Partnership: Fundamental -01
ACCOUNTING
FOR PARTNERSHIP
Section 4 of Partnership Act 1932
Persons who
have entered into partnership with one another are individually called
‘partners’ and collectively called ‘firm’.
The name
under which the business is carried, is called the ‘firm’s name’. A partnership
firm has no separate legal entity, apart from the partners constituting it.
Thus, the essential features of partnership are:
1.
Two or More Persons 4. Mutual Agency
2.
Agreement 5.
Sharing of Profit3.
Business 6. Unlimited Liability Limited Liability Partnership: Limited Liability Partnership (LLP) is an incorporated
partnership formed and registered under the Limited Liability Partnership Act,
2008 with limited liability and perpetual succession. It is viewed as an
alternative corporate business vehicle that provides the benefits of limited
liability but allows its partners, the flexibility of organizing their internal
structure as a partnership based on a mutually arrived agreement.
Salient
Features: The salient features of Limited Liability Partnership are as follows:
1. Limited
Liability Partnership is a corporate and a legal entity separate from its
partners.
2. Every
Limited Liability Partnership shall have at least two partners and shall also
have at least two individuals as designated partners, of whom at least one shall
be a resident in India.
3. The
Indian Partnership Act, 1932, shall not be applicable to Limited Liability
Partnership.
4. The
Limited Liability Partnership has a perpetual succession.
5. The
Central government has the power to investigate into the affairs of a Limited
Liability Partnership, if required, by appointment of a Competent Inspector for
the purpose.
Partnership
Deed: Partnership comes
into existence as a result of agreement among the partners. The Partnership Act does not require that the
agreement must be in writing, it may be oral. But wherever it is in writing, the document,
which contains terms of the agreement is called ‘Partnership Deed’.
Contents of the Partnership Deed
The Partnership Deed usually contains the following details:
• Names and
Addresses of the firm and its main business;
• Names and
Addresses of all partners;
• Amount of
capital to be contributed by each partner;
• The
accounting period of the firm;
• The date
of commencement of partnership;
• Rules regarding operation of Bank Accounts;
• Profit and loss sharing ratio;
• Rate of interest on capital, loan, drawings, etc.;
• Mode of auditor’s appointment, if any;
• Salaries, commission, etc., if payable to any partner;
• The rights, duties and liabilities of each partner;
• Treatment of loss arising out of insolvency of one or more
partners;
• Settlement of accounts on dissolution of the firm;
• Method of settlement of disputes among the partners;
• Rules to be followed in case of admission, retirement,
death of a partner; and
• Any other matter relating to the conduct of business.
Normally, the partnership deed covers all matters affecting
relationship of partners amongst themselves. However, if there is no express
agreement on certain matters, the provisions of the Indian Partnership Act,
1932 shall apply.
Rules
applicable in the absence of Partnership Deed: The important provisions affecting partnership accounts are
as follows:
(a) Interest
on Drawings (Sec.13): No interest is to be charged on the drawings made by
the partners, if there is no mention in the Deed.
(b) Remuneration
to Partners (Sec.13A): No partner is entitled to get salary or other
remuneration for taking part in the conduct of the business of the firm unless
there is a provision for the same in the Partnership Deed.
(c) Profit
Sharing Ratio (Sec.13B): If the partnership deed is silent about the profit-sharing
ratio, the profits and losses of the firm are to be shared equally by partners,
irrespective of their capital contribution in the firm.
(d) Interest
on Capital (Sec.13C): No partner is entitled to claim any interest on the
amount of capital contributed by him in the firm as a matter of right. However,
interest can be allowed when it is expressly agreed to by the partners. Thus,
no interest on capital is payable if the partnership deed is silent on the
issue. Further the interest is payable only out of the profits of the business
and not if the firm incurs losses during the period.
(e) Interest
on Advances/Loans (Sec.13D): If any partner has advanced some money to the
firm beyond the amount of his capital for the purpose of business, he shall be
entitled to get an interest on the amount at the rate of 6% p.a.
(f)
Admission of a new partner: No new partner can be admitted in the firm
without the consent of all existing partners. Maintenance of Capital Accounts of Partners
There are two methods by which the capital accounts of
partners can be maintained. These are:
(a) Fixed Capital Method, (b) Fluctuating Capital Method.
Format of Partner’s Capital and Current A/c under Fixed
Capital Method.
Dr. Partners’ Capital Account Cr.
Date
Particulars
A. Rs.
B. Rs.
C.
Rs.
Date
Particulars
A. Rs.
B. Rs.
C. Rs.
To Bank A/c
(drawing out of
capital)
To Bal. c/d (cl. Bal.)
By Bal. b/d
(op. balance)
By Bank A/c (fresh capital introduced)
Section 4 of Partnership Act 1932
Persons who have entered into partnership with one another are individually called ‘partners’ and collectively called ‘firm’.
The name under which the business is carried, is called the ‘firm’s name’. A partnership firm has no separate legal entity, apart from the partners constituting it.
Thus, the essential features of partnership are:
1. Two or More Persons 4. Mutual Agency
2. Agreement 5. Sharing of Profit
Limited Liability Partnership: Limited Liability Partnership (LLP) is an incorporated
partnership formed and registered under the Limited Liability Partnership Act,
2008 with limited liability and perpetual succession. It is viewed as an
alternative corporate business vehicle that provides the benefits of limited
liability but allows its partners, the flexibility of organizing their internal
structure as a partnership based on a mutually arrived agreement.
Salient
Features: The salient features of Limited Liability Partnership are as follows:
1. Limited
Liability Partnership is a corporate and a legal entity separate from its
partners.
2. Every
Limited Liability Partnership shall have at least two partners and shall also
have at least two individuals as designated partners, of whom at least one shall
be a resident in India.
3. The
Indian Partnership Act, 1932, shall not be applicable to Limited Liability
Partnership.
4. The
Limited Liability Partnership has a perpetual succession.
5. The
Central government has the power to investigate into the affairs of a Limited
Liability Partnership, if required, by appointment of a Competent Inspector for
the purpose.
Partnership
Deed: Partnership comes
into existence as a result of agreement among the partners. The Partnership Act does not require that the
agreement must be in writing, it may be oral. But wherever it is in writing, the document,
which contains terms of the agreement is called ‘Partnership Deed’.
The Partnership Deed usually contains the following details:
• Names and Addresses of the firm and its main business;
• Names and Addresses of all partners;
• Amount of capital to be contributed by each partner;
• The accounting period of the firm;
• The date of commencement of partnership;
• Rules regarding operation of Bank Accounts;
• Profit and loss sharing ratio;
• Rate of interest on capital, loan, drawings, etc.;
• Mode of auditor’s appointment, if any;
• Salaries, commission, etc., if payable to any partner;
• The rights, duties and liabilities of each partner;
• Treatment of loss arising out of insolvency of one or more partners;
• Settlement of accounts on dissolution of the firm;
• Method of settlement of disputes among the partners;
• Rules to be followed in case of admission, retirement, death of a partner; and
• Any other matter relating to the conduct of business.
Normally, the partnership deed covers all matters affecting relationship of partners amongst themselves. However, if there is no express agreement on certain matters, the provisions of the Indian Partnership Act, 1932 shall apply.
Rules applicable in the absence of Partnership Deed: The important provisions affecting partnership accounts are as follows:
(a) Interest on Drawings (Sec.13): No interest is to be charged on the drawings made by the partners, if there is no mention in the Deed.
(b) Remuneration to Partners (Sec.13A): No partner is entitled to get salary or other remuneration for taking part in the conduct of the business of the firm unless there is a provision for the same in the Partnership Deed.
(c) Profit Sharing Ratio (Sec.13B): If the partnership deed is silent about the profit-sharing ratio, the profits and losses of the firm are to be shared equally by partners, irrespective of their capital contribution in the firm.
(d) Interest on Capital (Sec.13C): No partner is entitled to claim any interest on the amount of capital contributed by him in the firm as a matter of right. However, interest can be allowed when it is expressly agreed to by the partners. Thus, no interest on capital is payable if the partnership deed is silent on the issue. Further the interest is payable only out of the profits of the business and not if the firm incurs losses during the period.
(e) Interest on Advances/Loans (Sec.13D): If any partner has advanced some money to the firm beyond the amount of his capital for the purpose of business, he shall be entitled to get an interest on the amount at the rate of 6% p.a.
(f) Admission of a new partner: No new partner can be admitted in the firm without the consent of all existing partners.
Maintenance of Capital Accounts of Partners
There are two methods by which the capital accounts of
partners can be maintained. These are:
(a) Fixed Capital Method, (b) Fluctuating Capital Method.
Format of Partner’s Capital and Current A/c under Fixed
Capital Method.
Dr. Partners’ Capital Account Cr.
|
Date |
Particulars |
A. Rs. |
B. Rs. |
C.
Rs. |
Date |
Particulars |
A. Rs. |
B. Rs. |
C. Rs. |
|
|
To Bank A/c
|
|
|
|
|
By Bal. b/d
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Partners’ Current Account Cr.
|
Date |
Particulars |
A.Rs. |
B.Rs. |
C. Rs. |
Date |
Particulars |
A.Rs. |
B. Rs. |
C. Rs. |
|
|
To Bal. b/d (Dr. bal.)
|
|
|
|
|
By Bal. b/d (Cr. bal.)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(b) Fluctuating Capital Method: Generally, only one account, i.e. capital account is maintained
under fluctuating capital method. All the adjustments such as share of profit
and loss, interest on capital, drawings, interest on drawings, salary or
commission to partners, etc are recorded directly in the capital accounts of
the partners. This makes the balance in the capital account to fluctuate from
time to time. That’s the reason why this method is called fluctuating capital
method. But when a new partner is unable to bring his share of goodwill in
cash, we open a current account, irrespective of capital is fixed or
fluctuating.
When we adjust capitals, sometimes adjustment is made through the current account, irrespective of capitals are fixed or fluctuating.
Important: We
can prepare both the accounts - Capital/Current Account, whether capitals are
fixed or Fluctuating, depending on the above situation.
The format of capital accounts prepared under the
fluctuating capital method is given below:
Dr. Partners’ Capital Account Cr.
|
Date |
Particulars |
A.Rs. |
B.Rs. |
C.Rs. |
Date |
Particulars |
A.Rs. |
B.Rs. |
C.Rs. |
|
|
To Bal. b/d
|
|
|
|
|
By Bal. b/d
|
|
|
|
Illustration 1. Sumit and Tapan are partners with capitals
of Rs.1,50,000 and Rs. 1,00,000 respectively. They agree to share profits in
the ratio of 3:2. Show how the following transactions will be recorded in the
capital accounts of the partners in case: (i) the capitals are fixed, and (ii)
the capitals are fluctuating. The books are closed on March 31, every year.
Solution: Fixed
Capital Method
Dr. Partners’ Capital Accounts Cr.
Dr. Partner’s Current Accounts Cr.
Working Notes: Calculation of interest on capitals:
Sumit-
10 % on Rs. 1,50,000 for 1 Year = 1,50,000 ×10/100 = 15,000
10 % on Rs. 30,000 for 8 months = 30,000×10/100×8/12 = 2,000 = 17,000
|
Particulars |
Sumit (Rs.) |
Tapan (Rs.) |
Additional capital contributed on Aug. 1, 2014
|
30,000
|
24,000
|
Dr. Partners’ Capital Accounts Cr.
|
Particulars |
Sumit Rs. |
Tapan Rs. |
Particulars |
Sumit Rs. |
Tapan Rs. |
To Balance c/d |
1,80,000 |
1,24,000
|
By Balance b/d
|
1,50,000
|
1,00,000
|
|
|
1,80,000 |
1,24,000 |
|
1,80,000 |
1,24,000 |
|
Particulars |
Sumit Rs. |
Tapan Rs. |
Particulars |
Sumit Rs. |
Tapan Rs. |
Drawings
|
18,000
|
12,000
|
Interest on capital
|
17,000
|
11,600
|
|
|
53,000 |
39,600 |
|
53,000 |
39,600 |
Sumit-
10 % on Rs. 1,50,000 for 1 Year = 1,50,000 ×10/100 = 15,000
10 % on Rs. 30,000 for 8 months = 30,000×10/100×8/12 = 2,000 = 17,000
Tapan-
10 % on Rs. 1,00,000 for 1 year = 1,00,000×10/100 = 10,000
10 % on Rs. 24,000 for 8 months = 24,000×10/100× 8/12 = 1,600 = 11,600
Fluctuating Capital Method
Dr. Partners’ Capital Accounts Cr.
10 % on Rs. 1,00,000 for 1 year = 1,00,000×10/100 = 10,000
10 % on Rs. 24,000 for 8 months = 24,000×10/100× 8/12 = 1,600 = 11,600
Fluctuating Capital Method
Dr. Partners’ Capital Accounts Cr.
|
Particulars |
Sumit Rs. |
Tapan Rs. |
Particulars |
Sumit Rs. |
Tapan Rs. |
Drawings
|
18,000
|
12,000
|
Balance b/d
|
1,50,000
|
1,00,000 24,000 11,600
18,000 10,000 |
|
|
1,80,000 |
1,24,000 |
|
1,80,000 |
1,24,000 |
24,000
12,000
Profit and Loss Appropriation Account
Profit
and Loss Appropriation Account is merely an extension of the Profit and Loss
Account of the firm. It shows how the profits are appropriated or distributed
among the partners. The
journal entries for preparation of Profit and Loss Appropriation Account and
making various adjustments through it are given as follows:
Journal Entries
1. Transfer of the balance of Profit and Loss Account to
Profit and Loss Appropriation Account:
(a) If
Profit and Loss Account shows a credit balance (net profit):
Profit
and Loss A/c Dr.
To
Profit and Loss Appropriation A/c
(b) If
Profit and Loss Account shows a debit balance (net loss)
Profit
and Loss Appropriation A/c Dr.
To
Profit and Loss A/c
2. Interest on Capital:
(a) For
crediting interest on capital to partners’ capital account:
Interest
on Capital A/c Dr.
To
Partner’s Capital/Current A/cs (individually)
(b) For transferring interest on
capital to Profit and Loss Appropriation Account:
Profit
and Loss Appropriation A/c Dr.
To
Interest on Capital A/c
3. Interest on Drawings:
(a) For
charging interest on drawings to partners’ capital accounts:
Partners’
Capital/Current A/c’s (individually) Dr.
To
Interest on Drawings A/c
(b) For
transferring interest on drawings to Profit and Loss Appropriation Account:
Interest
on Drawings A/c Dr.
To
Profit and Loss Appropriation A/c
4. Partner’s Salary:
(a) For
crediting partner’s salary to partner’s capital account:
Salary
to Partner A/c Dr.
To
Partner’s Capital/Current A/c’s (individually)
(b) For
transferring partner’s salary to Profit and Loss Appropriation Account:
Profit
and Loss Appropriation A/c Dr.
To
Salary to Partner’s A/c
5. Partner’s Commission
(a) For
crediting commission to a partner, to partner’s capital account:
Commission
to Partner A/c Dr.
To
Partner’s Capital/Current A/c’s (individually)
(b) For
transferring commission paid to partners to Profit and Loss Appropriation
Account:
Profit
and Loss Appropriation A/c Dr.
To
Commission to Partners Capital/Current A/c6. Share of Profit or Loss after appropriations: If Profit:
Profit
and Loss Appropriation A/c Dr.
To
Partner’s Capital/Current A/c’s (individually)
The format
of Profit and Loss Appropriation Account:Profit and Loss Appropriation Account
Dr. for the year ending ---------- Cr.
|
Particulars |
Amt. Rs. |
Particulars |
Amt. Rs. |
To Profit and Loss (net loss)
B xxx To General Reserve (% on Divisible Profits) To Profit transferred: A xxx B xxx |
xxx
|
By Profit and Loss (net profit) xxx Less: Int. on Partner’s Loan xxx Less: Rent paid to partner xxx Less: Manager’s commission xxx By Int. on Drawings: A xxx B xxx
By Loss transferred: A xxx (If there is loss) B xxx |
xxx |
|
|
xxx |
|
xxx |
Illustration 2. Amit and Baby are partners sharing profits
in the ratio of 3:2, with capitals of Rs. 50,000 and Rs. 30,000 respectively.
Interest on capital is agreed @ 6% p.a. Baby is to be allowed an annual salary
of Rs. 2,500. During the year 2024-25, the profits prior to the calculation of
interest on capital but after charging Baby’s salary amounted to Rs. 12,500. A
provision of 5% of the profit is to be made in respect of commission to the
Manager.
Prepare
Profit and Loss Appropriation account showing the distribution of profit and
the partners’ capital accounts for the year ending March 31, 2025.Solution Profit and Loss Appropriation
Account
Dr. for
the year ending 31st March 2017 Cr.
Dr. for
the year ending 31st March 2017 Cr.
|
Particulars |
Amt. Rs. |
Particulars |
Amt. Rs. |
|
Baby’s salary Interest on capital: Amit 3,000 Baby 1,800 Profit transferred: Amit 4,170
Baby 2,780 |
2,500 4,800 6,950
|
Profit and Loss (N.P)
12,500 |
14,250
|
|
|
14,250 |
|
14,250 |
Dr. Partners’ Capital Accounts Cr.
|
Particulars |
Amit Rs. |
Baby Rs. |
|
Amit Rs. |
Baby Rs. |
Balance c/d |
57,170 |
37,080 |
Balance b/d
|
50,000
|
30,000
|
|
|
57,170 |
37,080 |
|
57,170 |
37,080 |
Appropriations
More than Available Profit
Profit and Loss
Appropriation Account is prepared to appropriate profit earned by the
firm
during the year. However, if appropriations are more than the available profit,
then following steps are taken to appropriate the available profit:
Step 2: The
available profits are distributed between the partners in the ratio of amount
determined for each partner.
Interest
on Drawings
The calculation of interest on drawings under different
situations is shown as here under:
A-
Simple Method: This method for calculation of interest on drawing is
applied when drawings have been made by partners one or two times in a year and
drawing dates are given in the question. Period is calculated from the date of
drawing to the year end in months or days and interest is calculated as
follows:
Interest on
drawing = Drawing amount × Rate/100 × Months or Days/12 or 365
B-
Product Method:
When the partners withdraw different amounts of money at different time
intervals, the interest is calculated using the product method.
Product Table
|
Drawing
Date |
Drawing
Amount |
Period |
Product |
|
|
|
|
|
|
|
|
|
Total
Product |
Illustration 3: Sundar withdrew the following amounts from her firm, for personal use during the year ending March 31, 2025. Calculate interest on drawings by product method, if the rate of interest to be charged is 9 % p.a.
April 1, 2024 = 10,000; June 30, 2024 = 12,000; October 31, 2024 = 18,000; December 31, 2024 = 16,000; March 1, 2025 = 14,000.
Solution: Product Table
|
Drawing Date |
Drawing Amount |
Period |
Product |
April 1, 2024
|
10,000
|
12
|
1,20,000
|
|
|
|
|
3,80,000 |
Interest on drawing = Total Product × Rate/100 × 1/12
= 3,80,000 × 9/100 × 1/12 = 3,800 × 3/4
= 950 × 3 = 2,850.
C- Average Period Method: Many a time, a fixed amount of money is withdrawn by the partners, at equal time interval, say each month or each quarter. While calculating the time period, attention must be paid to whether the fixed amount was withdrawn at the beginning (first day) of the month/quarter, middle of the month/quarter or at the end (last day) of the month/quarter.
Monthly Drawing
Steps for Calculation of Interest on Drawing
Average Period = (Total Period in Months + 1 or – 1) / 2
Interest on drawing = Total Drawing × (Rate / 100) × (Av. Period / 12)
Suppose, Rohan withdrew Rs. 10,000 per month from the firm for his personal use during the year ending March 31, 2017. The rate of interest on drawing @ 8% p.a. The calculation of average period and the interest on drawings, in different situations would be as follows:
(a) When the amount is withdrawn at the beginning of each month:
Total Drawing = 10,000 × 12 = 1,20,000.
Average Period = (Total Period in Months + 1) / 2 = (12+1) / 2 = 13 / 2 = 6.5 months.
Interest on Drawings = 1,20,000 × 8/100 × 6.5/12 = 100 × 8 × 6.5 = Rs. 5,200.
(b) When the amount is withdrawn at the end of each month:
Total Drawing = 10,000 × 12 = 1,20,000.
Average Period = (Total period in Months – 1) / 2 = (12 – 1) / 2 = 5.5 months
Interest on Drawings = 1,20,000 × 8/100 × 5.5/12 = 100 × 8 × 5.5 = Rs. 4,400.
(c) When money is withdrawn in the middle of the month:
Total Drawing = 10,000 × 12 = 1,20,000.
Average Period = Total period in Months / 2 = 12 / 2 = 6 months
(Nothing is added or deduced from the total period.)
Interest on Drawings = 1,20,000 × 8/100 × 6/12 = 100 × 8 × 6 = Rs. 4,800.
Quarterly Drawing
If the amount is withdrawn at the beginning of each quarter (1st April, 1st July, 1st Oct., 1st Jan.) the interest is calculated on the total money withdrawn during the year, for a period 7.5 months, if withdrawn at the end of each quarter (30th June, 30th Sept., 31st Dec., 31st March) it will be calculated for a period of 4.5 months and if withdrawn in the middle of each quarter (15th May, 15th Aug., 15th Nov., 15th Feb.) it will be calculated for a period of 6 months.
Steps for Calculation of Interest on Drawing
Average Period = (Total Period in Months + 3 or – 3) / 2
Interest on drawing = Total Drawing × (Rate / 100) × (Av. Period / 12)
Note: If drawing date is not given in the question, then interest is calculated for an average period of six months.
Suppose Sohan and Mohan are partners in a firm, sharing profits and losses equally. During financial year 2024–2025, Sohan withdrew Rs. 30,000 quarterly. If interest is to be charged on drawings @ 8% per annum, the calculation of average period and interest on drawings will be as follows:
(a) If the amount is withdrawn at the beginning of each quarter:
Total Drawing = 30,000 × 4 = 1,20,000.
Average Period = (Total Period in Months + 3) / 2 = (12+3) / 2 = 15 / 2 = 7.5 months.
Interest on drawing = 1,20,000 × 8/100 × 7.5/12 = 100 × 8 × 7.5 = Rs. 6,000.
(b) If the amount is withdrawn at the end of each quarter:
Total Drawing = 30,000 × 4 = 1,20,000.
Average Period = (Total Period in Months – 3) / 2 = (12–3) / 2 = 9 / 2 = 4.5 months.
Interest on drawing = 1,20,000 × 8/100 × 4.5/12 = 100 × 8 × 4.5 = Rs. 3,600.
(c) If the amount is withdrawn in the middle of each quarter:
Total Drawing = 30,000 × 4 = 1,20,000.
Average Period = Total Period in Months / 2 = 12 / 2 = 6 months.
Interest on drawing = 1,20,000 × 8/100 × 6/12 = 100 × 8 × 6 = Rs. 4,800.
Average Periods Calculation in various cases
|
Day
of Drawing |
Monthly
Drawing |
Quarterly
Drawing |
|
Beginning
(Month/Quarter) |
(12+1)/2
= 13/2 = 6.5 months |
(12+3)/2
= 15/2 = 7.5 months |
|
Middle
(Month/Quarter) |
(12/2)
= 6 months |
(12/2)
= 6 months |
|
End
(Month/Quarter) |
(12–1)/2
= 11/2 = 5.5 months |
(12–3)/2
= 9/2 = 4.5 months |
Illustration 4: Kabir, a partner in Modern Travels withdrew money during the year ending March 31, 2025, from his capital account, for his personal use. Calculate interest in drawings in each of the following alternative situations, if rate of interest is 9% p.a.
(a) If he withdrew Rs. 6,000 per month at the beginning of the month.
(b) If an amount of Rs. 6,000 per month was withdrawn by him at the end of each month.
(c) If the amounts withdrawn were: Rs. 12,000 on June 01, 2024, Rs. 8,000; on August 31, 2024, Rs. 6,000; on September 30, 2024, Rs. 9,000, on November 30, 2024, and Rs. 8,000 on January 31, 2025.
Solution:
(a) Total Drawing = 6,000 × 12 = 72,000.
Average Period = (Total Period in Months+1) / 2 = (12+1) / 2 = 6.5 months.
Interest on drawings = 72,000 × 9/100 × 6.5/12 = 60 × 9 × 6.5 = Rs. 3,510.
(b) Total Drawing = 6,000 × 12 = 72,000.
Average Period = (Total Period in Months–1) / 2 = (11–1) / 2 = 5.5 months.
Interest on drawings = 72,000 × 9/100 × 5.5/12 = 30 × 9 × 5.5 = Rs. 2,970.
(c) Product Table
|
Drawing Date |
Drawing Amount |
Period |
Product |
June 01, 2024
|
12,000
|
10
|
1,20,000
|
|
|
|
|
2,64,000 |
= 2,64,000 × 9/100 × 1/12 = 220 × 9 = 1,980.
Guarantee of Profit to a Partner
Sometimes a partner is admitted into the firm with a guarantee of certain minimum amount by way of his share of profits of the firm. Such assurance may be given by all the old partners in a certain ratio or by any of the old partners, individually to the new partner.
Such a guarantee may be given either by:
2. Any one of the remaining partners: In this case, the deficiency is met by such partner
3. Two or more of the remaining partners (but not all of the remaining partners): In this case, the deficiency is met by such partners.
If the question is silent about the burden of guarantee, then the deficiency is borne by the remaining partners in their profit-sharing ratio.
Illustration 5: Mahesh and Dinesh share profits and losses in the ratio of 2:1. From April 01, 2024, they admit Rakesh into their firm who is to be given a share of 1/10 of the profits with a guaranteed minimum of Rs. 25,000. Mahesh and Dinesh continue to share profits as before but agree to bear any deficiency on account of guarantee to Rakesh in the ratio of 3:2 respectively. The profits of the firm for the year ending March 31, 2025, amounted to Rs. 1,20,000. Prepare Profit and Loss Appropriation Account.
Solution: Profit and Loss Appropriation Account
Dr. for the year ending 31st March 2025 Cr.
|
Particulars |
Amt. Rs. |
Particulars |
Amt. Rs. |
Profit transferred:
|
|
Profit and Loss (Net profit) |
1,20,000 |
|
|
1,20,000 |
|
1,20,000 |
Rakesh’s share of profit = 1,20,000 × 1/10 = 12,000 but he has been guaranteed Rs.25,000.
Thus, Rakesh’s profit deficiency = 25,000 – 12,000 = 13,000 will be borne by Mahesh and Dinesh in the ratio 3:2.
Mahesh = 13,000 × 3/5 = 2,600 × 3 = 7,800. Dinesh = 13,000 × 2/5 = 5,200.
Remaining profits = 1,20,000 – 12,000 = 1,08,000.
Mohit = Rs. 1,08,000 × 2/3 = 72,000 – 7,800 (deficiency) = 64,200.
Rohit = Rs. 1,08,000 × 1/3 = 36,000 – 5,200 (deficiency) = 30,800.
Past Adjustments
Sometimes a few omissions or errors in the recording of transactions or the preparation of summary statements are found after the final accounts have been prepared and the profits distributed among the partners. The omission may be in respect of interest on capitals, interest on drawings, interest on partners’ loan, partner’s salary, partner’s commission or outstanding expenses. There may also be some changes in the provisions of partnership deed or system of accounting having impact with retrospective effect. All these acts of omission and commission need adjustments for correction of their impact. Statement Showing Net Effect of Omitting Interest on Capital/Drawing, Salaries etc.
|
Particulars |
A Rs. |
B Rs. |
Total Rs. |
Interest on capital should have been credited
|
xxxx
|
xxxx
|
xxxx
|
|
xxxx
|
xxxx
|
xxxx
|
Total
|
xxxx
|
xxxx
|
xxxx
|
|
Net effect |
- (Dr.) |
+ (Cr.) |
Nil |
A’s Capital/Current A/c Dr.
To B’s Capital/Current A/c
(Adjustment entry made)
Note:
01. Current A/c will be used in case of Fixed Capital.
02. If profits have been already distributed in wrong ratio, then remaining profits must be distributed after salaries/commission in correct ratio.
Illustration 6: Rameez and Zaheer are equal partners. Their capitals as on April 01, 2015 were Rs. 50,000 and Rs. 1,00,000 respectively. After the accounts for the financial year ending March 31, 2016 have been prepared, it is discovered that interest at the rate of 6 per cent per annum, as provided in the partnership deed has not been credited to the partners’ capital accounts before distribution of profit. Rectify the above error.
Statement Showing Net Effect of Omitting Interest on Capital
|
Particulars |
Rameez Rs. |
Zaheer Rs. |
Total Rs. |
|
Interest on capital should have been credited Less: Profits already credited equally |
3,000 4,500 |
6,000 4,500 |
9,000 9,000 |
|
Net effect |
- 1,500 (Dr.) |
1,500 (Cr.) |
Nil |
Journal Entry
Rameez’s Capital A/c Dr. 1,500
To Zaheer’s Capital A/c 1,500
(Adjustment for omission of interest on capital)
Illustration 7: Nusrat, Sonu and Himesh are partners sharing profits and losses in the ratio of 5:3:2. The partnership deed provides for charging interest on drawing @ 10% p.a. The drawings of Nusrat, Sonu and Himesh during the year ending December 2024 amounted to Rs. 20,000, Rs. 15,000 and Rs. 10,000 respectively. After the final accounts have been prepared, it was discovered that interest on drawings has not been taken into consideration. Give necessary adjusting journal entry.
Solution- Statement Showing Net Effect of Omitting Interest on Drawing
|
Particulars |
Nusrat Rs. |
Sonu Rs. |
Himesh Rs. |
Total Rs. |
|
Interest on drawing should be debited Less: Division of profit/loss 5:3:2 |
2,000 2,250 |
1,500 1,350 |
1,000 900 |
4,500 4,500 |
|
Net effect |
- 250 Cr. |
150 Dr. |
100 Dr. |
Nil |
Adjusting Journal Entry
Sonu’s Capital A/c Dr. 150
Himesh’s Capital A/c Dr. 100
To Nusrat’s Capital A/c 250
(Adjustment for omission of interest on drawings)
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