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**CBSE accountancy class 12 chapter Accounting for Accounting for Partnership : Basic Concepts**. You can find the questions/answers/solutions for the**chapter 2**of**CBSE class 12 accountancy**in this page. So is the case if you are looking for**CBSE class 12 Commerce**related topic**Accounting for Partnership : Basic Concepts**. If you’re looking for numerical questions solutions you can find them at⁕

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Test Your Understanding – I

1. Mohan and Shyam are partners in a firm. State whether the claim is valid if the partnership agreement is silent in the following matters:

(i)

Mohan is an active partner. He wants a salary of ₹ 10,000 per year; (❌ Invalid)

(ii)

Shyam had advanced a loan to the firm. He claims interest @ 10% per annum; (❌ Invalid)

(iii)

Mohan has contributed ₹ 20,000 and Shyam ₹ 50,000 as capital. Mohan wants equal share in profits. (✔ Valid)

(iv)

Shyam wants interest on capital to be credited @ 6% per annum. (❌ Invalid)

2. State whether the following statements are true or false:

(i)

Valid partnership can be formulated even without a written agreement between the partners; (✔ True)

(ii)

Each partner carrying on the business is the principal as well as the agent for all the other partners; (✔ True)

(iii)

Maximum number of partners can be 50 (✔ True)

(iv)

Methods of settlement of dispute among the partners can’t be part of the partnership deed; (❌ False)

(v)

If the deed is silent, interest at the rate of 6% p.a. would be charged on the drawings made by the partner; (❌ False)

(vi)

Interest on partner’s loan is to be given @ 12% p.a. if the deed is silent about the rate. (❌ False)

Do It Yourself – I

1. Soumya and Bimal are partners in a firm Sharing profits and losses in the ratio of 3:2. The balance in their capital and current accounts as on April 01, 2019 were as under:

Soumya

₹

₹

Bimal

₹

₹

Capital Accounts

3,00,000

2,00,000

Current Accounts(Cr.)

1,00,000

80,000

The partnership deed provides that Soumya is to be paid salary @ ₹ 500 per month where as Bimal is to get a commission of ₹ 40,000 for the year. Interest on capital is to be credited at 6% p.a. The drawings of Soumya and Bimal for the year were ₹ 30,000 and ₹ 10,000 respectively. The net profit of the firm before making these adjustments was ₹ 2,49,000. Interest on Soumya’s drawings was ₹ 750 and Bimal’s drawings, ₹ 250. Prepare Profit and Loss Appropriation Account and Partner’s Capital and Current Accounts.

Working Notes:

Details

Calculation

Amount

₹

₹

Soumya’s salary per month

500

Soumya’s salary per year

500 × 12

6,000

Interest on Capital

Soumya’s capital

3,00,000

Interest on Soumya’s capital @ 6% p.a.

3,00,000 × \dfrac{6}{100}

18,000

Bimal’s capital

2,00,000

Interest on Bimal’s capital @ 6% p.a.

2,00,000 × \dfrac{6}{100}

12,000

Profit and Loss Appropriation Account

Dr

Cr

Particulars

Amount

₹

₹

Particulars

Amount

₹

₹

To Soumya’s Salary

6,000

By Profit and Loss

2,49,000

To Bimal’s Commission

40,000

By Interest on Drawings

To Interest on Capital

Soumya

750

Soumya

18,000

Bimal

250

1,000

Bimal

12,000

30,000

To Profit transferred to partner’s capital account:

Soumya

1,04,400

Bimal

69,600

1,74,000

2,50,000

2,50,000

Partners’ Capital Account

Dr

Cr

Date

Particulars

J.F.

Amount

₹

Soumya

₹

Soumya

Amount

₹

Bimal

₹

Bimal

Date

Particulars

J.F.

Amount

₹

Soumya

₹

Soumya

Amount

₹

Bimal

₹

Bimal

To Balance c/d

3,00,000

2,00,000

By Balance b/d

3,00,000

2,00,000

3,00,000

2,00,000

3,00,000

2,00,000

Partners’ Current Account

Dr

Cr

Date

Particulars

J.F.

Amount

₹

Soumya

₹

Soumya

Amount

₹

Bimal

₹

Bimal

Date

Particulars

J.F.

Amount

₹

Soumya

₹

Soumya

Amount

₹

Bimal

₹

Bimal

To Drawings A/c

30,000

10,000

By Balance b/d

1,00,000

80,000

To Interest on Drawings A/c

750

250

By Salary A/c

6,000

To Balance b/d

1,97,650

1,91,350

By Commission A/c

40,000

By Interest on Capital A/c

18,000

12,000

By Profit and Loss Appropriation A/c

1,04,400

69,600

2,28,400

2,01,600

2,28,400

2,01,600

2. Soniya, Charu and Smita started a partnership firm on April 1, 2019. They contributed ₹ 5,00,000, ₹ 4,00,000 and ₹ 3,00,000 respectively as their capitals and decided to share profits and losses in the ratio of 3:2:1. The partnership deed provides that Soniya is to be paid a salary of ₹ 10,000 per month and Charu a commission of ₹ 50,000. It also provides that interest on capital be allowed @6% p.a. The drawings for the year were Soniya ₹ 60,000, Charu ₹ 40,000 and Smita ₹ 20,000. Interest on drawings was charged as ₹ 2,700 on Soniya’s drawings, ₹ 1,800 on Charu’s drawings and ₹ 900 on Smita’s drawings. The net amount of profit as per Profit and Loss Account for the year 2019-2020 is ₹ 3,56,600.

(i)

Record necessary journal entries.

(ii)

Prepare profit and loss appropriation account

(iii)

Show capital accounts of the partners.

Working Notes:

Particulars

Calculation

Amount

₹

₹

Salary

Soniya’s Salary per month

10,000

Soniya’s Salary per year

= 10,000 × 12

1,20,000

Commission

Charu’s Commission

50,000

Interest on Capital

Soniya

{5,00,000 × \dfrac{6}{100}}

30,000

Charu

{4,00,000 × \dfrac{6}{100}}

24,000

Smita

{3,00,000 × \dfrac{6}{100}}

18,000

Total Interest on Capital

72,000

Interest on Drawings

Interest on Soniya’s Drawings

2,700

Interest on Charu’s Drawings

1,800

Interest on Smita’s Drawings

900

Total Interest on Drawings

5,400

Profit Available for Sharing

Net Amount of Profit

3,56,600

Soniya’s Salary

(1,20,000)

Charu’s Commission

(50,000)

Interest on Capital

(72,000)

Interest on Drawings

5,400

1,20,000

Soniya’s share of profit

{= 1,20,000 × \dfrac{3}{6}}

60,000

Charu’s share of profit

{= 1,20,000 × \dfrac{2}{6}}

40,000

Smita’s share of profit

{= 1,20,000 × \dfrac{1}{6}}

20,000

Journal

Date

Particulars

L.F.

Debit

Amount

₹

Amount

₹

Credit

Amount

₹

Amount

₹

Profit and Loss Appropriation A/c

Dr.

1,20,000

To Soniya’s Capital A/c

1,20,000

(Being Salary paid to Soniya)

Profit and Loss Appropriation A/c

Dr.

50,000

To Charu’s Capital A/c

50,000

(Being Commission paid to Charu)

Profit and Loss Appropriation A/c

Dr.

72,000

To Soniya’s Capital A/c

30,000

To Charu’s Capital A/c

24,000

To Smita’s Capital A/c

18,000

(Being Interest on capital paid)

Soniya’s Capital A/c

Dr.

2,700

Charu’s Capital A/c

Dr.

1,800

Smita’s Capital A/c

Dr.

900

To Profit and Loss Appropriation A/c

5,400

(Being Interest on drawings debited to partners’ Capital A/c)

Profit and Loss Appropriation A/c

Dr.

1,20,000

To Soniya’s Capital A/c

60,000

To Charu’s Capital A/c

40,000

To Smita’s Capital A/c

20,000

(Being Profit transferred to partners’ Capital A/c)

Soniya’s Capital A/c

Dr.

60,000

Charu’s Capital A/c

Dr.

40,000

Smita’s Capital A/c

Dr.

20,000

To Drawings A/c

1,20,000

(Being withdrawn by partners for personal use)

Total c/f

4,87,400

4,87,400

Profit and Loss Appropriation Account

for the year 2019-20

for the year 2019-20

Dr

Cr

Particulars

Amount

₹

₹

Particulars

Amount

₹

₹

To Salary to Soniya

1,20,000

By Profit and Loss A/c

3,56,600

To Commission to Charu

50,000

By Interest on Drawings A/c

To Interest on Capital A/c:

Soniya

2,700

Soniya

30,000

Charu

1,800

Charu

24,000

Smita

900

5,400

Smita

18,000

72,000

To Profit Transferred to:

Soniya’s Capital A/c

60,000

Charu’s Capital A/c

40,000

Smita’s Capital A/c

20,000

1,20,000

3,62,000

3,62,000

Parnters’ Capital Account

Dr

Cr

Date

Particulars

J.F.

Amount

₹

Soniya

₹

Soniya

Amount

₹

Charu

₹

Charu

Amount

₹

Smita

₹

Smita

Date

Particulars

J.F.

Amount

₹

Soniya

₹

Soniya

Amount

₹

Charu

₹

Charu

Amount

₹

Smita

₹

Smita

To Drawings A/c

60,000

40,000

20,000

By Balance b/d

5,00,000

4,00,000

3,00,000

To Interest on Drawings A/c

2,700

1,800

900

By Salary A/c

1,20,000

–

–

To Balance c/d

6,47,300

4,72,200

3,17,100

By Commission A/c

–

50,000

–

By Interest on Capital A/c

30,000

24,000

18,000

By Profit and Loss Appropriation A/c

60,000

40,000

20,000

7,10,000

5,14,000

3,38,000

7,10,000

5,14,000

3,38,000

Test your Unerstanding – II

1. Raju and Jai commenced business in partnership on April 1, 2017. No partnership agreement was made whether oral or written. They contributed ₹ 4,00,000 and ₹ 1,00,000 respectively as capitals. In addtion, Raju advanced ₹ 2,00,000 as loan to the firm on October 1, 2017. Raju met with an accident on July 1, 2017 and could not attend the business up to september 30, 2017. The profit for the year ended March 31, 2018 amounted to ₹ 50,600. Disputes have arisen between them on sharing the profits of the firm.

Raju Claims:

(i)

He should be given interest at 10% p.a. on capital and so also on loan. (❌ False. No interest is allowed on capital. Interest on loan is given @ 6% p.a.)

(ii)

Profit should be distributed in the proportion of capitals. (❌ False. Profit should be shared equally.)

Jai Claims:

(i)

Net profit should be shared equally. (✔ True)

(ii)

He should be allowed remuneration of Rs, 1,000 p.a. during the period of Raju’s illness. (❌ Salary and commission are not given to the partners.)

(iii)

Interest on capital and loan should be given @ 6% p.a. (❌ No interest is allowe on capital.) (✔ True. Interest on loan should be @ 6^ p.a.)

State the correct position on each issue as per the provisions of the Partnership Act. 1932.

2. Reena and Raman are partners with capitals of ₹ 3,00,000 and ₹ 1,00,000 respectively. The profit for the year ended March 31, 2017 was ₹ 1,80,000, before paying rent for her personal building to be used as godown for firm to Reena payable at ₹ 5000 per month. Interest on capital is to be allowed at 6% p.a. Raman was entitled to a salary of ₹ 30,000 p.a. The drawings of partners were ₹ 30,000 and 20,000. The interest on drawings to be charged to Reena was ₹ 1,000 and to Raman, ₹ 500.

Assuming that Reena and Raman are equal partners. State their share of profit after necessary appropriations.

Working Notes:

Particulars

Calculation

Amount

₹

₹

Interest on Reena’s capital @ 6% p.a.

{3,00,000 × \dfrac{6}{100}}

18,000

Interest on Raman’s capital @ 6% p.a.

{1,00,000 × \dfrac{6}{100}}

6,000

Annual Rent paid to Reena’s personal building

5,000 × 12

60,000

Profit and Loss Appropriation Account

Dr

Cr

Particulars

Amount

₹

₹

Particulars

Amount

₹

₹

To Rent to Reena

60,000

By Profit and Loss

1,80,000

To Raman’s Salary

30,000

By Interest on Drawings:

To Interest on Capitals

Reena

1,000

Reena

18,000

Raman

500

1,500

Raman

6,000

24,000

To Share of profit transferred to Capital accounts:

Reena

33,750

Raman

33,750

67,500

1,81,500

1,81,500

From the above, we can see that Profit : Reena, ₹ 33,750; Raman, ₹ 33,750

Test Your Understanding – III

1. Rani and Suman are in partnership with fixed capitals of ₹ 80,000 and ₹ 60,000, respectively. During the year 2015-16, Rani withdrew ₹ 10,000 from her capital and Suman ₹ 15,000. Profits before charging interest on capital was ₹ 50,000. Rani and Suman shared profits in the ratio of 3:2. Calculate the amounts of interest on their capitals @ 12% p.a. for the year ended March 31, 2016.

As it is not specified anything regarding the time at which the capital is withdrawn, we assume that the capital is withdrawn after six months. So, Rani’s capital is ₹ 80,000 for the first 6 months and 80,000 – 10,000 = 70,000 for the next 6 months

Interest on Rani’s capital

{= 80,000 × \dfrac{12}{100} × \dfrac{6}{12} + 70,000 × \dfrac{12}{100} × \dfrac{6}{12}}

= 4,800 + 4,200

= 9,000

Suman’s capital is ₹ 60,000 for the first 6 months and 60,000 – 15,000 = 45,000 for the next 6 months

Interest on Suman’s capital

{= 60,000 × \dfrac{12}{100} × \dfrac{6}{12} + 45,000 × \dfrac{12}{100} × \dfrac{6}{12}}

= 3,600 + 2,700

= 6,300

2. Priya and Kajal are partners in a firm, sharing profits and losses in the ratio of 5:3. The balance in their fixed capital accounts, on April 1, 2016 were: Priya, ₹ 6,00,000 and Kajal, ₹ 8,00,000. The profit of the firm for the year ended March 31, 2017 was ₹ 1,26,000. Calculate their shares of profits: (a) when there is no agreement in respect of interest on capital, and (b) when there is an agreement that the interest on capital will be allowed @ 12% p.a.

(a) When there is no agreement in respect of interest on capital:

Details

Calculation

Amount

₹

₹

Priya’s share of capital

1,26,000 × \dfrac{5}{8}

78,750

Kajal’s share of capital

1,26,000 × \dfrac{3}{8}

47,250

(b) When there is an agreementthat the interest on capital will be allowed @ 12% p.a.

Details

Calculation

Amount

₹

₹

Priya’s capital

6,00,000

Interest on Priya’s capital @ 12% p.a.

6,00,000 × \dfrac{12}{100}

72,000

Kajal’s capital

8,00,000

Interest on Kajal’s capital @ 12% p.a.

8,00,000 × \dfrac{12}{100}

96,000

Total Interest on capital

1,68,000

As the total interest i.e. 1,68,000 is more than the total profit i.e. 1,26,000, the interest will be paid to the extent of available profit in the ratio of their capitals as calculated below:

Details

Calculation

Amount

₹

₹

Ratio of capitals

6,00,000:8,00,000

= 3:4

Interest on Priya’s capital

1,26,000 × \dfrac{3}{7}

54,000

Interest on Kajal’s capital

1,26,000 × \dfrac{4}{7}

72,000

So, Profit NIL. Interest on capital: Priya, ₹ 54.000; Kajal, ₹ 72,000

Do it Yourself – II

1. Govind is a partner in a firm. He withdrew the following amounts during the year 2015-16:

April 30, 2019

6,000

June 30, 2019

4,000

Sept. 30, 2019

8,000

Dec. 31, 2019

3,000

Jan. 31, 2020

5,000

The interest on drawings is to be charged @ 6% p.a. The books are closed on March 31, every year. Calculate interest on drawing :

In this case, varying amounts are withdrawn at different intervals

When the partners withdraws varying amounts of money at different time intervals, the interest is computed using the product method. In this method, for each withdrawal, the money withdrawn is multiplied by the period (usually expressed in months) for which it remains withdrawn during the financial year. The period is calculated from the date of the withdrawal to the last day of the accounting year. The products thus calculated are totalled. Then the total of the products interest at the specified rate is calculated as under:

Interest = Total of Products × Rate × \dfrac{1}{12}

Statement Showing Calculation of Interest on Drawings

Date

Amount

₹

₹

Time Period

Product

₹

₹

April 30, 2019

6,000

11 months

66,000

June 30, 2019

4,000

9 months

36,000

Sep 30, 2019

8,000

6 months

48,000

Dec 31, 2019

3,000

3 months

9,000

Jan 31, 2019

5,000

2 months

10,000

Total

1,69,000

∴ Interest on Drawings

{= 1,69,000 × \dfrac{6}{100} × \dfrac{1}{12}}

= 845

2. Ram and Syam are partners sharing profits/losses equally. Ram withdrew ₹ 1,000 p.m. regularly on the first day of every month during the year 2015-16 for personal expenses. If interest on drawings is charged @ 5% p.a. Calculate interest on the drawings of Ram.

When the amount is withdrawn on the first day of the month

Average Period

{= \dfrac{No.~of~months~of~1^{st}~drawing + No.~of~months~of~last~drawing}{2}}

{= \dfrac{12 + 1}{2} = 6\dfrac{1}{2}}

So, for the given problem,

Interest on Drawings

{= 12,000 × \dfrac{5}{100} × \dfrac{6\dfrac{1}{2}}{12}}

{= 12,000 × \dfrac{5}{100} × \dfrac{13}{2 × 12}}

= 325

3. Verma and Kaul are partners in a firm. The partnership agreement provides that interest on drawings should be charged @ 6% p.a. Verma withdraws ₹ 2,000 per month starting from April 01, 2019 to March 31, 2020. Kaul withdrew ₹ 3,000 per quarter, starting from April 01, 2019. Calculate interest on partner’s drawings.

When the amount is withdrawn on the first day of the month

Average Period

{= \dfrac{No.~of~months~of~1^{st}~drawing + No.~of~months~of~last~drawing}{2}}

{= \dfrac{12 + 1}{2} = 6\dfrac{1}{2}}

Similarly, when the amount is withdrawn at the beginning of each quarter

Average Period

{= \dfrac{No.~of~months~of~1^{st}~drawing + No.~of~months~of~last~drawing}{2}}

{= \dfrac{12 + 3}{2} = 7\dfrac{1}{2}}

Considering the above, the caluclation will be as follows:

Details

Calculation

Amount

₹

₹

Drawings By Verma

(monthly for 12 months)

(monthly for 12 months)

= 2,000 × 12

24,000

Interest on drawings

{= 24,000 × \dfrac{6}{12} × \dfrac{13}{2} × \dfrac{1}{12}}

780

Drawings By Kaul

(quarterly for 4 quarters)

(quarterly for 4 quarters)

= 3,000 × 4

12,000

Interest on drawings

{= 12,000 × \dfrac{6}{12} × \dfrac{15}{2} × \dfrac{1}{12}}

450

Do It Yourself – III

Kavita and Lalit are partners sharing profits in the ratio of 2:1. They decide to admit Mohan with share in profits with a guaranteed amount of ₹ 25,000. Both Kavita and Lalita undertake to meet the liability arising out of Guaranteed amount to Mohan in their respective profit sharing ratio. The profit sharing ratio between Kavita and Lalit does not change. The firm earned profits of ₹ 76,000 for the year 2006–07.Show the distribution of profit amongst the partners.

Particulars

Calculation

Amount

₹

₹

Total Profit

76,000

Mohan’s guaranteed profit

25,000

Remaining Profit

51,000

Kavita’s share

51,000 × \dfrac{2}{3}

34,000

Lalit’s share

51,000 × \dfrac{1}{3}

17,000

Do It Yourself – IV

1. Gupta and Sarin are partners in a firm sharing profits in the ratio of 3:2. Their fixed capitals are: Gupta 2,00,000, and Sarin 3,00,000. After the accounts for the year are prepared it is discovered that interest on capital @10% p.a. as provided in the partnership agreement, has not been credited in the capital accounts of partners before distribution of profits. Record adjustment entry to rectify the error.

Working Notes:

Particulars

Calculation

Amount

₹

₹

Interest on Capital

Gupta’s capital

2,00,000

Interest on Capital

{2,00,000 × \dfrac{10}{100}}

20,000

Sarin’s capital

3,00,000

Interest on Capital

{3,00,000 × \dfrac{10}{100}}

30,000

Total Interest to be adjusted

50,000

Adjustment to Profit

Adjustment to Gupta’s profit

{50,000 × \dfrac{3}{5}}

30,000

Adjustment to Sarin’s profit

{50,000 × \dfrac{2}{5}}

20,000

This error can be rectified by any of the following ways:

(a) Through Profit and Loss Adjustment Account

Journal

Date

Particulars

L.F.

Debit

Amount

₹

Amount

₹

Credit

Amount

₹

Amount

₹

Profit and Loss Adjustment A/c

Dr.

50,000

To Gupta’s Capital A/c

20,000

To Sarins Capital A/c

30,000

(Being Interest on capital adjusted)

Gupta’s Capital A/c

Dr.

30,000

Sarin’s Capital A/c

Dr.

20,000

To Profit and Loss Adjustment A/c

50,000

(Being Loss to profit adjusted)

(b) Directly in Partner’s Capital Accounts

Details

Gupta

₹

₹

Sarin

₹

₹

(i) Amount which should have been credited as interest on capital

20,000 (Cr.)

30,000 (Cr.)

(ii) Amount actually credited by way of sharing of profit (₹ 50,000) divided in the ration 2:3

30,000 (Dr.)

20,000 (Dr.)

(iii) Difference between (i) and (ii) (Net Effect)

Dr. 10,000

(Excess)

(Excess)

Cr. 10,000

(Short)

(Short)

The following will be the corresponding journal entries

Journal

Date

Particulars

L.F.

Debit

Amount

₹

Amount

₹

Credit

Amount

₹

Amount

₹

Gupta’s Capital A/c

Dr.

10,000

To Sarin’s Capital A/c

10,000

(Being Adjustment for omission of interest on capital)

2. Krishna, Sandeep and Karim are partners sharing profits in the ratio of 3:2:1. Their fixed capitals are: Krishan ₹ 1,20,000, Sandeep 90,000 and Karim 60,000. For the year 2014-15, interest was credited to them @ 6% p.a. instead of 5% p.a. Record adjustment entries through P&L adjustments account.

Working Notes:

Particulars

Calculation

Amount

₹

₹

Interest on Capital

Krishna’s capital

1,20,000

Interest Credited

{1,20,000 × \dfrac{6}{100}}

7,200

Actual Interest

{1,20,000 × \dfrac{5}{100}}

6,000

Additional Interest Credited

1,200

Sandeep’s capital

90,000

Interest Credited

{90,000 × \dfrac{6}{100}}

5,400

Actual Interest

{90,000 × \dfrac{5}{100}}

4,500

Additional Interest Credited

900

Karim’s capital

60,000

Interest Credited

{60,000 × \dfrac{6}{100}}

3,600

Actual Interest

{60,000 × \dfrac{5}{100}}

3,000

Additional Interest Credited

600

Total Interest to be adjusted

2,700

Adjustment to Profit

Adjustment to Krishna’s profit

{2,700 × \dfrac{3}{6}}

1,350

Adjustment to Sandeep’s profit

{2,700 × \dfrac{2}{6}}

900

Adjustment to Karim’s profit

{2,700 × \dfrac{1}{6}}

450

This error can be rectified by any of the following ways:

(a) Through Profit and Loss Adjustment Account

Journal

Date

Particulars

L.F.

Debit

Amount

₹

Amount

₹

Credit

Amount

₹

Amount

₹

Krishna’s Capital A/c

Dr.

1,200

Sandeep’s Capital A/c

Dr.

900

Karim’s Capital A/c

Dr.

600

To Profit and Loss Adjustment A/c

2,700

(Being Interest on capital adjusted)

Profit and Loss Adjustment A/c

Dr.

2,700

To Krishna’s Capital A/c

1,350

To Sandeep’s Capital A/c

900

To Karim’s Capital A/c

450

(Being additional profit adjusted)

(b) Directly in Partner’s Capital Accounts

Details

Gupta

₹

₹

Sarin

₹

₹

Karim

₹

₹

(i) Additional amount which should have been credited as profit

1,350 (Cr.)

900 (Cr.)

450 (Cr.)

(ii) Amount actually credited as interest

1,200 (Dr.)

900 (Dr.)

600 (Dr.)

(iii) Difference between (i) and (ii) (Net Effect)

Cr. 150

(Short)

(Short)

0

Dr. 150

(Excess)

(Excess)

The following will be the corresponding journal entries

Journal

Date

Particulars

L.F.

Debit

Amount

₹

Amount

₹

Credit

Amount

₹

Amount

₹

Karim’s Capital A/c

Dr.

150

To Krishna’s Capital A/c

150

(Being Adjustment for additional interest credited on capital)

3. Leela, Meera and Neha are partners and have omitted interest on capital @9% p.a. for three years ended March 31, 2013 March 31, 2016. Their fixed capitals on which interest was to be allowed throughout were: Leela ₹ 80,000, Meera ₹ 60,000 and Neha ₹ 1,00,000. Their profit sharing ratio during the last three years were:

Year

Leela

Meera

Neha

2015-16

2

2

2

2014-15

4

5

1

2013-14

1

2

2

Record adjustment entry.

Working Notes:

Particulars

Calculation

Amount

Calculation for 2015-16

Interest on Leela’s capital

{80,000 × \dfrac{9}{100}}

7,200

Interest on Meena’s capital

{60,000 × \dfrac{9}{100}}

5,400

Interest on Neha’s capital

{1,00,000 × \dfrac{9}{100}}

9,000

Total Interest

21,600

Profit sharing ratio

2:2:2

Leela’s share of profit

{21,600 × \dfrac{2}{6}}

7,200

Meena’s share of profit

{21,600 × \dfrac{2}{6}}

7,200

Naha’s share of profit

{21,600 × \dfrac{2}{6}}

7,200

Calculation for 2014-15

Total Interest

21,600

Profit sharing ratio

4:5:1

Leela’s share of profit

{21,600 × \dfrac{4}{10}}

8,640

Meena’s share of profit

{21,600 × \dfrac{5}{10}}

10,800

Naha’s share of profit

{21,600 × \dfrac{1}{10}}

2,160

Calculation for 2013-14

Total Interest

21,600

Profit sharing ratio

1:2:2

Leela’s share of profit

{21,600 × \dfrac{1}{5}}

4,320

Meena’s share of profit

{21,600 × \dfrac{2}{5}}

8,640

Naha’s share of profit

{21,600 × \dfrac{2}{5}}

8,640

This error can be rectified in any of the following ways

(a) Through Profit and Loss Adjustment Account

Journal

Date

Particulars

L.F.

Debit

Amount

₹

Amount

₹

Credit

Amount

₹

Amount

₹

Profit and Loss Adjustment A/c

Dr.

64,800

To Leela’s Capital A/c

21,600

To Meena’s Capital A/c

16,200

To Neha’s Capital A/c

27,000

(Being Interest on capital adjusted)

Leela’s Capital A/c

Dr.

20,160

Meena’s Capital A/c

Dr.

26,640

Neha’s Capital A/c

Dr.

18,000

To Profit and Loss Adjustment A/c

64,800

(Being Loss to profit adjusted)

(b) Directly in Partners’ Capital Accounts

Details

Leela

₹

₹

Meena

₹

₹

Neha

₹

₹

(i) Amount which should have been credited as interest on capital:

2015-16

7,200

5,400

9,000

2014-15

7,200

5,400

9,000

2013-14

7,200

5,400

9,000

Total Interest

21,600 (Cr.)

16,200 (Cr.)

27,000 (Cr.)

(ii) Amount actually credited by way of share of profit

2015-16 in the ratio 2:2:2

7,200

7,200

7,200

2014-15 in the ratio 4:5:1

8,640

10,800

2,160

2015-16 in the ratio 1:2:2

4,320

8,640

8,640

Total Capital Credited

20,160 (Dr.)

26,640 (Dr.)

18,000 (Dr.)

Difference between (i) and (ii) (Net Effect)

Cr 1,440

(Excess)

(Excess)

Dr 10,440

(Short)

(Short)

Cr 9,000

(Excess)

(Excess)

Journal

Date

Particulars

L.F.

Debit

Amount

₹

Amount

₹

Credit

Amount

₹

Amount

₹

Meena’s Capital A/c

Dr.

10,440

To Leela’s Capital A/c

1,440

To Neha’s Capital A/c

9,000

Short Answer Questions

1. Define Partnership Deed.

A partnership deed is a document that contains the terms of partnership as agreed among the partners. Usually, the information about all aspects affecting the relationship between partners, including

⋆

Objective of business

⋆

Contribution of capital by each partner

⋆

ratio in which profit and losses will be shared by the partners

⋆

entitlement of partners to interest on capital

⋆

interest on loan

⋆

rules to be followed in case of

‣

admission

‣

retirement

‣

death

‣

dissolution etc.

2. Why it is considered desirable to make the partnership agreement in writing?

The Indian partnership Act 1932, does not mandate that the partnership agreement should be in written form. An oral agreement is equally valid. However, to avoid any disputes, it is preferred that the partners have a written agreement as it acts as a reference in case there is disagreement among the partners. In case of any disagreement, the parners can refer to the partnership agreement document and settle the disputes amicably.

3. List the items which may be debited or credited in capital accounts of the partners when:

(i)

Capitals are fixed.

(ii)

Capitals are fluctuating.

(i) The following items may be debited or credited in capital accounts of the partners when the capitals are fixed:

Partner’s Capital Account

Dr

Cr

Date

Particulars

J.F.

Amount

₹

₹

Date

Particulars

J.F.

Amount

₹

₹

To Bank A/c

(Permanent Withdrawal of Capital)

(Permanent Withdrawal of Capital)

xxx

By Balance b/d

(Opening Balance)

(Opening Balance)

xxx

To Balance c/d

(Closing Balance)

(Closing Balance)

xxx

By Bank A/c

(Fresh Capital Introduced)

(Fresh Capital Introduced)

xxx

(ii) The following items may be debited or credited in capital accounts of the partners when the capitals are fluctuating:

Partner’s Capital Account

Dr

Cr

Date

Particulars

J.F.

Amount

₹

₹

Date

Particulars

J.F.

Amount

₹

₹

To Balance b/d

(in case of debit closing balance)

(in case of debit closing balance)

xxx

By Balance b/d

(in case of credit opening balance)

(in case of credit opening balance)

xxx

To Drawings A/c

xxx

By Bank A/c

(Fresh capital introduced)

(Fresh capital introduced)

xxx

To Interest on Drawings A/c

xxx

By Salaries A/c

xxx

To Profit and Loss A/c

(for share of loss)

(for share of loss)

xxx

By Interest on Capital A/c

xxx

To Balance c/d

(in case of credit closing balance)

(in case of credit closing balance)

xxx

By Profit and Loss

Appropriation A/c

(for share of profit)

Appropriation A/c

(for share of profit)

xxx

By Balance b/d

(in case of debit closing balance)

(in case of debit closing balance)

xxx

xxxx

xxxx

4. Why is Profit and Loss Appropriation Account prepared?

Profit and Loss Appropriation Account is prepared for the following reasons:

i.

To show how the profits are appropriated or distributed among the partners, in accordance with the partnership deed.

ii.

To make the necessary adjustments for the

•

Partners’ salaries

•

Partners’ commission

•

Interest on capital

•

Interest on drawings etc

5. Give two circumstances under which the fixed capitals of partners may change.

The following are the two circumstances under which the fixed capitals of the partners may change.

i.

Fresh capital is introduced into the business by any of the partners, as per the agreement among the parters.

ii.

Part of the capital is permanently withdrawn by any of the partners, as per the agreement among the parters.

6. If a fixed amount is withdrawn on the first day of every quarter, for what period the interest on total amount withdrawn will be calculated?

If a fixed amount is withdrawn on the first day of every quarter, the interest is calculated on the total amount withdrawn during the year, for a period of seven and half months i.e., {\dfrac{12 + 3}{2} = \dfrac{15}{2} = 7\dfrac{1}{2}}

7. In the absence of Partnership deed, specify the rules relating to the following :

(i)

Sharing of profits and losses.

(ii)

Interest on partner’s capital.

(iii)

Interest on Partner’s drawings.

(iv)

Interest on Partner’s loan

(v)

Salary to a partner.

(i) In the absence of partnersip deed, the rule related to the sharing of profits and losses, according to Indian Partnership Act 1932, is to share the profits equally among the partners, irrespective of their capitals.

(ii) In the absence of partnersip deed, the rule related to the interest on partner’s capital, according to Indian Partnership Act 1932, is not to pay any interest.

(iii) In the absence of partnersip deed, the rule related to the interest on partner’s drawings, according to Indian Partnership Act 1932, is not to pay any interest.

(iv) In the absence of partnersip deed, the rule related to the interest on partner’s loan, according to Indian Partnership Act 1932, is to pay a fixed interest @6% p.a.

(iv) In the absence of partnersip deed, the rule related to the salary to the partner, according to Indian Partnership Act 1932, is not to pay any salary.

Long Answer Questions

1. What is meant by partnership? Explain its chief characteristics? Explain.

Section 4 of the Indian Partnership Act 1932 defines the partnership as ‘relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all’.

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.

The following are the chief characteristics of the partnership:

1. Two or more persons: In order to form partnership, there should be at least two persons coming together for common goal. This implies that the mininum number of partners in a firm can be two. However, there is a limit to the maximum number of partners. By virtue of Section 464 of the Companies Act 2013, the Central Government is empowered to prescribe maximum number of partners in a firm. However, the number of partners can not be more than 100. The Central government has prescribed the maximum number of partness in a firm to be 50.

2. Agreement: Partnership is formed by the agreement between two or more persons to do business and share its profits and losses. This agreement becomes the basis of relationship between the partners. It is not mandatory to have the agreement in the written form. An oral agreement is also equally valid. However, it is preferred that the partners have a written agreement so that any disputes are avoided.

3. Business: The agreement should be to carry on some business. just having a co-ownership of a property does not imply partnership. For instance, if two persons jointly purchase and own a land, they both are owners of the property. They will not become partners. However, if they run the business of purchasing and selling land, they’re called partners.

4. Mutual Agency: The business of a partnership concern may be carried on by all the partners or any one of them acting for all. This statement has two important implications.

i.

Every partner is entitled to participate in the conduct of the affairs of its business

ii.

There exists a relationship of mutual agency between all the partners.

Each partner carrying on the business is the principal as well as the agent for all the other partners. This implies that, with regards to the business of the firm

i.

He can bind other partners by his acts.

ii.

Also, he is bound by the acts of other partners

Relationship of mutual agency is so important that the partnership exists only if the element of mutual agency is present.

5. Sharing of Profit: Another important characteristic of partnership is that, the agreement between partners must be to share profits and losses of a business. The definition contained in the Indian Partnership Act 1932 describes partnership as relation between people who agree to share the profits of a business. However, this implies that they should share the losses also. Thus, sharing of both profits as well as losses is important. If some persons join hands for the purpose of some charitable activity, it will not be termed as partnership.

6. Liability of Partners: Each partner, jointly with all the other partners is liable severally to the third party for all the acts of the firm done while he is a partner. Also, the liability of a partner for acts of the firm is unlimited. This implies that his private assets can also be used for paying off the firm’s debts.

2. Discuss the main provisions of the Indian Partnership Act 1932 that are relevant to partnership accounts if there is no partnership deed.

If there is no partnership deed, the main provisions of the Indian Partnership Act 1932 that are relevant to partnership accounts are as follows:

(a) Profit Sharing Ratio: The profits and losses of the firm are to be shared equally by the partners, irrespective of their capital contribution in the firm.

(b) Interest on Capital: 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.

(c) Interest on Drawings: No interest is to be charged on the drawings made by the partners.

(d) Interest on Loan: If any partner has advanced loan to the firm for the purpose of business, he/she shall be entitled to get an interest on the loan amount at the rate of 6 per cent per annum.

(e) Remuneration for Firm’s Work: No partner is entitled to get salary or other remuneration for taking part in the conduct of the business of the firm.

3. Explain why it is considered better to make a partnership agreement in writing.

As per the Indian Partnership Act, 1932, partnership agreement can be either oral or written. The partnership act does not mandate that the agreement should be in writing. However, it is advisable to document the terms of agreement into the ‘Partnership Deed’. The ‘Partnership Deed’ contains all the details about all the aspects affecting the relationship between partners including

•

the objectives of business

•

contribution of capital by each partner

•

ratio in which the profits and losses will be shared by the partners

•

entitlement of partners to interest on capital

•

entitlement of partners to interest on loan

•

interest to be collected from the partners for drawings etc.

The clauses of partnership deed can be altered with the contsent of all the partners. The deed should be properly drafted and prepared as per the provisions of the ‘Stamp Act’. It should be preferably registered with the Registrar of Firms.

Over a period of time, it is possible that there might be disagreement on certain terms between few or all of the partners. In such a case, the partnership agreement acts as a reference and helps in resolving the issues. It also contains the details about the method of settlement of disputes among the partners. While the oral agreement is subjective and likely to be forgotten or ignored, the written partnership agreement is well documented and provides direction in resolving the disputes. It also acts as a document of evidence in case any matter need to be settled through legal means.

In addition, the written partnership agreement will be quite handy in case new partner need to be joined and should be educated regarding all the clauses of the partnership. So, all the partners have a good understanding of the expectations in advance and there by avoiding any issues from arising in the first place. Thus it even prevents the disputes from arising.

This is why it is considered better to make a partnership agreement in writing.

4. Illustrate how interest on drawings will be calculated under various situations.

When any of the partners withdraws money from the firm for personal use, the interest is charged on such drawings as per the provision made in the partnership agreement. However, if the partnership agreement is silent about the interest on drawings, then no in interest will be changed on the drawings. However, if there is a provision, the interest is charged on the drawings based on when the drawings are made and the duration for which the amount remains withdrawn from the firm.

The interest on drawings will be calculated under various situations as specified below:

Situation 1: When fixed amount was withdrawn every month

In a scenario where in fixed amount of money is withdrawn by the partners, at monthly intervals of time, we need to pay attention to whether the amount is withdrawn at

∎

beginning (first day) of the month

∎

middle of the month

∎

end (last day) of the month

Case a: When fixed amount is withdrawn at the beginning of each month and the rate of interest is given, then the interest is calculated for a period of 6½ months.

For example, if partner A withdraws ₹ 10,000 at the beginning of every month @6% p.a., then the interest is calculated as follows:

Amount

= 10,000 × 12 = 1,20,000

Interest on Drawings

{= 1,20,000 × \dfrac{6}{100} × \dfrac{6\frac{1}{2}}{12}}

{= 1,20,000 × \dfrac{6}{100} × \dfrac{13}{2} × \dfrac{1}{12}}

= 3,900

Case b: When fixed amount is withdrawn in the middle of the month and the rate of interest is given, then the interest is calculated for a period of 6 months.

For example, if partner A withdraws ₹ 10,000 in the middle of every month @6% p.a., then the interest is calculated as follows:

Amount

= 10,000 × 12 = 1,20,000

Interest on Drawings

{= 1,20,000 × \dfrac{6}{100} × \dfrac{6}{12}}

= 3,600

Case c: When fixed amount is withdrawn at the end of each month and the rate of interest is given, then the interest is calculated for a period of 5½ months.

For example, if partner A withdraws ₹ 10,000 at end of every month @6% p.a., then the interest is calculated as follows:

Amount

= 10,000 × 12 = 1,20,000

Interest on Drawings

{= 1,20,000 × \dfrac{6}{100} × \dfrac{5\frac{1}{2}}{12}}

{= 1,20,000 × \dfrac{6}{100} × \dfrac{11}{2} × \dfrac{1}{12}}

= 3,300

Situation 2: When fixed amount was withdrawn every quarter

In a scenario where in fixed amount of money is withdrawn by the partners, every quarter, we need to pay attention to whether the amount is withdrawn at

∎

beginning of the quarter

∎

end of the month

Case a: When fixed amount is withdrawn at the beginning of every quarter and the rate of interest is given, then the interest is calculated for a period of 7½ months.

For example, if partner A withdraws ₹ 10,000 at the beginning of every month @6% p.a., then the interest is calculated as follows:

Amount

= 10,000 × 4 = 40,000

Interest on Drawings

{= 40,000 × \dfrac{6}{100} × \dfrac{7\frac{1}{2}}{12}}

{= 40,000 × \dfrac{6}{100} × \dfrac{15}{2} × \dfrac{1}{12}}

= 1,500

Case b: When fixed amount is withdrawn at the end of each quarter and the rate of interest is given, then the interest is calculated for a period of 4½ months.

For example, if partner A withdraws ₹ 10,000 at end of every month @6% p.a., then the interest is calculated as follows:

Amount

= 10,000 × 4 = 40,000

Interest on Drawings

{= 40,000 × \dfrac{6}{100} × \dfrac{4\frac{1}{2}}{12}}

{= 40,000 × \dfrac{6}{100} × \dfrac{9}{2} × \dfrac{1}{12}}

= 900

Situation 3: When varying amounts are withdrawn at Different Intervals

When different amounts are withdrawn by parterners at different intervals of time, we use product method to calculate the interest. In the product method, each amount withdrawn is multiplied by the period it remained withdrawn (usually expressed in months) during the financial year. This period is calculated from the date of the withdrawal to the last day of the accounting year. All the products calculated thus are totalled. The interest is then calculated as

Total~of~Products × Rate × \dfrac{1}{12}

For instance, suppose a partner withdraws the amounts from the firm as follows. The accounting period of the firm ends on March 31

Date

Amount

Jun 01

21,000

Sep 01

24,000

Oct 01

18,000

Jan 01

12,000

Feb 01

27,000

The rate of interest is given as 8% p.a.

Statement Showing Calculation of Interest on Drawings

Date

Amount

₹

₹

Time Period

Product

₹

₹

Jun 01

21,000

10 months

2,10,000

Sep 01

24,000

7 months

1,68,000

Oct 01

18,000

6 months

1,08,000

Jan 01

12,000

3 months

36,000

Feb 01

27,000

2 months

54,000

5,76,000

The interest is calculated as follows:

Interest on Drawings

{= Sum of Products × Rate × \dfrac{1}{12}}

{= 5,76,000 × \dfrac{8}{100} × \dfrac{1}{12}}

= 3,840

Situation 4: When there is a one time drawing on a given date at a specific interest rate.

When the amount is withdrawn by the partner only once, the interest rate is given and the date on which the drawings are made is also provided, the interest is calculated as.

Interest on Drawings

{= Amount~withdrawn × \dfrac{Interest~Rate}{100} × \dfrac{Period}{12}}

For instance, if a partner withdraws ₹ 24,000 on Aug 01 and the interest on drawings is given as @11% p.a.. The accounting period of the firm ends on March 31 every year.

Duration

= 8 months

Interest on drawings

{= 24,000 × \dfrac{11}{100} × \dfrac{8}{12}}

= 1,760

Situation 5: When there is a one time drawing at a specific rate

When the amount is withdrawn by the partner only once, the interest rate is given and the date on which the drawings are made is not provided. So, we need to consider that the drawings remain withdrawn for a period of 6 months. In this case, the interest is calculated as.

Interest on Drawings

{= Amount~withdrawn × \dfrac{Interest~Rate}{100} × \dfrac{Period}{12}}

For instance, if a partner withdraws ₹ 20,000 and the interest on drawings is given as @11% p.a.. The interest is calculated as below:

Duration

= 6 months

Interest on drawings

{= 20,000 × \dfrac{11}{100} × \dfrac{6}{12}}

= 1,100

5. How will you deal with a change in profit sharing ratio among existing partners? Take imaginary figures to illustrate your answer?

Over a period of time, the profit sharing ratio among the existing partners might changes when one or more of the following scenarios are met.

◷

They mutually consent to change the profit sharing ratio

◷

Admission of a new partner

◷

Retirement of an existing partner

◷

Death of an existing partner

Change of profit is not a simple or straight forward task. There are a number of parameters that should be considered such as

◈

Profit or Loss on the revaluation of assets and liabilities.

◈

Adjustment of capital

◈

Goodwill, reserves and accumulation of profits etc.

When dealing with the general reserve, as it is the accumulated profits or lossess on revaluation of the assets and liabilities. This should be distributed into the partner’s capital account in accordance with the old profit sharing ratio.

Sometimes, the partners they themselves might decide to alter the profit sharing ratio. When this happens, there will be an increase in the profits of one or more partner at the expense of decrease in the profits of the other partner(s). In otherwords the gain in the profits debited into the capital account will be equal to the credit in the capital account of the other partner(s). The corresponding journal entries will be as follows:

Journal

Date

Particulars

L.F.

Debit

Amount

₹

Amount

₹

Credit

Amount

₹

Amount

₹

Profit Gaining partner’s Capital A/c

Dr.

xxx

To Profit Losing partner’s Capital A/c

xxx

(Being profit adjustment made due to change in the profit sharing ratio)

Example: Consider three partners A, B and C. As per the partnership deed, their profit sharing ratio is 1:2:3. They mutually agreed to change their profit sharing ratio to 4:5:6 in the future. They performed the revaluation of assets and liabilities. The books showed that the general reserve is ₹ 1,80,000 and profit due to revaluation of the Land and Building is ₹ 75,000. They need to make the following adjustment entries in the capital accounts so as to avoid any other changes to the books of accounts.

Particulars

A

B

C

Share of profit as per old profit sharing ratio of 1:2:3

30,000

60,000

90,000

Profit after revaluation of Land and Building

12,500

25,000

37,500

Total

42,500

85,000

1,27,500

Share of profit as per new profit sharing ratio 4:5:6

48,000

60,000

72,000

Share of profit on land and building as per new profit sharing ratio 4:5:6

20,000

25,000

30,000

Total

68,000

85,000

1,02,000

Difference

(Gain or Loss)

(Gain or Loss)

25,500

(Gain)

(Gain)

–

25,500

(Loss)

(Loss)

As per the above example, A has gained at the expense of C. So, the partner C should be compensated by A with the amount of ₹ 25,500. The corresponding adjustment entry would be as follows:

Journal

Date

Particulars

L.F.

Debit

Amount

₹

Amount

₹

Credit

Amount

₹

Amount

₹

A’s Capital A/c

Dr.

25,500

To C’s Capital A/c

25,500

(Being profit adjustment made due to change in the profit sharing ratio)