CHAPTER Accounting for Partnership Firms— Fundamentals LEARNING OBJECTIVES The study of this Chapter would enable you to understand: 2 Meaning and Definition of Partnership a i_ Essential Features or Characteristics of Partnership 22 O Rights of Partners Ea Partnership Deed is Importance of Partnership Deed a5 Provisions Affecting Accounting Treatment in the Absence of Partnership Deed 24 Interest on Partner's Loan to the firm 208 Distribution of Profit among Partners: Profit and Loss Appropriation Account 2.10 Special Aspects of Partnership Accounts: 2.22 © Partners’ Capital Accounts under Fixed and Fluctuating Methods © Salary or Commission to Partners © Interest on Partners’ Drawings © Interest on Partners’ Capitals © Adjustments for Incorrect Appropriations of Profits in the Past (Past Adjustments) © Guarantee of Profit MEANING) AND) DEFINITION |OF PARTNERSHIP: Partnership is an association between two or more persons who agree to do business and share its profits and losses. The partners act both as agents and principals of the firm. Partnership is defined by Indian Partnership Act, 1932, Section 4, as follows: “Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of then acting for all.” A partnership, thus, is a business relationship among, two or more persons to share profits and losses of the business, carried on by all or any of them acting for all. Partners, Firm and Firm Name: The persons who have entered into a partnership with one another individually are called partners and collectively a firm. The name under which the business is carried is called firm name. Nature of Partnership Partnership is a separate business entity from the accounting viewpoint. However, from the legal viewpoint, a partnership firm is not a separate legal entity from its partners. It means, firm’s debts can be paid from private assets of the partners, if the firm is not able to pay its liabilities. Scanned with CamScanner2.2 Double Entry Book Keeping—CBSE XII J ESSENTIAL FEATURES OR CHARACTERISTICS OF PARTNERSHIP. ‘The essential characteristics of partnership are: 1, Two or More Persons: There must be at least two persons to form a partnership ang all such persons must be competent to contract. According to Indian Contract Act, 1872 every person except the following is competent to contract: (a) Minor, (b) Persons of unsound mind, and (©) Persons disqualified by any law. dQ (Section 464 of the Companies Act, 2013 empowers the Central Government to prescrit: Maximum number of partners in a firm bat the HUMDET Of PATENTS So prescribed canno; be more than 100. The Central Government has prescribed maximum number. of partner, in Simm to be90 vide Rule 10 of the Companies (Miscellangous) Rules, 2014. Thus, in effect, a partnersiip firm cannot have more than 50 members) 2. Agreement: Partnership comes into existence by an agreement, either written or oral The agreement among the partners is the basis of their relationship which may be for g particular venture, for a period or at will. The written agreement among the partners js known as Partnership Deed. 3. Lawful Business: A partnership is established for a lawful business. Business includes trade, vocation and profession but not a joint ownership or charitable activity. 4. Profit-sharing: The agreement between/among the partners must be to share profits and : losses of the business. It is not essential that all the partners must share losses also. There be a provision in the Partnership Deed that a particular partner or partners shal] not bear the losses. 5, Business can be carried on by All or Any of the Partners Acting for All: Business of the partnership can be carried on by all the partners or by any of them acting for all the partners. In other words, partners are agents as well as the principals. | ‘As an agent, he represents other partners and thereby, binds them through his acts. ‘As a principal, he is bound by the act of other partners. | RIGHTS OF PARTNERS 1. Every partner has the right to participate in the management of the busines: 2. Every partner has the right to be consulted about the affairs of the business. 3. Every partner has the right to inspect the books of account and have a copy of it 4. Every partner has the right to share profits or losses with others in the agreed ratio. 5. If a partner has advanced loan, he has the right to receive interest thereon at an agreed rate of interest. In case the rate of interest is not agreed, interest is paid at the rate provided in the Indian Partnership Act, 1932, i.c., @ 6% p.a. 6. In case of an emergency, a partner has the right to act according to his best judgment and be indemnified for the expenses incurred by him. 7. A partner has the right not to allow the admission of a new partner. 8. After giving proper notice, a partner has the right to retire from the firm. 9. If a partner incurs expenses on the business or he pays amount on behalf of the firm that partner gets indemnified for these payments from the firm. Scanned with CamScannerChapter 2 Accounting for Partnership Firms—Fundamentals 2.3 PARTNERSHIP DEED Partnership comes into existence by an oral or written agreement. It is better to have written agreement to avoid any dispute. This written document known as Partnership Deed deta the terms and conditions of partnership. It is a legal document signed by all the partners and has clauses on the following: () Description of the Partners: Names, description and addresses of the partners. (ii) Description of the Firm: Name and address of the firm. (iii) Principal Place of Business: Address of the principal place of business. (iv) Nature of Business: Nature of business that the firm shall carry on. (¥) Commencement of Partnership: Date of commencement of partnership. (vi) Capital Contribution: The amount of capital to be contributed by each partner, whether the Capital Accounts shall be fixed or fluctuating. (vii) Interest on Capital: Rate of interest, if allowed, on capital. Interest on Drawings: Rate of interest, if to be charged, on drawings. Profit-sharing Ratio: Ratio in which profits or losses are to be shared by the partners. Interest on Loan: Rate of interest on loan by a partner to the firm. Remuneration to Partners: Amount of salary, commission, etc., if agreed, to be paid. Valuation of Goodwill: Method by which goodwill of the firm will be valued at the time of admission or retirement of a partner or at the time of death of a partner. Valuation of Assets: The manner in which assets of the firm shall be valued in the case of its reconstitution. Settlement of Account: The manner in which accounts of partner(s) shall be settled in case of his (their) retirement or death or at the time of dissolution of the firm. (xv) Accounting Period: The date on which accounts shall be closed every year. Normally accounts are closed on 31st March every year because every entity must submit the return of income on 31st March every year. (xvi) Rights and Duties of Partners: The rights and’duties of partners are defined. (vii) Duration of Partnership: The period of partnership, ie., whether it is for a specified period or for a venture or at will (xviii) Bank Account Operatio: fow shall the Bank Account be operated? Whether it shall be operated by any of the partners or jointly. (xix) Death of a Partner: Whether the firm will continue or dissolve. (x) Settlement of Disputes: Disputes, if any, among the partners—how they shall be settled. Importance of Partnership Deed Partnership Deed is an important legal document which defines relationship among, the partners. It is important to have written Partnership Deed to avoid and settle possible disputes. Itis useful because: 1. It governs the rights, duties and liabilities of each partner. 2. Disputes arising, if any, among the partners are settled on the basis of Partnership Deed, it being a written contract Is it essential to have a Partnership Deed? No, it is not essential but desirable to have a Partnership Deed. In case Partnership Deed does exist, provisions of the Indian Partnership, Act, 1932 will apply. ) Scanned with CamScanner/! 2.4 Double Entry Book Keeping—CBSE XII Provisions Affecting Accounting Treatment in the Absence of Partnership Deed In the absence of a Partnership Deed or if the Partnership Deed is silent, ie, it does not have a lause in respect of the following matters, the provisions of the Indian Partnership Act, 1932 apply. 1. Sharing of Profits/Losses Profits/Losses are shared equally by the partners. 2. Interest on Capital 2 is not paid (allowed) to partners. — = —— = : 3. Interest on Drawings Interest on drawings is not charged from partners. 4, Interest on Advance/Loan by a Partner Interest on loan is paid (allowed) @ 6% p.a. Interest on partner’ loan is a charge against profit. It means interest is paid whether the firm earns profit or incurs loss. 5, Remuneration to Partners Remuneration (salary, commission, etc,) is nat paid (allowed) to any partner. \ 6. Admission of Partner New partner cannot be admitted unless all the partners agree.) The partners may amend the Partnership Deed to include or change any of the above clauses, Liabilities of Partners Subject to agreement among the partners, 1. Ifa partner carries on a business that is similar to that of the firm in competition with the firm and earns profit from it, the profit earned from such business shall be paid to the firm. 2. If a partner earns profit for himself from any transaction of the firm or from the use of firm’s property or business connection, the profit so earned shall be paid to the firm. For example, a partner gets commission from the buyer of goods on goods sold by the firm, the commission so earned shalll be paid to the firm. Some other Important Provisions of the Indian Partnership Act, 1932 @) If all the partners agree, a minor may be admitted for the benefit of partnership. [Sec. 30] (i) A person may be admitted as a partner either with the consent of all the existing partners or in accordance with an express agreement among the partners. _[Sec. 31] ) A partner may retire from the firm either with the consent of all the other partners or ‘i in accordance with an express agreement among the partners. [Sec. 32] (iv) Registration of the firm is optional and not compulsory. [Sec. 69] (v) Unless otherwise agreed by the partners in the Partnership Deed, a firm is dissolved on the death of a partner. [Sec. 35] Note: It should be noted that above provisions of the Indian Partnership Act, 1932 are applied when Partnership Deed does not exist or where it exists but it does not have a clause to this effect. LIMITED LIABILITY PARTNERSHIP. Limited Liability Partnership (LLP) is a business vehicle like partnership with additional feature of partners’ liability being limited. Thus, it has elements of partnership and company. Another important feature of LLP is that each partner is not responsible or liable for another partner's misconduct or negligence. LLP as Constituted in India The Limited Liability Partnership Act, 2008 came into effect from 31st March, 2009, LLP is different from a Partnership as it operates like a partnership, but in a LLP each partner is protected from personal liability, except to the extent of his capital contribution in the LLP. Scanned with CamScanner—~ —————— a Chapter 2- Accounting for Partnership Firms—Fundamentals 2.5, 4, LLP is subject to income tax like any other Partnership firm. 2, A partner is not liable for independent or unauthorised actions of other partners, thus allowing . "Individual partners to be shielded from joint liability created by another partner's wrongful business decisions or misconduct. 3, LLP is @ body corporate and a legal entity separate from its partners. It has perpetual succession like a limited liability company. Indian Partnership Act, 1932 is not applicable to LLPs and also the fimit on numbor of partners in a LLP is not applicable unlike an ordinary partnership firm where the maximum number of partners cannot exceed the number specified under Section 464 of the Companies Act, 2013, which at present is 50. The LLP Act, 2008 specifies that at least ono of the partners in the LLP is citizen of India and an Indian national 4, The Registrar of Companies (ROC) is the authority to register and control LLPs. Characteristics of @ LLP 1. Separate Legal Entity: Like a company, LLP also has a separate legal entity. Therofore, partners and the LLP are distinct from each other, like a company where company has lagat | entity separate from its shareholders 2. Minimum Capital: Minimum capital of a LLP is not specified. Thus, partners in the LLP decide | how much capital will be contributed by each partner. 3. Minimum Number of Members: A LLP can be established with at least two members who shall also be the Designated Partners and shall have Director Identification Number (DIN). There is no limit on the maximum number of partners. Members other than the Designated Partners | are required to have Director Identification Number (DIN). udit Is not mandatory 4, Audit is not mandatory: All companies, whether private or public, are required to get their books of account audited. However, audit of LLP's books of account is not mandatory except: uutions of the LLP exceeds ¢ 25 Lakhs; or | (b) If the annual turnover of the LLP exceeds % 40 Lakhs {a} If the cont Registration Process of a LLP is same as that of a company. Benefits of a LLP 1, Itis more flexible as compared to a company to organise internal structure. 2. There is no maximum limit for the number of partners in LLP. In a private Ii number of shareholders is limited to 200 shareholders excluding past and present employee shareholders. ted company, 3. Raising and utilisation of funds depends on the partners’ will as against norms prescribed in . the Companies Act, 2013 as applicable to companies. 4. Liability of partners is limited to their contribution as against liability of partners being unlimited in the case of normal partnership. However, the LLP Agreement is prepared in the same manner as Partnership Deed is prepared. Disadvantages of LLP 1. Any act of the partner without the knowledge of other partners may bind the LLP. 2, LLP cannot raise money from the public. 3. Venture capital firms generally prefer not to invest in LLPs. Private Limited is preferred over LLP. Scanned with CamScanner——$ $e = 2.6 Double Entry Book Keeping—CBSE XI Ilustration 1 (Provisions of the Indian Partnership Act, 1932). Ambrish, Lalit and Charu are partners in a firm. They do not have a Partnership Deed. (i) Ambrish, who has contributed more capital than other partners, demands interest on capital at 10% p.a, But Lalit and Charu do not agree with him. (i) Lalit has devoted his full time in the business and demands a salary of % 5,000 p.m But Ambrish and Charu do not agree with him. (ii) Charu demands interest on the loan of & 50,000 advanced by her at the market rate of interest, fc, @ 12% p.a. (iv) Ambrish has drawn T 10,000 from the firm for personal use. Lalit and Charu demang that interest should be charged @ 10% per annum. (v) Profit before taking into account any of the above claims amounted to % 50,000 at the end of the first year of the business. Ambrish demands share of profit in the capital ratio How will the disputes be settled? Solution: The partners do not have a Partnership Deed. Therefore, provisions of the Indian Partnership Act. 1932 will apply to settle the disputes: (i) Interest on capital is not payable to any partner. Therefore, Ambrish will not get interes, on the capital. (i) Remuneration is not payable to any partner. Therefore, Lalit will not get salary. Gii) Interest on Partner's Loan is payable @ 6% p.a. Therefore, Charu will get interest & 3,009 (ée., & 50,000 x 6/100). (iv) Interest on Ambrish’s Drawings will not be charged. (x) Profit after Interest on Charu's Loan, i.e., % 47,000 is to be distributed equally. Ilustration 2 (Provisions of the Indian Partnership Act, 1932). ‘Atal and Lal are partners in a firm. They do not have Partnership Deed. What shall be the position in the following cases? () Atal devotes more time than Lal in the business. Atal demands a salary of € 6,000 per month for it. (ii) Lal has invested capital of & 50,000 whereas Atal has invested € 5,000 as capital. Atal, however, has advanced ¥ 10,000 as loan to the firm. What interest, if any, will be allowed to Atal and Lal? (iii) Atal wants to introduce his son Inder as partner. Lal objects to his proposal. (iv) Lal wants that profit should be distributed in the ratio of their capitals but Atal wants that it should be distributed equally. Solution: In the absence of Partnership Deed, provisions of the Indian Partnership Act, 1932 shall apply to settle the disputes: (i) Salary is not payable to any partner. Therefore, Atal will not get salary. (ii) Interest on capital is not payable to any partner in the absence of Partnership Deed Therefore, Atal and Lal will not get interest on their capitals. Interest on loan is payable © 6% pa. Thus, Atal will get interest on loan @ 6% p.a. (iii) A person cannot be introduced as partner without the consent of all the partners ‘Therefore, Inder cannot be admitted into partnership because Lal objects to it. (iv) Profits shall be shared equally between Atal and Lal after deducting interest on lozt of Atal @ 6% p.a. on @ 10,000. Scanned with CamScannerY) Chapter 2 Accounting for Partnership Firms—Fundamentals 2.7 Illustration 3 (Oral Agreement). Harry and Garry are partners in a firm. They have not entered into Partnership Deed but had agreed on following: () Salary will be paid to Harry @ % 10,000 per month. (ii) Garry will get commission @ 10% of Net Profi (iii) Interest will be allowed on capitals @ 10% p.a (iv) Interest will be charged on drawings @ 10% p.a. (v) Partner cannot be admitted without the consent of both the partners. How will be the following disputes resolved? 1, Garry demands to be paid salary as Harry is being paid because his commission is lower. 2. Harry demands that his son Sherry be admitted as partner for 25% share to be given out of his share of profits to which Garry disagrees. Solution: Partnership agreement may be written or oral. Therefore, the terms agreed orally between Harry and Garry is a valid agreement. 1, The demand of Garry to be paid salary as is paid to Harry is not valid in view of agreement of payment of commission. 2. Harry’s demand to admit Sherry into partnership is also not valid as both the partners had agreed to admit a new partner with the consent of both the partners. Bar Ajey and Ashish decided to run a clinic in slum area providing free medical advice and also ribute medicines free of cost. Both of them decided to contribute % 1,00,000 each as initial corpus. Should they enter into Partnership Agreement? Give reasons. G22 Rajesh and Prabhu entered into partnership to start a firm namely M/s A.P. Enterprises by writing a Partnership Deed. Rajesh invests more capital than Prabhu and also manages the business. Rajesh demands that he should be given 75% of profit instead of 50% as agreed. Is his demand acceptable? Give your reasons. 22 Ved intends to retire from the firm and desires that his son Dev be inducted as a partner in his place. The Partnership Deed does not have a clause in this respect. Suggest how can Dev be inducted into the firm as a partner. Payment made or due to a partner may be a charge against profit or an appropriation of profit. Charge against profit means that the amount should be paid or credited to Partner’s Capital Account whether the firm earns profit or not. Whereas appropriation means that it is allowed only when the firm earns profit. : Interest on Partner’s Loan and Rent Payable to a partner are charge against profit and not 4n appropriation of profi Scanned with CamScanner Scr fiPe 2.8 Double Entry Book Keeping—CBSE XII Difference between Charge Against Profit and Appropriation of Profit for the year among partners under diferent heads a8 per the Partnership Oned | eisdebited to Profit andLoss Appropriation Account Its done after accounting of ll charges. It means deduction from revenue to determine net [profit or loss for the year. T tis debited to Profit and Loss Account. | tis done before Appropriation of Profi. - lnremenparmerslun. | Sala to pernesletest on capa aver o p rofit to General Reserve. = a ress =srietA aL If any partner gives loan to the firm, he should receive interest at the agreed rate as specified in the Partnership Deed. In the absence of an agreement or deed, the Indian Partnership Act, 1932 will apply and the lending partner will get interest @ 6% p.a. on loan. terest on partner's loan is a charge against profit)It means that a partner will get interest on loan Nature of Interest on Partner's Loan r mt prop “whether the firm has oss. } Accounting Treatment Interest on partner's loan being a charge against profit is debited to Profit and Loss Account. On the other hand, interest on partner's loan is a gain to a partner as a lender. Hence, it is credited to his Loan Account and not to his Capital Account. Journal entries passed are: i) To provide Interest on Partner's Loan: Interest on Partner's Loan A/c Dr. To Partner's Loan A/c (ii) To close the interest on Partner's Loan A/c: Profit and Loss A/c To Interest on Partner's Loan A/c It is important to distinguish Loan Account and Capital Account of a partner because: 1. As per the Indian Partnership Act, 1932, partner’s loan is repayable on dissolution before repayment of capital to partners; and 2. In the absence of any agreement, partners get interest @ 6% p.a. on loan advanced whereas they are not entitled to interest on capital. G24 Accountant of the firm has debited interest on partner’s loan to the Profit and Loss Appropriation Account and credited it to the Partner’s Capital Account. Action of the Accountant is not correct. Why? Dr. Mlustration 4. Amit, Bimal and Chaman are partners sharing profits and losses equally. Amit and Chaman have given loan to the firm on Ist October, 2018 of € 1,00,000 and % 1,50,000 respectively. It is agreed that interest @ 9% p.a. will be paid on loan. Books of account of the firm are closed on 31st March every year. Interest on loan is yet to be paid as on 31st March, 2019. Pass Journal entries in the books of account of the firm and prepare ledger accounts of the two partners. Ke 7 Scanned with CamScannerChapter 2. Accounting for Partnership Firms—Fundamentals 2-9 olution {Im the Books of Amit, imal and Chaman i JOURNAL | poniculars ai —_ & [om Bank A/c | To Amit’s Loan A/c ee 250,000 1,00,000 To Chaman’s Loan Ae | raaes ‘ [geing the loan from partners Ai | : ~| —_— _ 2 | | = To. Amit’s Loan Alc | | 4500, To Chaman’s Loan A/c 6750 n pot ‘Being the Interest on Partners’ Loan Account provided | 2], @9%pa) / profit and Loss A/c 41,250 To. Interest on Partners’ Loan A/c 11,250 ; [eeing the Interest on Partners Loan Account transferred to profit and Loss Account) Ledger n AMIT'S LOAN ACCOUNT ce Particulars % [ate _ | Particulars [ras 2018 | ~ | To Balance id 104,500 | Oct. 1| By Bank A/c | 1,900,000 2019 | - March 31 By Interest on Partners’ Loan A/e | __ 4,500 1,04500 | 1,04,500 2019 | Apr 1) By Balance b/d 1,04,500 Oe CCHAMAN'S LOAN ACCOUNT ee. : Date. Particulars z Date Particulars z | 2019) 2018 “ | March 31|To Balance c/d 156,750 | Oct. 1 | By Bank A/c 1,50,000 2019 | March 31) By Interest on Partners'Loan A/e | 1,56,750 | 2019 | . April 1| By Balance b/d 1,56,750 Illustration 5. Akhil and Bharat are partners sharing profits and losses in ratio of 2 : 3 with capitals of %2,00,000 and % 1,00,000 respectively. On Ist October, 2018, Akhil and Bharat gave loans of %4.00,000 and 2,00,000 respectively to the firm. The Partnership Deed is silent on payment nn Scanned with CamScanner2.10 Double Entry Book Keeping—CBSE XI of interest on Partner's Loan. Determine the amount of profit or loss for the year ende 31st March, 2019 in each of the following cases to be distributed among, partners: Case 1. If the Profit before interest for the year amounted to & 25,000. Case 2. If the Profit before interest for the year amounted to % 15,000. Case 3. _ If the Loss before interest for the year amounted to & 25,000. Solutio: When the Partnership Deed issilent as to Interest on Partner’s Loan, as per the Indian Partnership Act, 1932, interest @ 6% p.a. is allowed on loan by a partner. Case 1. Distributable Profit/Loss = Profit before Interest - Interest on Partners’ Loan = % 25,000 — 2 18,000* = % 7,000. “Interest on Akhil’s Loan (€ 4,00,000 x 6/100 x 6/12) & 12,000 Interest on Bharat’s Loan (% 2,00,000 x 6/100 = 6/12) &_ 6,000 Total = 18,000 Case 2. Distributable Profit/Loss = Profit before Interest — Interest on Partners’ Loan = % 15,000 — 7 18,000 = & 3,000 (Loss). INTEREST ON PARTNER’S LOAN IS A CHARGE AGAINST PROFIT Interest on partner's loan being a charge against profit is paid or credited to Partner's Loan Account even if profit is less than the amount of interest on loan. The resulting loss is distributed zmong partners in the profit-sharing ratio. Case 3. Distributable Profit/Loss = Loss before Interest + Interest on Partner’s Loan = % 25,000 + % 18,000 = € 43,000 (Loss). Gos Mahesh, 2 partner in M/s MSN & Co., has advanced loan of € 1,00,000 to the firm. Rete of interest was not decided but Mahesh demands interest @ 12% p.a. at the year end, giving the reason that he has taken loan from Bank @ 12% p.a. Naresh, the other partner, does not agree to pay interest. Who is correct and why? DISTRIBUTION OF PROFIT AMONG PARTNERS: PROFIT AND LOSS APPROPRIATION ACCOUNT, A partnership firm, like a proprietorship firm prepares Trading Account, Profit and Loss Account and Balance Sheet. In addition, a partnership firm prepares Profit and Loss Appropriation Account to which net profit or net loss as per the Profit and Loss Account is transferred to sho» its appropriation. This account, is an extension of the Profit and Loss Account, and is credited the amount of Net Profit or debited with the amount of Net Loss (transferred from Profit and Scanned with CamScanner== Chapter 2- Accounting for Partnership Firms—Fundamentals 2.11 Loss Account). It is credited with the amount of interest on drawings of the partners (which js loss to the partners but an income for the firm) and debited with interest on the capitals of the partners, partners’ salaries and commissions, ete., (which is a loss for the firm and income for the partners). If the partners decide, an amount is transferred to Reserve and the balance profit (Divisible Profit) is distributed between/among the partners in their profit-sharing ratio, “Appropriation of profit is made up to the amount available for distribution, Thus, if after transfer of net loss and credit of interest charged on drawings to Profit and Loss Appropriation ‘account, the balance is loss, appropriation is not made. The loss is distributed among the partners in their profit-sharing ratio. But if it results in profit, appropriation is made up to the amount of profit. Net Profit is the profit earned by an enterprise from its operating and non-operating activities. It is the net effect of operating and non-operating revenues and expenses that are charge against profit Distributable or Di le Profit is the profit that is available for tribution among partners after allowing remuneration (Salary, Commission, etc.) to partners, interest on capital, transfer to reserve and charging interest on drawings. Profit and Loss Appropriation Account is an extension of the Profit and Loss Account. Net Profit ‘as per Profit and Loss Account is transferred to Profit and Loss Appropriation Account. Specimen of the Profit and Loss Appropriation Account PROFIT AND LOSS APPROPRIATION ACCOUNT De forthe year ended... Pantculars % | Particulars To Profit and Loss A/c — | By Profitand Loss A/c i: (Net Loss transferred from (Net Profit transferred from | Profitand Loss Account) Profit and Loss Account) To. Interest on Capitals: By Interest on Drawings: | ‘Abhay - Abhay -| Bhaskar al) = Bhaskar 5 To. Partners’ Salaries ~] To. Partners’ Commissions To. Reserve ~ To. Profit transferred to: | “*abhay’s Capital A/c (or Abhay’s Current A/c) *Bhaskar’s Capital A/c - ~ > *#(or Bhaskar’s Current A/c) “Under Fluctuating Capital Method “*Under Fixed Capital Method Always remember that amount payable to a partner (except interest on loan and rent) such as interest | on capital {if not specified to be a charge), salary, commission, etc., is an appropriation of profit. Scanned with CamScanner2.12 Double Entry Book Keeping—CBSE XI! JOURNAL ENTRIES RELATING TO THE PROFIT AND LOSS APPROPRIATION ACCOUNT 1.Transfer of profit from Profit and Loss Account to Profit and Loss Appropriation Account “ZTransfer of toss from Profit and | Loss Account to Profit and Loss ‘Appropriation Account 3. For Partners'Salaries/Commission | 4. For Allowing Interest on Capitals 5. For Charging Interest on Drawings Profit and Loss A/c To Profit and Loss Appropriation A/c (Being the profit transferred) Profit and Loss Appropriation A/c To Profit and Loss A/c (Being the loss transferred) Partners’ Salaries/Commission A/c To Partners'Capital/Current** A/cs (Individually) sion allowed to partners) (Being the salaries/com (il) On Closure of Salaries/Commission Account Profit and Loss Appropriation A/c To Partners’ Salaries/Commissions A/cs (Being the salaries/commission allowed to partners debited to Profit and Loss Appropriation Account) Akernatively.a combined entry may be passed a: — Profit and Loss Appropriation A/c To Partners'Capital/Current** A/cs (Individually) (Being the salaries/commission allowed to partners by debiting Profit and Loss Appropriation Account) (Interest on Capital A/c To Partners’ Capital/Current** A/cs (Individually) (Being the interest on capitals allowed to partners @ ....% p.a) (i) To Close interest on Capital Account Profit and Loss Appropriation A/c To. Interest on Capital A/c (Being the interest on capital allowed transferred to Profit and Loss Appropriation Account) Alternatively,a combined entry may be passed a: Profit and Loss Appropriation A/c To Partners'Capital/Current** A/cs (Individually) (Being the interest on capitals transferred to Profit and Loss Appropriation Account) @ Partners’ Capital/Current** A/cs (individually) To Interest on Drawings A/c (Being the interest charged on drawings) (ii) To Close interest on Drawings Account Interest on Drawings A/c To Profit and Loss Appropriation A/c (Being the interest charged on drawings transferred to Profit and Loss Appropriation Account) Alternatively, a combined entry may be passed as Partners’Capital/Current** A/cs (Individually) To Profit and Loss Appropriation A/c (Being the interest charged on drawings and credited to Profit and Loss Appropriation Account) Scanned with CamScanner Op Or Or Dy Or Dt Dres Chapter 2 Accounting for Partnership Firms—Fundamentals 2.13 , transfer to Reserve out of Profit* | Profit and Loss Appropriation A/c ~Dr. To Reserve Ale {Being the amount transferred to Reserve) sfer of Credit Balance of Profit | Profit and Loss Appropriation Alc |Loss Appropriation Account| To partners\Capital/Current** A/cs (individually) Divisible/Distributable Profit | (Being the balance profit transferred to Capital Accounts of s partnersin ther profit-sharing ratio) apeserve is an amount set aside out of profit to strengthen the financial position of the firm or to meet an unforescen liability. For example, Workmen Compensation Reserve is s aside out of profit | to meet a claim of staff, if any. 1 Accounts are maintained following Fixed Capital | epurtnes’ Current Accounts are used when Ca ‘Accounts Method. (atures of Profit and Loss Appropriation Account [itis an extension of the Profit and Loss Account 3, It shows the appropriation of net profit or loss for the accounting, period. 4, Entries in this account are passed giving effect to the Partnership Deed. { pifference between Profit and Loss Account and Profit and Loss Appropriation Account | == Profit and Loss Account Profit and Loss Appropriation Account | << | 2, It is prepared only by the partnership firms. ' | | It is prepared after Trading Account. It | It is prepared after Profit and Loss Account. It therefore, starts with Gross Profit (on the credit side) oF Gross Loss (on the debit side) as per the Trading Account. {tis prepared to determine net profit eamed or net loss incurred during the accounting year. Itsdebited withthe expenses (charge against profit) and credited withthe income.not being operating income to determine net profit or Loss forthe accounting period Preparation of this account is not guided by the Partnership Deed or Agreement. While preparing this account, Matching Principle (ie, revenue Is matched against expenses) is followed. therefore, starts with Net Profit (on the credit side) or Het Loss (on the debit side) as per the Profit and Loss Account It is prepared to show appropriation of net proft, ie, distribution of Net Profit or Loss for the accounting petlod among the partners, In is debited with the items of appropriation of profit such as salary/commission to partners, interest on capital and transfer to reserve, etc. It is credited with the items of income being debited to Partners’Capital Accounts or Current ‘Accounts such as interest on drawings. Preparation of this account is guided by the Partnership Deed or Agreement. While preparing this account, Matching Principle isnot followed being not applicable. Let us understand complete set of final accounts with the help of following illustration for better understanding of Profit and Loss Appropriation Account. Scanned with CamScanner14 Double Entry Book Keeping—CBSE XII Ilustration 6. Ayub and Amit are partners in M/s Amrit Papers sharing profits and losses equally trial balance is prepared from the books of account as at 31st March, 2019: Following Panicle Dee | Opening Stock 45,000 Purchases | 760,000 Sales Return 25,000 Salary and Wages | 180,000 Rent | 1.10.00 General Expenses | 38,000: Sundry Debtors 2,00,000 Furniture and Fixtures 50,000 Computers 2,20,000 Machinery 3,00,000 Cash at Bank 75,000 Cashin Hand 25,000 Drawings: Ayub 60,000 Amit 50,000 21,35,000 Particulars Sales Purchases Return ‘Sundry Creditors Capital Accounts: ‘Ayub Amit Crom 1250009 10,00 90,009 4.00.00, 3,85,00q Prepare Trading Account, Profit and Loss Account and Profit and Loss Appropriation Account for the year ended 31st March, 2019 and Balance Sheet as at that date after accounting the following adjustments: (i) Stock as at 31st March, 2019 was ® 50,000; Gi) Rent is % 10,000 per month; (iii) Depreciate Furniture and Fixtures and Computers @ 20% p.a., Machinery @ 10% p.a.; and (iv) Interest on Capitals is allowed @ 6% p.a. Solution: M/s Amrit Papers TRADING ACCOUNT Dr. for the year ended 31st March, 2019 @ Particulars z Particulars z To Opening Stock 45,000| By Sales 12,50,000 To Purchases 7,60,000 Less: Sales Return 25,000 | 12,25,900 Less: Purchases Return 19,900 _| 7,50,000] By Closing Stock 50,000 To Gross Profit transferred to Profit and Loss Account 480,000 12,75,000 Scanned with CamScannerail — Chapter2. Per 2+ Accounting for Partnership Firms—Fundamentals 2.15 Pi (og ROFTT AND 1088 Account * year ended 315 March, 2019 & particule sea 2 _| Particulars z nd Wages bok————— Fi ssn 1.80,000| By Gross Profit—transferred 4,80,000 | 12 AFF: outstanding Rent noone] fomTading count qo. General Expenses 35,000 “Depreciation on: 7 mitre and Fstres 10,000) Computers 444,000 4 Peinery 30,000 Net Prof oat Profit transferred to Proft and Loss "appropriation Account _ 61.000 480,000 PROFIT AND LOSS APPROPRIATION ACCOUNT for the year ended 313t March, 2019 ce } a | Particulars x i = 24000 By Profit and Loss A/c (Net Profit) 61,000 t ire 23,100 | 47,100 Jo Profit transferred to: | ‘pyub’s Capital A/c 6.950 ‘it’s Capital A/c 6950 13,90¢ | am | t BALANCE SHEET as at 315t March, 2019 : inblties | ok Assets { = gables | a a Gopal Ne | Furniture and Fixtures 50,000 | | i | Less: Depreciation 10,000 | 40,000 ‘Add; Interest on Capital ‘Computers “2,20,000 Share of Profit Less: Depreciation “44000 | 1,76,000 , Machinery 3,00,000 ! 370.950 | Less: Depreciation 30000 | 2,70,000 Sundry Debtors 2,00,000 srest on Capital Closing Stock | 50,000 | Cashin Hand | 25,000 | (Cash at Bank 75,000 | 365,050 | 90,000 1 | 10,000 ' [836.000 Mlustration 7. A and B entered into partnership on Ist April, 2018 without any Partnership Deed. They introduced capitals of € 5,00,000 and & 3,00,000 respectively. On 31st October, 2018, A advanced %2,00,000 as loan to the firm without any agreement as to interest. Profit and Loss Account for the year ended 31st March, 2019 showed a profit of 4,30,000, but the partners could not agree upon the amount of interest on loan to be charged and the basis - of division of profits. —————— Scanned with CamScanner2.16 Double Entry Book Keeping—CBSE XII Pass a Journal entry for distribution of the profit between the partners and prepare Capita) Accounts of both the partners and Loan Account of A. {AI 2011, Dates Modifies, Solutio JOURNAL Date Particulars foe po i fox Set 2019 4 March 31. Profit and Loss Appropriation A/c Dr. | 425,000 To A's Capital A/c Yo &s Capital Ae | | {Being the profit distributed between A and 8 equally) (WN 2) i I m PARTNERS CAPITAL ACCOUNTS « | Date Particulars Age | Sage Date Particulars A @ x | 8 z z 1s 7 | 2018—*| | 7 March 31 | To Balancecid | 7.12500 | 5.12500 | April 1) By BankA/c | 5.00.00 | 3.00000 | | | 2019 | March 31, By ProfitandLoss | | | | Appropriation Ac] 2,12.500 | 2.12500 | i { | (Prof) \ j 7.42500 | _5,12,500 72500 | 5, De. A'S LOAN ACCOUNT @ Dae | Parca [® [pate | Pariculrs 7 | ae | on | March 31 To Balance o/d 205,000 | Oct. 31| By BankA/e 2.00000 2019 i | March 31) By InterestonA’sLoanA/c(WN 1) 5,000 a """| Working Notes: 5 |. Interest on A’s Loan = € 2,00,000 x = 41, Interest on 4% 00,000 « = > = Journal entries for interest on 4's loan will be: | \ “(Interest on 4's Loan A/c Dr. 75,000 To A's Loan A/c or Interest Payable A/c 2508 (Being the interest on Partners'Loan due) Aa Profit and Loss A/c Dr. 5,000 To Interest on A's Loan A/c 25.0 (Being the interest on Partners’ Loan transferred to ' Profit and Loss Account) tInterest on Loan is to be paid © 6% pa. ‘Since there is no agreement between partners A and B regarding interest on partner's loan, the provisions? Indian Partnership Act, 1932 will apply. It prescribes that Interest on Partner's Loan is 2 charge against th profit hence, should be debited to Profit and Loss Account. 2. Net Profit after Interest on A’s Loan = 4,30,000 ~ % 5,000 = @ 4,25,000, which is shared equally because t profit-sharing ratio is not given. Scanned with CamScannerL és Chapter 2- Accounting for Partnership Firms—Fundamentals 2.17 Rent Paid to a Partner Rent paid to partner, like interest on loan by a partner, isa charge against profit and not an appropriation of profit. It is.a charge on profit because rent is paid to a partner for using his or her personal property sportrusines I debited to Profit and Loss Account (sot to the Profit and Loss Appropriation Account) ‘and credited to Rent Payable Account. ~ ~ 4 Illustration 8 (Rent Payable to a Partner). Aman and Boman are partners sharing profits equally. Business is being carried from the property owned by Aman ona yearly rent of & 24.000. Aman isto get salary off 1,20,000 p.a. and Boman is to get commission © 5% of net sales, which during the year was € 30,00,000. Profit for the year ended 31st March, 2019 before providing for rent was €5,00,000. Prepare Profit and Loss Appropriation Account for the year ended 31st March, 2019. Solution: PROFIT AND LOSS APPROPRIATION ACCOUNT De. forthe year ended 315t March, 2019 c. z Particulars z 1,20,.000 | By Proftand.Loss A/c (Net Profit) 476,000, Capital A/c (Commission) 1.50,000 @ 5,00.000 - 8 24,000") ‘transfered to: _Aman's Capital A/c 103,000 — | Boman's Capital A/c 1,03,000 “5p PL | € A+B flee | TRE ¥24000 isthe rent which is to be provided as a charge against the profit. & 2.6 Anita and Asha started business on 1st April, 2018 from property owned by Anita. It was agreed that Anita will be paid rent @ 7 10,000 per month trom Ist April, 2019. At the time of preparing accounts for the year ended 31st March, 2019, Anita demanded that rent be credited to her for the year to which Asha did not agree. Who is correct and why? & 2.7 M/s ABC & Co. is advised to debit salary and commission of partners to the Profit and Loss Appropriation Account. Why do you think that it should not be debited to the Profit and Loss Account? Illustration 9 (Profit and Loss Appropriation Account). Aseem and Nihar started a business on Ist April, 2018 with capitals of % 3,00,000 and % 2,00,000 respectively. According to the Partnership Deed, Nihar is to get salary of % 3,000 per month, Aseem is to get 10% commission on Profit after allowing salary to Nihar and interest is to be During the allowed on capitals @ 6% p.a. Profit-sharing ratio between the two partners is 3 : Year, the firm earned net profit of % 2,50,000. Pass Journal entries for division of profits and prepare Profit and Loss Appropriation Account. The firm closes its accounts on 31st March every year. Scanned with CamScanner A.9 == =). | 2.18 Double Entry Book Keeping—CBSE XII Solution: JOURNAL Date [Particulars UF} 6m) | a, ze |. : : ] March 31 | Profit and Loss Ae Or, 250000 | To Profit and Loss Appropriation Alc | 250149 (Being the transfer of net proft to Profit and Loss Appropriation Account) March 31) Nihar's Salary Ae me 60,000 To Nihar’s Capital A/c | 0m (Being the salary due to Nihar @%5,000 per month) | March 31 /Aseem’s Commission A/c ed To Asem’ Capital A/c 0 {Being the commission due to Aseem) March 31 | Profit and Loss Appropriation A/c 79,000 To Nihar's Salary A/c 60.009 To Aseem's Commission A/c We (Being the salary and commission to Partners transferred to | Profit and Loss Appropriation Account) | March 31 | Interest on Capital A/c Dr. 30,000 | To Aseem's Capital A/c | ) To Nihar’s Capital A/c (Being the interest on capitals alowed to partners @ 6% p.a) March 31 | Profit and Loss Appropriation A/c Dr. 30,000 To Interest on Capital A/c 2a (Being the interest on capitals transferred to Profit and Loss Appropriation Account) | March 31 | Profit and Loss Appropriation A/c Dr. 141,000 | To Aseem's Capital A/c (& 1,41,000 x 3/5) To Nihar’s Capital A/c (® 1,41,000 x 2/5) 56400 (Being the distribution of profit among the partners) PROFIT AND LOSS APPROPRIATION ACCOUNT Or. for the year ended 31st March, 2019 & Particulars z Particulars z To Nihar’s Capital A/c — Salary 60,000 | By Profit and Loss A/c | soo To. Asem’ Capital A/e—Commission 19,000 (Net Profit) | To Aseem’s Capital A/c — Interest on capital 18,000 To. Nihar's Capital A/c — Interest on capital 12,000 To Profit transferred to: ‘Aseer’s Capital A/c (3/5) 84,600 ‘Nihar's Capital A/c (2/5) 56,400 141,000 2,50,000 F200 Illustration 10 (Profit and Loss Appropriation Account). _-~\ Xand Y started business on 1st April, 2018 with capitals of €5,00,000 each. fs perthe Partnersiif t[,_ Deed, both X and Y are to get monthly salary of & 10,000 each and interest on capitals @ 10% P* (Drawings during the year were X—%°60,000 and Y— 1,00,000; interest on Drawings bein charged @ 10% p.a. During the year, the firm incurred a loss of € 2,00,000. be Scanned with CamScannerChapter 2 Accounting for Partnership Firms—Fundamentals 2.19. Pass Journal entries for the above and prepare Profit and Loss Appropriation Account. The firm closes its accounts on 31st March, every year. solution: JOURNAL oe Particulars Le | Or.) C.@ 2019 | March 31| Profit and Loss Appropriation A/c -b. | — | 200000 a To Profit and Loss A/c | 2,00,000 (Being the transfer of net fos) — 3000 | 7 Ys Capital A’c | 5.000 | To Interest on Drawings A/c | | 000 (Being the interest charged on drawings) | | Murch 31 [Interest on Drawings A/c De | 8000 | To Profit and Loss Appropriation Ae 8000 (Geing the interest on drawings transferred to Profit and Loss | | | ‘Appropriation A/c) | | March 31] 25 Capital A/c Dr | 96,000 | Ys Capital A/c ~Dr | | 96000 To Profit and Loss Appropriation A/c } | 1,92.000 {Being the loss transferred to Pariners’ Capital Accounts) I | PROFIT AND LOSS APPROPRIATION ACCOUNT be forthe year ended 31st March, 2019 ce Particulars z {Ree Particulars zt — 7 = 4 To Profitand Loss A/c (Net Loss) 2,00000 | By Interest on Drawings Ales: x y 5000 | 8000 : By Xs Capital A/c (Loss) ~~] 96,000 By Y's Capital Ac (Loss) 96,000 200,000 Working Notes: 1. In the absence of dates of drawings, interest on Drawings has been calculated for the average period of 6 months. Thus, | Interest on X's Drawings = @ 60,000 x 10/100 x 6/12 = % 3,000; Interest on Y's Drawings = @ 1,00,000 x 10/100 x 6/12 = & 5,000. ~ Cx to partners and interest on capitals are not allowed because the firm has incurred loss." - Tifistration 11. ‘Arun and Arora were partners in a firm sharing profits in the ratio of 5 : 3. Their fixed capitals . on Ist April, 2010 were: Arun % 60,000 and Arora % 80,000. They agreed to allow interest on | capital @ 12% p.a. and to charge on drawings @ 15% p.a. Profit of the firm for the year ended | 3ist March, 2011 before all above adjustments was % 12,600. Drawings made by Arun were | %2,000 and by Arora % 4,000 during the year. Prepare Profit and Loss Appropriation Account of Arun and Arora. Show your calculations clearly. The interest on capital will be allowed even if the firm incurs a loss. (CBSE 2012) iil Scanned with CamScanner2.20 Double Entry Book Keeping—CBSE XII Solution: PROFIT AND LOSS APPROPRIATION ACCOUNT eS De for the year ended 31st March, 2011 Particulars z Particulars: To. Profit and Loss A’c (Net Loss) 4200 | By Interest on Drawings A/C: (© 12600 - 16,800) Arun's Current A/c Arora’s Current A/C | By Net Loss transferred to: ‘Arun's Current A/C Arora’ Current A/C [4200] Notes: 1, Interest on Drawings: Arun Arora Amount of Drawings 2,000 = 4,000 te of Interest 15% pa. 15% pa. Interest on Drawings (for 6 Months) 150 = 300 Since the dates of drawings are not given, interest will be charged for average period of 6 months, 2. Interest on Capitals: Arun Arora Opening Capital 60,000 = 80,000 } Rate of Interest 12% pa. 12% pa. Interest on Capital 60,000 x 12% € 80,000 x 12% 7,200 =%9,600 Total interest on Capital = ¥ 16,800. Interest on Capital is a charge against profit. Hence, will be debited to Profit and Loss Account: Appropriations are more than Available Profit . . it available So far, we have discussed the manner in which profit is appropriated when the profit av aie for distribution among partners is more than the amount of appropriation. But, there may De? situation where total amount of appropriation is more than the amount of profit available for appropriation. In such situations, profit available for distribution among partners is di tributed in the ratio of appropriation to be made. The ratio of appropriation is determined as follows: (i) Determine the amount payable as appropriation to each partner as per the Partnership Deed (ignoring the profit available for distribution among partners). For example, salary payable, commission payable and interest on capital, etc., payable to each partner is determined. (ii) Total the amount of appropriation (as per step (i) above) for each partner s >parately (ii) Ratio of the Appropriations (as per step (ii) above) to be made to each partner is the ratio in which profit is appropriated. It should be kept in mind that no particular item like salary, commission, interest on capital, etc... priority over other items of appropriation. ere ee Scanned with CamScanner5 Chapter 2- Accounting for Partnership Firms—Fundamentals 2.21 Pictorial Depiction of Appropriation of Net Profit Determine Amount of Appropriation as per the Partnership Deed for each Partner Total the Amount of Appropriations Verity Is the Net Profit more than or equal to the Amount of Total Appropriation? Debit Profit and Loss Appropriation Account with Individual Items of Appropriation. Distribute Net Profit in excess of Appropriation, among Partners in the Profit-sharing Ratio. Distribute Net Profit among the Partners in the Ratio of Appropriation to be made to each Partner. Let us take an example for more clarity. Atul and Amit are partners in a firm. As per the Partnership Deed the partners are to get salary of ® 1,00,000 and & 1,20,000 p.a. respectively and interest on capital @ 10% p.a. which is % 20,000 and % 40,000 respectively. Net profit for the year % 2,10,000 will be appropriated in the ratio of 3 : 4 calculated as follows: Atul Amit @) Salary 1,00,000 1,20,000 Interest on Capital 20,000 40,000 Total Amount of Appropriation 1,20,000 1,60,000 Therefore, thi %1,20,000 60,000 Or 3 Thus, % 90,000 (i.e., 3/7 of % 2,10,000) and @ 1,20,000 (i.e., 4/7 of % 2,10,000) being the total of appropriations for Atul and Amit respectively. mo ftp, Ilustration 12 (Appropriations are more than Available Profit). “7 , Ajay and Vijay are partners sharing, profits in the ratio of 3 : 2. Ajay is a non-working partner and contributes % 20,00,000 as his capital. Vijay is a working partner of the firm. The Partnership Deed provides for interest on capital «@ 8% p.a. and salary to every working partner % 8,000 permonth, Profit before providing for interest on capital and partner's salary for the year ended 31st March, 2019 was ® 80,000. Show the distribution of profit. Scanned with CamScanner2.22 Double Entry Book Keeping—CBSE XI! Solution; PROFIT AND LOSS APPROPRIATION ACCOUNT De. for the year ended 31st March, 2019 fe Particulars zt Particulars z ‘To Ajays Capital A/c (interest on capital) 50,000 | By Profit and Loss A/c (Net Profit) 2 ‘To. Vijay's Capital A/c (Salary) 30,000, — 80,000 L200 Note: Interest on Ajay’s Capital = % 20,00,000 x 8/100 = & 1,60,000; Salary to Vijay = % 8.000 x 12 = 2 96 or, Thus, Interest on Ajay's Capital + Salary to Vijay = & 1,60,000 + % 96,000 = @ 2,56,000. Since both interest on capital and salary to partners are appropriations and the profit available distribution is 80,000, ie, less than the amount of appropriations to be made, the available profy ; distributed in the ratio of appropriations to be made to Ajay and Vijay, Le, 1,60,000 (interest on caps % 96,000 (salary), or 5:3. Special Aspects of Partnership Accounts Financial Statements or Final accounts of a partnership firm are prepared following the sams principles that are followed for preparing the financial statements or final accounts of a proprietorship firm. But there are some aspects that require discussion. They are as foll Partners’ Capital Accounts; Remuneration (Salary or Commission) to Partners; Interest on Partners’ Drawings; Interest on Partners’ Capitals; ‘Adjustments for Incorrect Appropriations of Profits in the Past (Past Adjustments); and .. Guarantee of Profit. Let us discuss each of these aspects in detail. 1. PARTNERS’ CAPITAL ACCOUNTS, In a proprietorship firm only one Capital Account is maintained because the firm has a sol proprietor. But, in a partnership firm, separate Capital Account is maintained for each partner because each partner has separate transactions with the firm. For example, if Atul, Amit ani Akhil are three partners in a firm, there shall be three Capital Accounts, one each for Atul, At! and Akhil. The Partners’ Capital Accounts may be maintained by following any of the two methods: (i) Fixed Capital Accounts Method; (ii) Fluctuating Capital Accounts Method. DT ew Ne Fixed Capital Accounts Method Fixed Capital means capital invested by each partner in the firm remains fixed or unaltered unless a partner introduces additional capital or withdraws out of his or her capital. Whe" Fixed Capital Accounts Method is followed, two accounts, i,, a Capital Account and a Currest Account for each partner are maintained. Capital Account: Capital Account of each partner continues to show same balance year aft# year and changes only if additional capital is introduced, which is credited to Capital Accout! withdrawal is made out of capital, which is debited to the Capital Account. Current Account: Current Account is maintained to record transactions other than transactio™ relating to capital such as drawings against profit, interest allowed on capital, interest chars! on drawings, salary or commission payable to a partner, share of profits/losses. Asa result, balance of Current Account fluctuates with every transaction with the partner. Scanned with CamScannerChapter 2 Accounting for Partnership Firms—Fundamentals 2.23" | t Account of each partner is debited wit! . () His drawings against profit; Share of loss; and ( | Hote: Please note that Drawings against Capital is debited to Partner's Capital Account. i) Interest on drawings; ) Transfer of amount to Capital Account, © | gimilarly, Current Account of each partner is credited with: (i) Interest on Capital; (ii) Remuneration (Salary or commission); Git) Share of Profit; and (iv) Transfer of amount from Capital Account. Normally, Partner’s Current Account has a credit balance but, ifa partner has withdrawn more ‘amount than his or her share of the profits, then it will have a debit balance. ‘he balances of the Partners’ Capital Accounts are shown on the liabilities side of the Balance Sheet, as hat much amount is due to then. side and debit balance on the assets side } credit balance in Current Account is shown on the liabiliti of the Balance Sheet. } Outline of the two accounts maintained under the Fixed Capital Accounts Method are: I PARTNERS CAPTTAL ACCOUNTS & I y@ | z@ | Particulars xm | 1@ | z@ = — | By Balance b/d [Fo ae = ie By Cash/Bank A/c 3 - ie | = = (Additional capita) | ve | 2@ | Paniculers | ~ By Balance b/d ~ = 2 (in case of credit | opening balance) x a N 3 . - | tects! | 2 | - : By Commissionle | Es ~ | By Partners Salary Alc a capa ~ | 8y ProfitandlossApp.Ac| ~ |e | (Profit) *The balance may be on the opposite (credit) side also. Fluctuating Capital Accounts Method Under Fluctuating Capital Accounts Method only one account namely ‘Ca| maintained for each partner. All transactions of a partner (e.g., capital introduced or withdrawn), salary or commission, | interest allowed on capital, drawings (against profit), interest charged on drawings, share of profit or share of loss, etc, are recorded in his Capital Account, As a result, balance in the Capital Account fluctuates with every transaction. Capital Accounts having credit balances are shown on the liabilities side while Capital Accounts having debit balances are shown on the assets side of the Balance Sheet. ee hs Scanned with CamScanner2.24 Double Entry Book Keeping—CBSE Xil Fluctuating Capital Accounts Method is normally followed for maintaining, Capital Accounts therefore, i the absence of any instruction or information, Fluctuating Capital Accounts Method , followed for maintaining the Partners’ Capital Accounts. Outline of the Capital Account under Fluctuating Capital Accounts Method is as follows: bs PARTNERS CAPITAL ACCOUNTS « Particulars [xe [ove | zm] Panicutars [xm | re [ze Jo Besncebdtnesecf | — = |= | By Balance bdtincaseof | — . 5 ‘debit opening balance) | | credit opening balance) Jo CashBokAc Drawings) = | = ~ | By CasheBank Ave a agzinst Cann ' | (Additional Capital) - Yo Drawings A’c (Drawings -.] = - By Interest on Capital A/c - | agains Prof | By Commission A/c | = ~ Jo Interest on Drawings Ac] = | S = By Partner’sSalaryA’e | - = Ye Pomandis Ae | | = | By ProfitandLossApp Ae | = ~ ess) | (rofid) | | 7 % Bolance ci - | - - | | fees |= ——————— Tine Eulonce may De on the epposite (credit) side also. Pictorial Depiction of Methods of Maintaining Partners’ Capital Accounts with Items Debited and Credited Partners’ Capital Accounts Maintained Following Fixed Capital Accounts Method] Fluctuating Capital Accounts Methoo - 3] + a Capital Account po TT Credit with © Further Capital ee a with == introduced ana Drawings © Remuneration Je Drawings (4 ‘against (Salary, Profit) SS (Ag. Capital Commission) le tniteres @ Intereston D ston Capital rawings Share of Profit @ Share of Los, ‘Credit with @ Remuneration (Salary, Commissio: Interest on Capital Share of Profit Scanned with CamScannerChapter 2- Accounting fot Firms—Fundamentals 2,25 r Partners Difference between Fixed Capital Account and Fluctuating Capital Account 1, No.of Accounts Maintained 2, Frequency of Change a — 4 Balance Difference betweer Balance of Account = Transactions Two accounts are maintained for each partner, ie, Fired Capital Account and Current Account. Balance in Fived Capital Account does not change except when further capital is introduced or capital is withdrawn. ‘Transactions relating to Capitals are recorded in Fixed Capital Accounts and transactions for drawings, interest on drawings, interest on capital salary, commission, share of profit of loss are recorded in Current Account. Italways shows credit balance in Capital Account. | Account and Current A ‘Capital Account is maintained in all the cases, whether following Fixed Capital Account Method or Fluctuating Capital Account Method. "only one account (ie. Capital Account) is | maintained for each partner. The balance changes with every transaction | of the partner with the firm, All ransactions whether for capital, drawings, interest on drawings. interest on capita, salary, commission, share of profit or loss are | recorded in Capital Account. | | Fluctuating Capital Account can also show debit balance. Current Account is maintained when Fixed Capital Account method is followed. Capital Account wil always have a credit balance | Balance ofa Current AcCount may have when Fixed Capital Account Method is folowed. In Fluctuating Capital Account Method, it may hhave either credit or debit balance. In case of fixed capital, Capital Account balan’ generally remains unchanged from year to ye. It changes when further capital is introduced or capital is withdrawn by a part Capital Account records the amour bya partner in the frm, invested Illustration 13 (When Capitals are Fixed and Fluctuating). Aand Bare partners with capitals of 60,000 and & 20,000 respectively on Ist April, 2018. Net profit (before taking into account the provisions of the Deed) for the year ended 31st March, 2019 was ¥ 24,000. The Partnership Deed provides for the follow (2) Bis entitled to a salary of % 6,000 p.a. (®) Interest on capitals is to be allowed © 6% p.a. (c) Interest on drawings is to be charged % pa. a credit of debit balance. Balance of Current Account does not change when capital is introduced or withdrawn by a partner. | Current Account records the transactions such as drawings interest on capital interest on drawings, salary,commission, profit or | toss ete. The drawings of the partners A and B were 2 6,000 and % 4,000 respectively and interest on drawings for A being % 200 and for 8% 100. Pass the Journal entries for the abo 2 and show how profit will be divided between 4 and B and also show the Capital Accounts of the partners along with their Drawings Accounts () if they are fixed, and (ii) if they are fluctuating. ld Scanned with CamScanner ay2.26 Double Entry Book Keeping —CBSE Xt! Solution: PROFIT AND LOSS APPROPRIATION ACCOUNT Dr. for the year ended 31st March, 2019 Parnculars ~ Particulars a Yo Intestontaptala: | “py Proft'and Coss Ave (Net A 6% on & 60,000) 3.600 By Interest on Drawings A/cs: B (6% 09 € 20.000) 4.200 | 4,800 A Jo By Salary A’c 6.000 8 To. Proft transferred to: (Equal share of profil? Ay Canitalurrent™™ Ae 6750 85 GaptaltCurent™* Ave 6750 i jp 28305 SECTS GUAT ITE OFT Tg TaTO Nat WEN. “Tn eaFE OT HHT APIO: = i) Fixed Capitals Inthe Books of Aand 8 (i) Fixed Capitals Books off Dae Panicubes a a) aa wT = March 31] Profit and Loss A/c Dr 24,000 To. Profit and Loss Appropriation A/c aml + going the net profit forthe year transferred to Profit and Loss | Appropnation Account) | PBs$alay Ke ana 6,000 (Tyo Bs Current Ne sa | (Being the salary credited to 6's Current Account) (Be salary Ce = “profit and Loss Appropriation A/c Or 6,000 (To. BsSelary Ne 6 (Being the salary allowed transferred to Profit and Loss URpprosnavion Accom). “Interest on Capital Afe =r E00 | To. A's Current Ac est | To Bs Current A/c Tate | (Geing the interest on capital allowed to Partners @ 69) __} Profit and Loss Appropriation A/€ Dr 4,800 To Interest on Capital Ae 40 | (geing the intrest on capt allowed wansered to t Profit and Loss Appropriation Account) opriation Account), “FsCurrent We ~r 200 | Bs Current A/c Dr. 100 | To. Interest on Drawings A/c a | (Being the interest on drawings charged) Hiterest on Drawings Ai | 300 eye Profit and Loss Appropriation A/c (Being the interest on Drawings transferred) tasDrwingsAeCSCSC~SststsSCSsSsS 6,000 B's Drawings A/c ad 4,000 | To CoshiBank Alc (Being the drawings made by the partners) As Current Ae ~Dr. 6,000 Bs Current Wie Dr. 4,000 To A's Drawings Alc oat To Bs Drawings A/c Sd (Being the Drawings transferred to their Current Accounts) Profit and Loss Appropriation Alc To. A's Current Alc To. 8 Cument Alc (Being the divisible profit credited to their Current Accounts in equal share) | 13,500 Scanned with CamScannerChapter 2- Per 2 Accounting for Partnership Firms—Fundamentals 2.27 A'S CAPITAL ACCOUNT ce. Sel RT| Oates Particulars z 2019 lance o/d ao March 31 Te April 1 |By Balance b/d oe 8S CAPITAL ACCOUNT ce irene coeur: _% [bate [rarticutars z 2019 2018 1] To Balance id March 3 April 1| By Balance b/d — i, A'S CURRENT ACCOUNT ce. Particulars z fe Date | Particuk oe | joue iculars ae 20 it March 31 | TO pe peawings Ac Me March 31 | By Interest on Capital A/c 3,600 arch 31 [To lnterest on Drawing March 31| By Profit and Loss App. A/c 6750 Match 31 To Balance —Profit (1/2) ~ |__10350 8S CURRENT ACCOUNT ce [Particulars z Date Particulars z ch - 2019 | To B's Drawings A/c 4,000 | March 31 | By Interest on Capital A/c. 1,200 To. Interest on Drawings A/c 100 | March 31 | By Bs Salary Ae 6,000 To Balance /d 9850 | March 31 | By Profit and Loss App. A/c 6,750 —Profit (1/2) 13,950_| Fi A'S DRAWINGS ACCOUNT & Date__| Particulars z Date | Particulars z 2019 2019 | ae = March 31,|To Cash/Bank A/c March 31| By A's Current A/c be B’S DRAWINGS ACCOUNT. &. Date _| Particulars Date _| Particulars z 2019 2019 | ‘March 31 | To Cash/Bank A/c March 31 | By 6's Current Ale Gi) Fluctuating Capitals JOURNAL, Date [Particulars 2019 March 31] Profit and Loss A/c To Profit and Loss Appropriation A/c (Being the net profit for the year transferred to Profit and Loss Appropriation Account) ante BS Salary A/c i To B's Capital A/c (Being the salary credited to B's Capital Account) _ 6,000 Scanned with CamScanner2.28 Double Entry Book Keeping—CBSE XI! ~Dr. 6,000 | Profit and Loss Appropriation A/c Or. 000 e. To BsSalary Ac | 7 (Being the salary allowed transferred to Profit and Loss | DT, A interest Or, | 800 : To A's Capital A/c 2, To B's Capital A/c es (Being the interest on capital allowed to partners @ 6% p.a) Profit and Loss Appropriation A/c Dr. 4,800 To Interest on Capital A/c (Being the interest on capital allowed transferred to Profit and Loss Appropriation Account) | A's Capital A/c 200 | B's Capital A/c 100 To Interest on Drawings A/c (Geing the interest on drawings charged) Interest on Drawings A/c Dt. 300 To Profit and Loss Appropriation A/c {Being the interest on Drawings transferred) Er ‘AS Drawings A/c 6,000 B’s Drawings Alc 4 4,000 To Cash/Bank Ale 10600 (Being the drawings made by the partners) ‘As Capital Ale 6,000 BS Capital A/c 4,000 To A’s Drawings A/c To B's Drawings A/c (Being the drawings transferred to their Capital Accounts) Profit and Loss Appropriation A/c ~Dr 13500 To A’sCapital A/c 6730 To. Bs Capital A/c 6730 (Being the divisible profit credited to their Capital Accounts in equal share) Or. ASS CAPITAL ACCOUNT @ Date | Particulars = | Date —_| Particulars t 2019 2018 March 31 | To 4's Drawings Alc 6000 | April 1) By Balance b/d 000 March 31 |To Interest on Drawings Alc 200 | 2019 March 31 |To Balance vd 64,150 | March 31] By Interest on Capital A/c 30 March 31 | By Profit and Loss App. A/c 60 —Profit (1/2) a 70350 70380 ee Dr. 8'S CAPITAL ACCOUNT @ Date [Particulars = | Date | Particulars t 2019 2018 March 31 |To B's Drawings A/c 4,000 | April 1] By Balance b/d 2oj0n0 March 31 |To Interest on Drawings A/c 100 | 2019 March 31 |To Balance c/d 29,850 | March 31 | By Interest on Capital A/c 120 ‘March 31) By B's Salary A/c 6,000 March 31] By Profit and Loss App. A/c 6750 —Profit (1/2) a 33,950, 33,950 Scanned with CamScannerChapter 2 - Accounting for Partnership Firms—Fundamentals 2.29 A'S DRAWINGS ACCOUNT fe Particulars t Date Particulars. z 2019 To Cash/Bank A/c March 31 | By As Capital A/c or B'S DRAWINGS ACCOUNT cr. Date | Particulars % [ate | Particulars x 2019 2019 | March 31 |To Cash/Bank A/c REMUNERATION |(SALARY OR/GOMMISSION) 10) PARTNERS Remuneration (Salary or Commission) is allowed to the partners for looking after the business of the firm. Salary or Commission to Partners is allowed only if the Partnership Deed allows it to be paid. Also the amount allowed is the amount stated in the Partnership Deed. Thus, if the Partnership Deed does not exist or it exists but does not provide for allowing salary and commission, it is not allowed. March 31 | By B's Capital A/c Nature Salary or commission to a partner is an appropriation of profit, and not a charge against profit. It means, salary or commission to partners is allowed only if the Partnership Deed allows it ‘and also the firm earns profit during the year. ~~ ( (Nv Salary payable to each partner is normally stated as an amount’ But, Commission payable to a partner is stated as percentage of profit, which may be allowed to the partners either (i) as a percentage of net profit or distributable profit before charging, commission; or (i) as a percentage of net profit or distributable profit after charging, commission. Commission, under the two methods, is computed as follows: (Percentage of Net Profit or Distributable Profit before charging Commission: Rate of Commission Net Profit or Distributable Profit (before Commission) = 00 (ii) Percentage of Net Profit or Distributable Profit after charging Commission: Rate of Commi 100 + Rate of Commi Net Profit or Distributable Profit (before Commission) * Accounting Treatment Remuneration (Salary or Commission) to partners, is an appropriation of profit and therefore, is debited to Profit and Loss Appropriation Account. Journal entries passed are (On Allowing Remuneration (Salaries or Commission) to Partners: Partners’ Salaries/Commission A/c Dr. To Partners’ Current A/cs (When Capitals are fixed} To Partners’ Capital A/es {When Capitals are fluctuating] (i) On Closure of Remuneration (Salaries or Commission) A/es to Partners: Profit and Loss Appropriation A/c To Partners’ Salaries/Commission A/c Scanned with CamScanner2.30 Double Entry Book Keeping—CBSE XII IMustration 14 (Commission to Partners and Distribution of Profit). X and Y are partners in a firm. X is to get commission of 10% of net profit before charging, any ions. Noy commission. Y is to get a commission of 10% on net profit after charging all comm: profit for the year ended 31st March, 2019 was & 55,000. Find the commission of X and Y, Also, show the distribution of profit. Solution: PROFIT AND LOSS APPROPRIATION ACCOUNT Or. for the year ended 31st March, 2019 Cr Particulars z Particulars z To X's Commission A/c &% 55,000 x 10/100) 5,500 | By Profit and Loss Account (Net Profit) 55,000 To Y's Commission A/c (Note) 4,500 {1 55,000 - € 5.500) x 10/110] To Profit transferred to Capital A/cs: x 22,500 y 22/500 | 45,000 | 35,000 Note: The above stated amount of Y's Commission can be verified. After charging all commissions, not profit comes to € 45,000 [ic., 8 55,000 ~ (€ 5,500 + & 4,500)]. Thereafter, calculate Y's Commission @ 10% ‘of & 45,000. Illustration 15. A, B, and C are partners in a firm. According to the Partnership Deed, the partners are entitle to draw up to % 7,000 per month. On the Ist day of every month A, B and C drew 7, % 6,000 and ® 5,000 respectively. Interest on capitals and interest on drawings are fixed © 8% and 10% respectively. Profit for the year ended 31st March, 2019 was ® 7,55,000 out of which % 2,00,000 are to be transferred to General Reserve. B and C are to get salary of % 30,000 and 45,000 p.a. respectively and A is to receive commission @ 10% on distributable profits after charging such commission. On Ist April, 2018, balances of their Capital Accounts were % 5,00,000, ¥ 4,00,000 and & 3,50,000 respectively. Prepare Profit and Loss Appropriation Account for the year ended 31st March, 2019 and Capital Accounts of Partners in the books of the firm. PROFIT AND LOSS APPROPRIATION ACCOUNT Solution: Or. for the year ended 31st March, 2019 a Particulars Particulars 2 To General Reserve Ae By Profit and Loss A/c (Net Profit) | 755.000 To Interest on Capital A/cs: By Interest on Drawings A/cs (WN 1): A @ 5,00,000 x 8/100) 40,000 AW 84,000 x 10/100) 8,400 B 4,00,000 x 8/100) 32,000 B® 72,000 x 10/100) 7,200 CR 3,50,000 x 8/100) 28,000 | 1,00,000 C(& 60,000 x 10/100) 6000} 2 To Partners’ Salaries A/cs: — al 8 30,000 c 45,000 | 75,000 | To As Commission A/c(WN2) —————|-—36,508 To Profit transferred to: As Capital A/c 1,21,697 B's Capital A/c 1.21,697 C's Capital A/c 121697 | 3,65,091 | 7.76600 [_ 776600 Scanned with CamScannerChapter 2- Accounting for Partnership Firms—Fundamentals 2.31 PARTNERS CAPA ACCOUNTS & AR. BR) CR) Particulars A BR) ce) 84000 72000 60,000 | By Balance bid $,00.000 | 400.000 | 350.000 8400) 7,200 6,000 | By Interest on Capital A/c | 40,000 | 32,000 28,000 }6,05,806 | 5,04,497 | 4,78,697 | By Partners’ Salaries A/c “ 30,000 | 45,000 By Ascommsson Ne | 36509) | By Proft and Loss Appropnation Ae | 121697 |1.21657 | 12,697 6,98,206 | 5,83,697 6,98,206 | 5,83,697 | 544,697, Working Notes: 1,_ Interest on capital and interest on drawings are @ 8% and 10% (and not 83 p.a. an! @ 10% pa) respectively. ‘Therefore, the time factor is ignored. 2, As Commission = 10/110 x & 7,55,000 + % 21,600 ~ 2 1,00,000 - & 75,000 ~ @ 2,00,000) = & 36,509. 3, Unless otherwise stated in the Deed, profit of the year is divided among partners equally, 3, INTEREST ON| PARTNERS! DRAWINGS Drawings mean the amount withdrawn, in cash or in kind, by partners for their personal use. Drawings may be out of capital or against profit eee i Drawings Against Capital and Drawings Against Profit Drawi 198 against Capital means withdrawal by a partner out of his or her capital. Interest | ‘on capital: is allowed on the capital for the period it is used. Therefore, interost is not wi j.e., paid on the amount of capital withdrawn. Drawing by a partner against his ‘capital is debited to his or her Capital Account. As a result of this, partner gots st on capital on the amount and for the period capital remains in business. For ple, Partner Anmol has opening capital of % §,00,000 against which he withdraws 10 ‘on 1st October, 2018. Partnership Deed provides for interest on capital @ 10% p.a. get interest on capital for the year ended 31st March, 2019 as follows: % 25,000 % 20,000 £45,000 profit for 2 of expected profit, the firm charges. Alsuch drawings ot an ogrood rate of Inerost. tthe Partnership Dvod does not exist oF it ‘on drawings, interest on drawings is not charged. ings against Profit does not reduce capital, hence, it is not considered for calculating rest on capital. nce between Drawings Against Profit and Drawings Against Capital Drawings Against Profit Drawings Against Copital 92 5. on® T0037 2 Interest on Drawings by B: P Q R Date Amount ®) | No.of Months up to 31st March, 2018 Product ®) ‘30th April,2018 | 6.000 | n | 66,000 31st May, 2018 6,000 | 10 | 60,000 30th June, 2018 6,000 9 | 54,000 31st July,2018 8 | 48,000 31st August, 2018 7 | 42,000 30th September, 2018 6 36,000 Interest on % 3,06,000 @ 5% p.a. for one month = % 1,275 Alternatively, Interest may be calculated for 8.5 months [(11 months + 6 months)/2] @ 5% p.a. 5 85 on % 36,000 = % 36,000x =%1,275. | Interest on Drawings by C: P Q R | S=OxR Date Amount @) No.of Months up to 31st March,2019. | Product ) sth April, 2018 | us | 69,000 15th May,2018 105 63,000 15th June,2018 95 57.000 15th July, 2018 85 51,000 15th August, 2018 | 75 (Sth September,2018 | | 65 ‘ii ——| i: Interest on & 3,24,000 @ 5% p.a. for 1 month = & 1,350. Alternatively, Interest may be calculated for 9 months [(11.5 months + 6.5 months)/2] @ 5% p.a. on % 36,000 = % 36,000 % =F x3. = 1,350. 12 ation 4. If fixed amount is withdrawn in the beginning of each quarter during the year, interest is charged on the whole amount for a period of 7!4 months*. F Drawi Total Drawings x Rate of Interest _ 74 terest on Drawings = “00 = 1 4+3.Months _ 15 Month “Average Period = 24 Montes 22ien = ae = 7% Months. Scanned with CamScanneri | i | | 2.36 Double Entry Book Keeping—CBSE XI! Situation 5. If fixed amount is withdrawn in the middle of each quarter during the yea, terest is charged on the whole amount for a period of 6 months*. Total Drawings x Rate of Interest 6 100 12 5 6+ < < saverage Period 205 Monthe-=1.5 Months _ 12 Month: Situation 6. If fixed amount is withdrawn at the end of cach quarter during the year, charged on the whole amount for a period of 4% months*. Total Drawings » Rate of Interest 4¥% 100 “2 9 Months +0 Month _ 9 Months 2 2 Hlustration 19 (When there is regular Drawings at Quarterly Intervals). Calculate interest on drawings of Mr. Siddhant @ 10% p.a. for the year ended 31st March, 2019 in each of the following alternative cases: Interest on Drawings = ~ 6 Months. interest Interest on Drawings = saverage Period ~ = 4% Months. Case 1. If he withdrew & 60,000 in the beginning of each quarter. Case 2 If he withdrew % 60,000 at the end of each quarter. Case 3. If he withdrew % 90,000 in the middle of each quarter. Solution: Total Drawings in Cases 1 and 2 = % 60,000 = 4 = ¥ 2,40,000; Total Drawings in Case 3 = % 90,000 = 4 = % 3,60,000. Cased Case2 Case 3 : a {12+ 5) Months = 75 Monthel= (20) Months _ 45 onthe = ase) Months 6 rocans a | 75,10 6 10 fon (= 2 240000% =x a5 %3,60,000 x x05 \Drewings [= % 15000. 18,000, Situation 7. If fixed amount is withdrawn during 6 months: (i) In the beginning of each month: Interest on Drawings = Total Drawings x Rate 3% (ii) In the middle of each month: 100 12 Interest on Drawings = Total Drawings x nae x (iii) At the end of each month: Rate, 2% ton Drawings - i 24 Interest on Drawings ~ Total Drawings x Sat x 2% Ilustration 20 (When drawings are made for a period of 6 months only). A, Band C started a firm on Ist October, 2018 sharing profits equally. A drew regularly % 4,000 | in the beginning of every month for the six months ended 31st March, 2019. B drew regularly % 4,000 at the end of every month for the six months ended 31st March, 2019. C drew regularly _ % 4,000 in the middle of every month for the six months ended 31st March, 2019. Calculate interest on drawings @ 5% p.a. for the period ended 31st March, 2019. Scanned with CamScannerChapter 2. Accounting for Partnership Firms—Fundamentals 2.37 Solution: Total Drawings of each partner = 4,000 6 ~ % 24,000. Case1 | Case2 | Case3 ‘Average Period (50) Months — > «onthe e (55:05) MOMS = sons 2 Interest on 53 = 2250 & 826000% So x3 Drawings 25 2250 = 124000 755% 99 Situation 8. If the date of withdrawal is not given, then interest on total drawings for the year is calculated for six months on the average basis. Illustration 21. Calculate interest on drawings of Rakesh @ 10% p.a. for the year ended 31st March, 2019 in each of the following alternative case: Case 1. If his drawings during the year were 2 30,000. Case 2. If he withdraws % 2,500 per month during the year. Solution: Case 1. Assuming that drawings were made evenly throughout the year, interest on drawings has been calculated for an average period of 6 months. Interest on Drawings = % 30,000 = 10/100 = 6/12 = 1,500. Case 2. Total Drawings = % 2,500 = 12 = % 30,000 Interest on Drawings = % 30,000 = 10/100 = 6/12 = % 1,500. Important Note: /f the date of drawings is not given and Accounting period is less than 6 months, then the Interest on Total Drawings is calculated for half of the accounting period. Situation 9. When the rate of interest is given without the word ‘per annum’ (p.a.), interest is charged without considering the time factor. Illustration 22. Calculate interest on A’s drawings @ 10% if he withdrew % 2,50,000 during the year. Solution: Interest on drawings = 2,50,000 « 10/100 = % 25,000. Remember: Interest on drawings is an income for the firm and hence is credited to Profit and Loss Appropriation Account. On the other hand, interest on drawings is a loss to the partner and is debited to his Capital Account (in case of Fluctuating Capital) or Current Account {in case of Fixed Capital). | The Journal entries to record interest on drawings ar ifPartners CopitalAccounisare huctuatiig | () Partners’ Current Ales Dr |) Partners Capital Ales Dr. Tointerest on Drawings Alc To Interest on Drawings A/c (Being the interest charged on partners’ drawings) (Geing the interest charged on partners’ drawings) fi) Interest on Drawings A/c Dr. | il) Interest on Drawings A/c Dr. To Profit and Loss Appropriation A/c To Profit and Loss Appropriation A/c (Being the interest on drawings transferred to (Geing the interest on drawings transferred to Profit and Loss Appropriation A/c) Profit and Loss Appropriation A/c) ee Alternatively:_In place of above two entries only single | Alternatively: In place of above two entries, only single entry may be passed as follows: entry may be passed as follows: Partners’ Current A/es Dr Partners Capital Acs Dr. To Profit and Loss Appropriation A/¢ To Profit nd Loss Appropriation A/c Geing the interest charged on drawings of partners) (Geing the interest charged on drawings of partners) Scanned with CamScannerCRSE XT 2.38 Double Entry Book Keepi F fp sie eiersn cencaaney etereetier sete rer ereere en omnng } %. When a partner draws a fixed sum in the beginning of every month, interest is charged on, the whole amount for 6% months at an agreed rate per annum. When @ partner draws a fixed sum in the middle of every month, interest is charged on the whole amount for 6 months at an agreed rate per annum. When a partner draws a fixed sum at the end of every month, interest is charged on the whole amount for 5% months at an agreed rate per annum. 4. When a partner withdraws a fixed sum in the beginning of each quarter, interest is chargey on the whole amount for a period of 73: months at an agreed rate per annum. . 5. When a partner withdraws @ fixed sum in the middle of each quarter, interest is chargeg on the whole amount tor a period of 6 months at an agreed rate per annum. 6. When a partner withdraws a fixed sum at the end of each quarter, interest is charged on, the whole amount tor a period of 4% months at an agreed rate per annum. 7. When a partner withdraws unequal amount on different dates, interest is calculated usin Simple Method or Product Method. ‘a 8. When dates of drawings are given and the interest is to be charged at an agreed rate pa; annum, interest is calculated on the basis of time. 8. If date of withdrawal is not given, the interest on total drawings for the year is calculate for six months on the average basis. 10. When rate of interest is given without the word ‘per annum’, considering the time factor. | | | | | terest is charged without Gos The Partnership Deed does not provide for charging interest on drawings. Therefore, the provisions of the Indian Partnership Act, 1932 apply whereby interest cannot be charged, The partners desire to charge interest thereon. Can you suggest what steps should they : take so that the firm can charge interest on drawings? 4, INTEREST, ON PARTNERS’ CAPITALS Interest on Capital is allowed to compensate a partner for contributing capital to the firm in excess of the profit-sharing ratio. Like interest on drawings, it is also calculated at the agreed rate with reference to the time capital has been used in the business. Interest on capital is calculated on the opening balance of the partner’s capital. Additional Capital: If additional capital is introduced during the it from the date additional capital is introduced till the end of the accounting year. Sin if capital is withdrawn by a partner during the year, interest is not allowed on the amoun of capital withdrawn. For example, Alok, partner in Alok é& Co., had capital to his credi amounting to 2 5,00,000 as on Ist April, 2018. He withdraws ® 1,00,000 on Ist January, 2019 Interest on Capital is allowed @ 10% p.a. He will get interest @ 10% on % 5,00,000 for 9 months and @ 10% on % 4,00,000 for 3 months. Reasons or justification for allowing interest on capital are: (i) When Capitals of partners are different but profit-sharing ratio is equal. If a partne: invests more capital as compared to other partners and profit-sharing ratio is equel interest paid on capital compensates him or her for more investment. In case i on capital is not paid, share in profit of a partner investing more capital will be equ to share of profit of partners investing less capital. year, interest is allowed on r es! Scanned with CamScanner