dispute be settled.
ANS: C is correct
because in the absence of Partnership deed the profits are to be shared equally.
Q2 A and B are partners sharing profits in the
ratio of 3 : 2 with capitals of Rs. 5,00,000 and Rs. 3,00,000 respectively.
Interest on capital is agreed @ 6% p.a. B is to be allowed an annual salary of
Rs. 25000. During 2006, the profits of the year prior to calculation of
interest on capital but after charging B's salary amounted to Rs. 125000. A
provision of 5% of the profits is to be made in respect of Manager's commission.
Prepare an account showing the
allocation of profits and partners' capital accounts.
Solution:2 Profit and Loss Appropriation Account
Particulars Amount Particulars Amount
Rs.
Rs.
To Interest on Capital By
Profit after B's
Salary but before
other
adjustments 125000
A 30000
B 18000 48000
To Prov. Manager's
Commission 3850
(5% of Rs.77000*)
To Profit transferred to :
A's Capital A/c 43890
B's Capital A/c 29260 73150
12500 125000
Provision is made on profit after
charging interest on capitals, i.e. 125000-48,000 Rs. 77,000 .
Partners capital Accounts
Particulars A
B Particulars A
B
To Balance c/d 573890 372260 By
Balance b/d 500000 300000
By
interest on capital 30000 18000
By
salary - 25000
By
P and L
Appropriation A/c 43890 29260
573890 372260 573890 372260
Q.3 X and Y
are partners sharing profits and losses in the ratio of 3 : 2 with capitals of
Rs. 50,000 and Rs. 30,000 respectively. Each partner is entitled to 6% interest
on his capital. X is entitled to a salary of Rs. 800 per month together with a
commission of 10% of net 'Profit remaining after deducting interest on capitals
and salary but before charging any commission. Y is entitled to a salary of Rs.
600 per month together I. with-a commission of 10% of Net profit remaining
after deducting interest on capitals and salary and after charging all
commissions. The profits for the year prior to calculation of interest on
capital but after charging salary of partners amounted to Rs. 40,000. Prepare
partners' Capital Accounts :.-
(i) When
capitals are fixed , and
(ii) when
capitals are. fluctuating.
Note: (1) Calculation of interest on
Capital: Interest for 3 months i.e. from
1st April to 30th June, 2004
A
B
A on Rs. 5,00,000 @ 10% p.a. 12500
B on Rs. 3,00,000 @ 10% p.a. 7500
Interest for 9 months i.e. from 1st July, 2004 to 31st March, 2005 :
A on Rs. 3,50,000 @ 10% p.a. 26250
B on Rs. 3,50,000 @ 10% p.a. 26250
Q 4 Give the
answer to the following:
(1)P and Q are partners sharing
profits and losses in the ratio of 3:2. On 1st April 2009 their
capital balances were Rs.50,000 and 40,000 respectively. On 1st July
2009 P brought Rs.10,000 as his additional capital whereas Q brought Rs.20,000
as additional capital on 1st October 2009. Interest on capital was
provided @ 5% p.a. Calculate the interest on capital of P and Q on 31st
March 2010.
(2)A and B are partners sharing
profits and losses in the ratio of 2:1. A withdraws Rs.1500 at the beginning of
each month and B withdrew Rs. 2000 at
the end of each month for 12 months.
Interest on drawings was charged
@ 6% p.a. Calculate the interest on drawings of A and B for the year ended 31st December
2009.
Ans. 1 Interest on Capital For P
|
DATE
|
AMOUNT
|
NO . OF MONTHS
|
PRODUCT
|
|
1-4-2009
TO 31-3-10
|
50,000
|
12
|
6,00,000
|
|
1-7-2009
TO 31-3-10
|
10,000
|
09
|
90,000
|
|
|
|
TOTAL
|
6,90,000
|
Interest on capital for P will be = 6,90,000 x 5/100 x 1/12
= 2,875
For Q
|
DATE
|
AMOUNT
|
NO
OF MONTHS
|
PRODUCT
|
|
1-4-2009
to 31-3-10
|
40,000
|
12
|
4,80,000
|
|
1-10-2009
to31-3-10
|
20,000
|
06
|
1,20,000
|
|
|
|
TOTAL
|
6,00,000
|
Interest on
capital for Q will be = 6,00,000 x 5/100 x 1/12
= 2,500
Ans. 2 Interest on Drawings
For A = Total
drawings of the year x rate/100 x Average calculated
period
= 18,000x6/100 x 13/2 x1/12
= 585
For B
= 24,000 x 6/100 x 11/2 x1/12
= 660
Q.5 A, B and C are
partners in a firm sharing profits and losses in the ratio of 2:3:5. Their fixed capitals were 15,00,000,
Rs.30,00,000 and Rs.6,00,000 respectively. For the year 2009 interest on capital was credited to them @
12% instead of 10%. Pass the necessary
adjustment entry.
Ans:
TABLE SHOWING ADJUSTMENT
|
PARTICULARS
|
A
RS
|
B
RS
|
C
RS
|
TOTAL
RS
|
|
Interest that should have been credited @ 10%
|
1,50,000
|
3,00,000
|
6,00,000
|
10,50,000
|
|
Interest already credited @ 12%
|
1,80,000
|
3,60,000
|
7,20,000
|
12,60,000
|
|
Excess credit in partners account
|
(30,000)
|
(60,000)
|
(1,20,000)
|
(2,10,000)
|
|
By recovering the extra amount paid the share of profits
will increase and it will be credited in the ratio of 2:3:5
|
42,000
|
63,000
|
1,05,000
|
2,10,000
|
|
Net effect
|
+12,000
|
+3,000
|
-15,000
|
Nil
|
Adjustment Entry:
C’s current A/c Dr. 15,000
To A’s Current
A/c
12,000
To B’s Current
A/c 3,000
( For interest less charged on capital, now rectified)
Q.6 From the following balance sheet of X and Y,
calculate interest on capitals @ 10% p.a. payable to X and Y for the year ended
31st December, 2008.
Liabilities Amount Assets Amount
X's Capital 50,000 Sundry Assets 1,00,000
Y's capital 40,000 Drawings X 10,000
P & L appropriation A/c (1998) 20,000
1,10,000 1,10,000
During the year 2008, X's drawings were
Rs. 10,000 and Y's Drawing were Rs. , 3,000. Profit during the year, 2008 was
Rs.30,000.
Ans : 6 Calculation of Opening Capitals X Y
Rs.
Rs.
Capitals as on 31st Dec.,
2008 50,000 40,000
Add : Drawings (Previously
deducted) . - 3,000
50,000 43,000
Less: Profit distributed
(30,000- 20,000' equally 5,000 5,000
Opening Capitals 45,000 38,000
Interest on 'capitals: @
10% p.a; 4,500 3,800
Working Notes:
(1) As
X’s drawings are shown in the Balance Sheet, it means his drawings are not deducted.
From his .capital till now, so his drawings are not included back.
(2) Profits
for 2008 were Rs. 30,000 and profits of Rs. 20,000· are, shown in the Balance Sheet, which means only Rs.
10,000 profits were distributed between the partners.
Q.7 A, B and C entered into partnership on 1st April,
2008 to share profits & losses in the ratio of 4:3:3. A, however,
personally guaranteed that C's share of profit after charging interest on
Capital @ 5% p.a. would not be less than Rs. 40,000 in any year. The Capital
contributions were:
A, Rs. 3,00,000; B, Rs. 2,00,000 and C,
Rs. 1,50,000.
The profit for the year ended on 31st
March, '2008 amounted to Rs. 1,60,000. show the Profit & Loss Appropriation
Account. .
Solution:7 Profit and Loss
Appropriation Account
(
for the year ending on 31st March 2008)
Particulars Amount Particulars Amount
To Interest on Capital: By
Profit before adjustments 1,60,000
A 15,000
B 10,000
C 7,500 32,500
To net Profit transferred
A. (51,000-1,750) 49,250
B. (1,27,500x3/10) 38,250
C. (38,250+1,750) 40,000 1,27,500
1,60,000 1,60,000
Q 8 A, and C are partners with fixed
capitals of Rs. 2,00,000, Rs. 1,50,000 and Rs. 1,00,000 respectively. The
balance of current accounts on 1st
January, 2004 were A Rs. 10,000 (Cr.); B Rs. 4,000 (Cr.) and C Rs.
3,000 (Dr.). A gave a loan to the firm of Rs. 25,000 on 1st July, 2004 . The Partnership deed
provided for the following:-
(i) Interest
on Capital at 6%.
(ii) Interest
on drawings at 9%. Each partner drew Rs. 12,000 on 1st July, 2004 .
(iii) Rs.
25,000 is to be transferred in a Reserve Account.
(iv) Profit
sharing ratio is 5:3: 2 upto Rs. 80,000 and above Rs. 80,000 equally. Net Profit of the firm before above
adjustments was Rs. 1,98,360.
From the above information prepare
Profit and Loss Appropriation Account, Capital and Current Accounts of the
partners.
Solution: 8
Profit and
Loss Appropriation Account
for the year ended 31st December, 2004
Particulars Amount Particulars Amount
To Interest on Capital at 6% : By
profit and Loss A/c 198360 A
12000
Less: interest on A's Loan @ 6% p.a. on Rs
25,000 for six months 750 197610
A 12000
B 9000 By interest on drawings @
9% p.a. for
6 months on Rs 12,000
C 6000 27000 A
540
To reserve A/c 25000 B 540
To profit C
540 1620
A's current A/c 62410
B's current A/c 46410
C's current A/c 38410 147230
199230 199230
Capital Accounts
Particulars A
B C Particulars A B C
To balance b/d 2,00,000 1,50,000 1,00,000 By balance c/d 2,00,000 1,50,000 1,00,000
Current accounts
Particulars A B C Particulars A B C
To balance b/d - - 3000 By balance b/d 10000
4000 -
To drawings 12000 12000 12000 By interest on capi 12000 9000 6000
To interest on 540 540 540 By
P&L A/c 62410 46410 38410
drawings
To balance c/d 71870 46870 28870
84,410 59,410 44,410 84,410 59,410 44,410
Calculation of Distribution of Profits :
Upto Rs. 80000 in the ratio of 5:3:2
Above Rs. 80,000
equally
Q.9 Ram
and Shyam started a partnership business on 1st January, 2007. Their
capital contributions were Rs. 2,00,000 and Rs. 10,0000 respectively. The
partnership deed provided:
i. Interest
on capitals @10% p.a.
ii. Ram,
to get a salary of Rs. 2,000 p.m. and Shyam Rs. 3,000 p.m.
iii. Profits
are to be shared in the ratio of 3:2.
The profits for the year ended 31st December, 2007 before
making above appropriations were Rs. 2,16,000. Interest on Drawings amounted to
Rs. 2,200 for Ram and Rs. 2,500 for Shyam. Prepare Profit and Loss
Appropriation Account.
Ans:9 Profit and Loss Appropriation Account
for the year ending on 31st Dec., 2007
Particulars Amount Particulars Amount
To Interest on Capital: Rs. By Profit 2,16,000
By
Interest on Drawings
Ram 2,000 Rs.
Shyam 1,500 35,000 Amit
2,200
To Salary Vijay
2,500 4,700
Ram 24,000
Shyam 36,000 60,000
To Net profit transferred
Ram Capital A/c 75,420
Shyam Capital A/c 50,280 1,25,700
2,20,700
2,20,700
[Q.10 P
and Q are partners with capitals of Rs. 6,00,000 and Rs. 4,00,000 respectively.
The profit and Loss Account of the firm showed a net Profit of Rs. 4, 26,800
for the year. Prepare Profit and Loss account after taking the following into
consideration:-
(i) Interest
on P's Loan of Rs. 2,00,000 to the firm
(ii) Interest
on 'capital to be allowed @ 6% p.a.
(iii)
Interest on Drawings @ 8% p.a. Drawings were ; P Rs 80,000 and Q Rs. 1000,000.
(iv) Q
is to be allowed a commission on sales @ 3%. Sales for the year was Rs. 1000000
(v) 10%
of the divisible profits is to be kept in a Reserve Account.
[Solution:10 Profit and Loss Account for the year ended
Particulars Amount Particulars Amount
To Interest on P's Loan A/c 12000 By profit before interest 426800
To Profit transferred to
P&L Appropriation A/c 414800
426800 426800
Profit and Loss
Appropriation Account for the year ended.
Particulars Amount Particulars Amount
To interest on Capital By
profit and Loss A/c (Profit) 414800
P 36000 By interest on drawings
Q 24000 60000 P
3200
To Q's commission 60000 Q 2000 5200
To reserve A/c 30000
To profit
P's Capital 135000
Q's capital 135000 270000
420000 420000
Notes:
(i) If
the rate of interest on Partners' Loan is not given in the question, it is to
be wed @ 6% p.a. according to the Partnership Act.
(ii) Interest
on Partners' Loan is treated as a charge against Profit, so it is shown in the
debit of Profit and Loss A/c.
(iii) If
the date of Drawings is not given in the question, interest on drawings will be
charged and average period of 6 months. .
(iv) Reserve
Fund is calculated at 10% on Rs. 3,00,000 (i.e. Rs. 4,26,800 + Rs. 5,200- 12,000 - Rs. 60,000 - Rs. 60,000.
