CHAPTER 8 – PARTNERSHIP ACCOUNTS – UNIT 1 – INTRODUCTION TO PARTNERSHIP ACCOUNTS

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Chapter 8 – Partnership Accounts

Unit 1 – Introduction to Partnership Accounts

Meaning When two or more persons do business together, it is known as partnership.

Features 1. Existence of Agreement

2. Business

3. Sharing of Profit

4. Mutual Agency

Number of Partners in a Firm 1. Minimum = 2

2. Maximum = 50

Partnership Deed

Meaning Written document containing all the terms and conditions of Partnership.

Rules in the Absence of Partnership Deed Issues Provision

1. Salary/Commission to Partners No 2. Interest on Capital No 3. Interest on Drawings No 4. Interest on Partner’s Loan 6% 5. Profit Sharing Ratio Equal

Accounts of Partnership Firm

Charge Against Profit vs. Appropriation of Profit S.

No. Charge Against Profit Appropriation of Profit

1. Deducted from Revenue Distribution of Net Profit to Partners under appropriate heads

2. Debited to the Profit & Loss A/c Debited to the Profit & Loss Appropriation A/c

Note – Rent Paid to Partner, and Interest on Partner’s Loan are charges against profit.

Profit & Loss Appropriation A/c

Profit and Loss Appropriation A/c

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Dr. for the year ended… Cr.

Particulars ₹ Particulars ₹

To Interest on Capitals: By Profit & Loss A/c (Net Profit) ……..

To A's Capital A/c …….. By Interest on Drawings:

To B's Capital A/c …….. …….. By A's Capital A/c …….. To Partners' Salaries A/c …….. By B's Capital A/c …….. ……..

To Partners' Commissions A/c …….. To Reserve A/c ……..

To Profit transferred to:

To A's Capital A/c ……..

To B's Capital A/c …….. ……..

…….. ……..

Partners’ Capital Accounts

Interest on Capital Interest on Partner’s Capital A/c …Dr. To Partner’s Capital/Current A/c

Profit & Loss Appropriation A/c …Dr. To Interest on Partner’s Capital A/c

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OR

Profit & Loss Appropriation A/c …Dr. To Partner’s Capital/Current A/c

Note: If the Capital Accounts are maintained following the Fixed Capital Method, then interest is

allowed only on the balance of the Capital A/c and not on the balance of the Current A/c.

Interest on Drawings

Accounting Treatment Partner’s Capital/Current A/c …Dr. To Interest on Partner’s Drawings A/c

Interest on Partner’s Drawings A/c …Dr. To Profit & Loss Appropriation A/c

OR Partner’s Capital/Current A/c …Dr. To Profit & Loss Appropriation A/c

Calculation of Interest on Drawings

Irregular Drawings No particular method. Calculate normally.

Regular Drawings

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑛 𝐷𝑟𝑎𝑤𝑖𝑛𝑔𝑠 = 𝑇𝑜𝑡𝑎𝑙 𝐷𝑟𝑎𝑤𝑖𝑛𝑔𝑠 ×𝑅𝑎𝑡𝑒 𝑜𝑓 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡

100×

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑒𝑟𝑖𝑜𝑑

12

where,

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝑃𝑒𝑟𝑖𝑜𝑑 =𝑀𝑜𝑛𝑡ℎ𝑠 𝐿𝑒𝑓𝑡 𝐴𝑓𝑡𝑒𝑟 𝐹𝑖𝑟𝑠𝑡 𝐷𝑟𝑎𝑤𝑖𝑛𝑔𝑠 + 𝑀𝑜𝑛𝑡ℎ𝑠 𝐿𝑒𝑓𝑡 𝐴𝑓𝑡𝑒𝑟 𝐿𝑎𝑠𝑡 𝐷𝑟𝑎𝑤𝑖𝑛𝑔𝑠

2

Average Period in Various Cases of Regular Drawings

Case Average Period

1. Beginning of Every Month 6.5 2. Middle of Every Month 6 3. End of Every Month 5.5 4. Beginning of Every Quarter 7.5 5. Middle of Every Quarter 6 6. End of Every Quarter 4.5

Note: In case the date of drawings is not given in the question, assume that it was withdrawn evenly

throughout the year, and calculate the interest on drawings for an average period of 6 months.

Past Adjustments The errors or omissions occurred in the past are accounted for by passing one Journal Entry.

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Table Showing Adjustments (Adjustment Table) Question

A, B and C are partners in a firm sharing profits and losses equally. For the year ended 31st March, 2018,

₹1,00,000 each was transferred to their capitals as their share of profits. Later on, it was realised that

interest on capital was not allowed to A – ₹12,000, B – ₹9,600 and C – ₹10,500 and also interest was not

charged on drawings of A and B amounting to ₹1,200 and ₹900 respectively. Pass a journal entry for

rectifying the above errors.

Solution

An adjustment table is prepared as follows:

Particulars A's Capital A/c B's Capital A/c C's Capital A/c Firm

Dr. (₹) Cr. (₹) Dr. (₹) Cr. (₹) Dr. (₹) Cr. (₹) Dr. (₹) Cr. (₹)

Profit Already Distributed 1,00,000 - 1,00,000 - 1,00,000 - - 3,00,000 Interest on Capital - 12,000 - 9,600 - 10,500 32,100 - Interest on Drawings 1,200 - 900 - - - - 2,100 Profit to be Distributed - 90,000 - 90,000 - 90,000 2,70,000 -

1,01,200 1,02,000 1,00,900 99,600 1,00,000 1,00,500 3,02,100 3,02,100

Net Effect 800 (Cr.) 1,300 (Dr.) 500 (Cr.) NIL

The journal entry is passed as follows:

Date Particulars L.F. Dr. (₹) Cr. (₹)

B's Capital A/c Dr. 1,300

To A's Capital A/c 800 To C's Capital A/c 500

Guarantee to a Partner of Minimum Profit Incoming Partner is given a guarantee that his share of profit will not be less than a certain

amount.

If his share falls short of the guaranteed amount, the remaining partners bear the deficiency in

the agreed ratio.

In the absence of agreement, the deficiency is borne in the profit sharing ratio.

Profit & Loss Appropriation A/c

Particulars ₹ Particulars ₹

To Profit transferred to: By Profit & Loss A/c (Net Profit) xxx To A's Capital A/c xxx To Less: Deficiency borne xxx xxx To B's Capital A/c xxx To Less: Deficiency borne xxx xxx To C's Capital A/c xxx To Add: Deficiency met by A xxx

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To Add: Deficiency met by B xxx xxx

xxx xxx