Accounting for Partnership : Basic Concepts

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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
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
Date
Particulars
J.F.
Amount

Soumya
Amount

Bimal
Date
Particulars
J.F.
Amount

Soumya
Amount

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
Date
Particulars
J.F.
Amount

Soumya
Amount

Bimal
Date
Particulars
J.F.
Amount

Soumya
Amount

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
Credit
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
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
Date
Particulars
J.F.
Amount

Soniya
Amount

Charu
Amount

Smita
Date
Particulars
J.F.
Amount

Soniya
Amount

Charu
Amount

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
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)
= 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)
= 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
Credit
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)
Cr. 10,000
(Short)
The following will be the corresponding journal entries
Journal
Date
Particulars
L.F.
Debit
Amount
Credit
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
Credit
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)
0
Dr. 150
(Excess)
The following will be the corresponding journal entries
Journal
Date
Particulars
L.F.
Debit
Amount
Credit
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
Credit
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)
Dr 10,440
(Short)
Cr 9,000
(Excess)
Journal
Date
Particulars
L.F.
Debit
Amount
Credit
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:
Date
Particulars
J.F.
Amount
Date
Particulars
J.F.
Amount
To Bank A/c
(Permanent Withdrawal of Capital)
xxx
By Balance b/d
(Opening Balance)
xxx
To Balance c/d
(Closing Balance)
xxx
By Bank A/c
(Fresh Capital Introduced)
xxx
(ii) The following items may be debited or credited in capital accounts of the partners when the capitals are fluctuating:
Date
Particulars
J.F.
Amount
Date
Particulars
J.F.
Amount
To Balance b/d
(in case of debit closing balance)
xxx
By Balance b/d
(in case of credit opening balance)
xxx
To Drawings A/c
xxx
By Bank A/c
(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)
xxx
By Interest on Capital A/c
xxx
To Balance c/d
(in case of credit closing balance)
xxx
By Profit and Loss
Appropriation A/c
(for share of profit)
xxx
By Balance b/d
(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
Credit
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)
25,500
(Gain)
25,500
(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
Credit
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)