12th Commerce Book Keeping Accountancy

Written according to the New Textbook (2013-2014) published by the Maharashtra State Board of Secondary and Higher Secondary Education, Pune.

Editio n: March 2014

Std. XII Commerce

Book-Keeping and Accountancy Prof. Shaikh Riyaz Abdul Kadar (GDC & A, PGDFM, PGDBM)

Shaikh Shaikh Imran Imran Ab dul Kadar Kadar (M.Com, GDC & A)

Ms. Toral Juthani (M.Com, PGDFM)

Ms. Urvi Mehta (M.Com, C.S.)

        

Precise Theory for every topic including Specimen Journal Entries and Formats for Ledger Accounts. Covers Answers To All Textual Questions as well as Board Questions (March 08  March 14). Includes a section of Solved Example for every chapter covering array of questions from simple to complex. Includes Additional Practice Problems for better preparation. Quick Review at the end of each chapter to facilitate quick revision. Two Model Question Papers as per the latest paper pattern. Includes Board Question Paper of March 2014. Simple and Lucid language. Self evaluative in nature.

TargetPublications PVT. LTD. Mumbai, Maharashtra Tel: 022 – 6551 6551 Website : www.targetpublications.org | email : [email protected]

Std. XII Commerce

Book-Keeping and Accountancy Target Publications PVT. LTD. All rights reserved

First Edition : March 2014

Price :

`

330/-

Printed at: India Printing Works 42, G.D. Ambekar Marg, Wadala, Mumbai – 400 031

Published by Target Publications PVT. LTD. Shiv Mandir Sabhagriha, Mhatre Nagar, Near LIC Colony, Mithagar Road, Mulund (E), Mumbai - 400 081 Off.Tel: 022 – 6551 6551 email: [email protected] Website :

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No part of this book may be reproduced or transmitted in any form or by any means, C.D. ROM/Audio Video Cassettes or electronic, mechanical including photocopying; recording or by any information storage and retrieval system without permission in writing from the Publisher.

Preface Book Keeping and Accountancy is an indispensable subset of accounting. It refers to the process of accumulating, organizing, storing and accessing the financial information of a business concern, thus facilitating in their day-to-day operations. It further aids in preparing the financial statements such as Trading Account, Profit & Loss Account and Balance Sheet at the end of each accounting year. We present to you "Std. XII Commerce: Book-Keeping and Accountancy" with a revolutionary fresh approach towards content, thus laying a platform for an in depth understanding of the subject. This book has been written according to the revised syllabus and guideline as prescribed by the state board and includes specimen journal entries/ ledgers and illustrations. We have provided a section of solved examples for every chapter, which covers an array of questions from simple to complex. It further encompasses solutions to all textual questions as well as board questions from March 2008 to March 2014. Furthermore, towards the end of every chapter we have provided a set of sums for practice which helps in revision. This is followed with a section of 'Quick Review' which quickly summarizes the key points of the chapter at a glance. The book also includes two model question papers as per the latest paper pattern. We are sure, this study material will turn out to be a powerful resource for students and facilitate them in understanding the concepts of this subject in the most lucid way. The journey to create a complete book is strewn with triumphs, failures and near misses. If you think we've nearly missed something or want to applaud us for our triumphs, we'd love to hear from you. Please write to us on: [email protected]

Best of luck to all the aspirants!

Yours faithfully Publisher

Time: 3 Hours

Total Marks: 80

Q.1. Attempt any THREE of the following sub-questions :

[15]

Includes five sub-questions of five marks each. Out of the five, three sub-questions have to be answered. (A)

Answer the following questions in ‘one sentence’ each:

Five sub-questions will be given. (B)

[one mark each]

Write a word/term/phrase which can substitute each of the following statements :

Five sub-questions will be given. (C)

[one mark each]

Select the most appropriate alternative from those given below and rewrite the statements:

Five sub-questions. Each sub question carries four options. (D)

State whether the following statements are True or False :

Five sub-questions will be given. (E)

[one mark each] [one mark each]

Prepare a specimen of Bill of Exchange.

Q.2. Practical problem on Single Entry System.

[8]

OR Theory Questions on Analysis of Financial Statements.

Two sub-questions will be given.

[four marks each]

Q.3. Practical problem on Reconstitution of Partnership (Admission / Retirement / Death of a Partner). [10] OR Practical problem on Reconstitution of Partnership (Admission / Retirement / Death of a Partner).

Questions will be asked from any two of the above three chapters. Q.4. Practical problem on Bill of Exchange.

[10]

Q.5. Practical problem on Dissolution of Partnership Firm.

[10]

OR Practical problem on Accounting for Shares / Debentures.

One question will be asked from Dissolution of Partnership Firm and the second question will be asked either from Accounting for Shares or Accounting for Debentures. Q.6. Practical problem on Accounts of ‘Not for Profit’ Concerns.

[12]

Q.7. Practical problem on Partnership Final Accounts.

[15] Total:

Scheme of Evaluation Marks (A) (B)

Written Examination Project Preparation (with Viva)

80 20 Total:

100

80

Unitwise Weightage No.

Units

Marks

Marks With Option

Problem

Objectives

Total

Problem

Objectives

Total

1.

Introduction to Partnership (Objectives only) and Partnership Final Accounts

15

02

17

15

03

18

2.

Accounts of ‘Not for Profit’ Concerns

12

01

13

12

02

14

3.

Admission / Retirement Death of a Partner OR Admission / Retirement Death of a Partner

02

22

04

24

10

20

04

20

25

118

/

10 10

12

/

10 10

Dissolution of Partnership Firm OR Accounting for Shares / Accounting for Debentures

10

5.

Bill of Exchange (Objectives include 5 marks for question on specimen)

10

6.

Single Entry System OR Analysis of Financial Statements (Theory Questions)

08

Total

65

4.

02

02

12 10

06

16

10 08

02

10 08

15

80

93

No.

Units

Page No.

1.

Introduction to Partnership

1

2.

Partnership Final Accounts

18

3. 4.

Reconstitution of Partnership (Admission of Partner) Reconstitution of Partnership (Retirement of Partner)

130 203

Reconstitution of Partnership 5.

(Death of Partner)

241

6.

Dissolution of Partnership Firm

270

7

Accounts of ‘Not for Profit’ Concerns

323

8

Single Entry System

397

9

Bill of Exchange (Trade Bill)

449

10

Company Accounts Part  I 545 (Accounting for Shares)

11

Company Accounts Part  II 591 (Accounting for Debentures)

12

Analysis of Financial Statements

615

Model question paper – I

640

Model question paper – II

645

Board Question Paper  March 2014

650

Note: All Textual questions are represented by * mark.

Target Publications Pvt. Ltd.

Chapter 01: Introduction to Partnership

Contents:

1.1

1.1

Introduction

1.2

Partnership

1.3

Partnership Deed

1.4

Indian Partnership Act, 1932

1.5

Methods of Capital Accounts

Introduction

There are many forms of business organizations. Sole Trading Concern is the oldest form. The sole proprietorship is a form of business that is owned, managed and controlled by a single individual. He has to arrange capital for the business and he alone is responsible for its management. But, when he needs to expand the business, he needs more resources and capital. It becomes very difficult for a sole trader to manage and run the activities of the business alone with limited resources and capital. The limited access of a sole proprietor to financial resources and his limited managerial skills create the need for an additional partner. Thus, the Partnership form of business comes into existence. 1.2

Partnership

Meaning and Definition:

Partnership is an association of two or more persons who agree to combine their financial resources and managerial abilities to operate a business and share Profits and Losses in an agreed ratio. The definition of Partnership as per the Indian Partnership Act, 1932 is, “Partnership is the relation between persons who have agreed to share profit of business carried on by all or any of them acting for all." Features: i. Agreement: Partnership is formed on the basis of an agreement between two or more persons to carry on business activities. Without agreement partnership cannot be formed. Agreement may be in written or oral form. The terms and conditions of partnership are laid in a document known as Partnership Deed. ii. Registration: It is not compulsory to register a partnership firm except, in the state of Maharashtra. However, if the partners so decide, it may be registered with the Registrar of Firms. iii. Lawful Business: Illegal business activities are not permitted by law. Partnership form of business should only undertake those business activities which are permitted by law or which are legal. iv. Membership: To form a partnership firm minimum two persons are required. The maximum limit on the number of persons is 10 for banking business and 20 for other businesses. If the number exceeds the above limit, the partnership becomes illegal. v. Sharing of Profits and Losses: There must be an agreement among the partners to share the Profits and Losses of the business in an agreed profit sharing ratio. All partners of the firm will be entitled to an equal share in Profit and Losses, if the partnership deed is silent about the ratio.

1


Std. XII (Commerce): Book-Keeping & Accountancy

vi.

Unlimited Liability: The partners of the firm have Unlimited Liability. They are jointly as well as individually liable for the debts and obligations of the firms. If the Assets of the firm are insufficient to meet the firm’s Liabilities, the personal properties of the partners can also be utilized for the repayment of the firm’s Liabilities. However, the Liability of a Minor Partner is limited to the extent of his share in the profit. vii. Management: All the partners can participate actively in the business management depending on the agreement formed. viii. Dissolution: Dissolution means to close the business. Legally a partnership comes to an end if any partner dies, retires or becomes insolvent. ix. Relationship between the Partners: The partnership business may be carried on by all or any of the partners acting for all. Thus, each partner is a principal and so can act in his own right. At the same time, he can act on behalf of the other partners as an agent. Thus, every partner acts as an Agent as well as Principal. Types of Partners: Following are the various types of partners: i. Active Partners: Partners who take active part in the conduct of day-to-day transactions of the firm are called Active Partners. These partners perform the business activities on behalf of the other partners. ii. Sleeping Partners: A Sleeping Partner is also known as Dormant Partner. Sleeping or Dormant Partners are those, who do not take active part in the management of the business. Such partners only contribute capital in the firm and are bound by the activities of other partners. However, they share in the profits and losses of the business iii. Nominal Partners: Nominal partners are those who lend their name to the firm but do not have interest in the business. They do not make any capital contribution, and are not entitled to take part in management, but are liable to third parties, like the other partners. iv. Minor Partner: A minor is a person who has not completed 18 years of age. A minor cannot become a partner because he is not qualified to enter into a contract. However, he may be admitted to the benefits of partnership with the mutual consent of all the partners. His liability is limited to the extent of his share in the capital and profits of the firm. He cannot file a suit against the firm or its partners to get his share except when he wants to disassociate himself from the firm. v. Partner in Profits only: This type of a partner only shares in the profits of the firm. However, his liability for the firm's debts is unlimited. He is not allowed to take part in the management of the firm. A partnership firm may associate with such a partner for their money and goodwill. vi. Partner by Estoppel: A Partner by Estoppel neither contributes capital nor is entitled to any share in the profits. He is actually not a partner in the firm. However, any person who represents himself in front of a third party as a partner of the firm becomes a Partner by Estoppel. He becomes liable to the third parties that presume him to be a partner of the firm. 1.3

Partnership Deed

Partnership Deed is the written agreement between or among the partners. It is also known as Articles of Partnership. Partnership Deed lays down the terms and conditions of partnership and the rights, duties and obligations of partners for the internal management of the firm. A partnership deed is very helpful in situations of conflicts or disputes arising between partners. The relations of partners are governed by the Partnership Deed. A Partnership Deed generally contains the following important contents: i. Names and addresses of the Partnership Firm. ii. Nature of business to be conducted and its duration.

2



iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii. xiv. xv.

Names, Addresses and other information about the partners. The total amount of Capital contributed by the each partner. The amount of drawings permissible for each partner. Rate of Interest on Capital and Drawings, if any. Profit Sharing Ratio of the partners. Rate of Interest on Loan given by partners to the firm. Accounting and Audit procedures of the firm. Methods of valuation of the Goodwill of the firm. Provisions for admission, retirement and insolvency of partners. Provisions for Dissolution of the firm and settlement of accounts after dissolution. Division of work among the partners and their Remuneration / Commission, if any. Method of operating Bank Accounts and authority for signing the cheques. Other terms and conditions which are agreed by all the partners.

1.4

Indian Partnership Act, 1932

The Indian Partnership Act is in force since 1932. This act is applicable in the absence of partnership deed or if the partnership deed is silent on any specific point. Stated below are the important provisions of this act: i. Distribution of Profits: In the absence of partnership deed, all the partners are treated as equal and they will be entitled to equal share in the Profits and Losses of the business. However, if profit sharing ratio is given, then Profits / Losses should be shared by partners in the agreed ratio only. ii. Interest on Capital: According to the Act, no interest is to be allowed on Partner’s Capital. However, if a provision is made in the partnership deed, it should to be given to the partners as per the agreement. iii. Interest on Drawings: As per the Act, there is no provision for Interest on Drawings. However, if the partnership deed states that Interest on Drawings is to be charged, then it should be charged as per the agreement. Interest on Drawings is to be charged for a period of six months in cases where the total amount of Drawings is given but the dates of withdrawals are not available. iv. Interest on Partner’s Loan: Interest on Loan should be allowed at the rate of 6% per annum as per the Act. If a separate provision is made in the partnership deed then interest should be allowed as per the agreement. v. Salary or Commission to Partners: Partners are not entitled to any Salary or Commission for doing any additional or extra work for the firm. However, if any special provision is made in the partnership deed then it should be provided as per the agreement. vi. Admission of a New Partner: According to the Act, a person can be admitted into partnership only with the consent of all the existing partners. 1.5


An amount contributed by a partner either in the form of cash or kind into the business of a partnership firm is known as Partner’s Capital. This amount may be equal or it may be in the profit sharing ratio or as per the common understanding among partners. Capital Accounts of partners can be maintained in two ways: i. Fixed Capital Method: Under the Fixed Capital Method, the amount of capital of the partners remains fixed unless some additional capital is introduced or some amount of capital is withdrawn by an agreement among the partners. Thus, under fixed capital method, two accounts are maintained for each partner namely Partners Capital Account and Partners Current Account.

3

Target Publications Pvt. Ltd. a.


Partner’s Capital Account: The below items are recorded in this account: 1. Amount contributed by a partner at the beginning.

2.

Additional Capital introduced by a partner during the year.

3.

Part of capital amount withdrawn during the year .

Journal Entries recorded in Partners Capital Account under Fixed Capital Method: Date

Particulars

i.

L.F.

Debit

Credit

Additional Capital introduced by Partners in Cash

Cash/Bank A/c To Partner’s Capital A/c (Being additional capital introduced) ii.

Dr.

xxx xxx

Additional Capital introduced by Partners in Kind

Asset A/c To Partner’s Capital A/c (Being capital brought in the form of asset) iii.

Dr.

xxx xxx

Capital is Withdrawn by the Partner

Partner’s Capital A/c To Cash/Bank A/c (Being amount of capital withdrawn by partner)

Dr.

xxx xxx

Format for Partner’s Capital Account under Fixed Capital Method: Partner’s Capital Account Dr.

Cr. Particulars

To Cash/Bank A/c (Amount of Capital Withdrawn)

To Balance c/d (Credit Balance)

X

xxx

Y

xxx

xxx

xxx

xxx

xxx

Particulars

X

Y

By Balance b/d (Credit Balance) By Cash/Bank A/c (Additional Capital) By Assets A/c (Capital in Kind)

xxx xxx

xxx xxx

xxx

xxx

By Balance c/d (Debit Balance)

xxx

xxx

xxx

xxx

[ Note: Generally Partners Capital Account shows a Credit Balance and is shown on the Liability side of the Balance sheet. If the account has a Debit Balance, it is shown on the Asset side of the Balance sheet.] b.

Partner’s Current Account: This account is maintained when partners adopt the Fixed Capital Method. Below items are recorded in this account: 1. Amount withdrawn by partners for their personal use. 2. Goods withdrawn by partners for their personal use.

3. 4. 5. 6.

4

Interest on Partners Capital. Interest on Partners Drawings. Salary or Commission to Partners. Distribution of Profit or Loss of the Firm.



Journal Entries recorded in Partners Current Account under Fixed Capital Method: Date

Particulars

i.

ii.

iii.

iv.

v.

vi.

vii.

viii.

ix.

x. a.

b.

Interest on Capital allowed to Partners Interest on Capital A/c To Partner’s Current A/c (Being interest on capital allowed to partners) Transfer of Interest on Capital to Profit & Loss Account Profit & Loss A/c To Interest on Capital A/c (Being interest on capital transferred to Profit & Loss A/c) Salary/Commission allowed to Partners Salary/Commission A/c To Partner’s Current A/c (Being salary or commission allowed to partners) Transfer of Salary/Commission to Profit & Loss Account Profit & Loss A/c To Salary/Commission A/c (Being salary/commission transferred to Profit & Loss A/c) Interest charged on Partners Drawings Partner’s Current A/c To Interest on Drawings A/c (Being Interest on drawing charged) Transfer of Interest on Drawings to Profit & Loss Account Interest on Drawings A/c To Profit & Loss A/c (Being interest on drawings transferred to Profit & Loss Account) Drawings made by the Partners in Cash Drawings A/c To Cash A/c (Being cash withdrawn for personal use) Drawings made by the Partners in Goods Drawings A/c To Goods A/c (Being goods withdrawn for personal use) Transfer of Drawings to Partners Current Account Partner’s Current A/c To Drawings A/c (Being drawings transferred to Partners Current Account) For distribution of Net Profit or Net Loss Net Profit Profit & Loss A/c To Partner’s Current A/c (Being profit transferred to Current Account) Net Loss Partner’s Current A/c To Profit & Loss A/c (Being net loss transferred to Current Account)

L.F.

Dr.

Debit

Credit

xxx xxx

Dr.

xxx xxx

Dr.

xxx xxx

Dr.

xxx xxx

Dr.

xxx xxx

Dr.

xxx xxx

Dr.

xxx xxx

Dr.

xxx xxx

Dr.

xxx xxx

Dr.

xxx xxx

Dr.

xxx xxx

5



Format for Partner’s Current Account under Fixed Capital Method: Partner’s Current Account Dr.

Cr. Particulars

X

Y

Particulars

X

Y

To Balance b/d (Debit Balance) To Drawings A/c (Cash) To Drawings A/c (Goods) To Interest on Drawings A/c To Profit and Loss A/c (Loss)

xxx xxx xxx xxx xxx

xxx xxx xxx xxx xxx

By Balance b/d (Credit Balance) By Interest on Capital By Interest on Loan By Salary to Partner By Commission to Partner By Profit and Loss A/c (Profit)

xxx xxx xxx xxx xxx xxx

xxx xxx xxx xxx xxx xxx


xxx

xxx

By Balance c/d (Debit Balance)

xxx

xxx

xxx

xxx

xxx

xxx

[ Note: Partner’s current account can either have a Debit Balance or a Credit Balance. If Partner’s Current Account has a Debit Balance, it should be shown on the Asset side of the Balance sheet and if it has a Credit Balance, it should be shown on the Liability side of the Balance sheet.] ii.

Fluctuating Capital Method: In the Fluctuating Capital Method, only one account, i.e. Partner’s Capital Account is maintained for each partner. All the transactions affecting a Partner's Account like Interest on Capital, Drawings, Interest on Drawings, Salary/Commission to Partners and Share of Profit or Loss are recorded in the Partner’s Capital Account. As a result of this, the Closing Balance of the Partner’s Capital Account keeps fluctuating (changing). Thus, it is known as the Fluctuating Capital Method. Below transactions are recorded in the Partner’s Capital Account under this method: 1. Capital Introduced or the Opening Balance 2. Additional Capital introduced during the year 3. Interest on Capital 4. Drawings made during the year 5. Interest on Drawings 6. Salary/ Commission to Partners 7. Withdrawal of Capital 8. Share of Profit or Loss 9. Closing Balance

Format for Partner’s Capital Account under Fluctuating Capital Method: Partner’s Capital Account Dr.

Cr. Particulars

X

Y

To Balance b/d (Debit Balance) To Drawings A/c (Cash) To Drawings A/c (Goods) To Interest on Drawings A/c To Cash/Bank A/c (Withdrawal of Capital) To Profit and Loss A/c (Share of Loss)

xxx xxx xxx xxx xxx

xxx xxx xxx xxx xxx

xxx

xxx


xxx

xxx

xxx

xxx

6

Particulars

By Balance b/d (Credit Balance) By Cash/Bank A/c (Additional Capital) By Assets A/c (Capital in Kind) By Interest on Capital A/c By Interest on Loan A/c By Salary A/c By Commission A/c By Profit and Loss A/c (Share of Profit) By Balance c/d (Debit Balance)

X

Y

xxx

xxx

xxx

xxx

xxx

xxx

xxx xxx xxx xxx xxx

xxx xxx xxx xxx xxx

xxx

xxx

xxx

xxx



Notes: i. Credit Balance of Partner’s Capital Account is shown on the Liability side of the Balance sheet and Debit Balance of Partner’s Capital Account is shown on the Asset side of the Balance sheet. ii. In the absence of information, partners follow Fluctuating Capital Method. iii. Interest on Capital is paid on the Opening Balance only if date of additional capital is not given. If the date of additional capital is given, then interest on capital will be given on total capital and will be calculated as under a. On Opening Balance for 12 months. st b. On Additional Capital from date of additional capital to date of Balance Sheet i.e., 31 Mar. Interest on Capital is paid only if there is a profit in the business. iv. Interest on Drawings is provided as under: a. If Drawings are made at the beginning of every month, Interest is charged for 6.5 months. b. If Drawings are made in the middle of every month, Interest is charged for 6 months. c. If Drawings are made at the end of every month, Interest is charged for 5.5 months. d. In absence of information, Interest is charged for 6 months. Solved Examples Q.1. Ram and Shyam are partners with their capital ` 30,000 and ` 20,000. Net Profit of the firm is ` 40,000, what will be each partner’s share if: i. Partnership deed is silent or in the absence of information. ii. They share in the ratio of their capital. iii. They share in ratio of 3 : 4. iv. The profit is ` 19,001 and partners share equally. Solution: i. If the partnership deed is silent or in the absence of information both partner will share Profits & Losses equally i.e. 50 : 50 Ram’s Share = ` 20,000 Shyam’s Share = ` 20,000. ii. If they share Profits & Losses in the ratio of their capital, then the Profit sharing ratio will be calculated as under: Ram : Shyam

iii.

iv.

30, 000 : 20, 000 i.e. 3 : 2 So, their profit will be 20,000  3 = ` 12,000 Ram’s Share = 5 20,000  2 = ` 8,000 Shyam’s Share = 5 If they share Profits & Losses in the ratio of 3 : 4 then profit will be calculated as under: 40,000  3 = ` 17,143 Ram’s Share = 7 40,000  4 = ` 22,857 Shyam’s Share = 7 If the profit is `19,001 and partners share equally, profit will be distributed as under: Ram : Shyam 1 : 1 19,001 i.e. = ` 9,500.5 2 In this case, Profit will be shared as under Ram’s Share = ` 9,501 Shyam’s Share = ` 9,500 ` 1 is given more to Ram because he had contributed more capital as compared to Shyam.

7



Q.2. Calculate the Interest on Capital in the following situation: Rate of interest is 12%. Capital of Ram ` 40,000, Laxman ` 60,000 and Shyam ` 30,000. Shyam was admitted on 01-10-11 for year ending 31-3-12. Solution: No. of Monthsin the Firm Interest on Partner’s Capital = Capital  Rate of Interest  12 12 12  Interest on Ram’s Capital = 40,000  = ` 4,800 100 12 12 12  Interest on Laxman’s Capital = 60,000  = ` 7,200 100 12 12 6  Interest on Shyam’s Capital = 30,000  = ` 1,800 100 12 Q.3. Capital of Arjun is ` 20,000 and that of Kailash is ` 30,000 as on 01-04-11. Arjun introduced additional capital of ` 15,000 on 01 st Jan, 2012 and Kailash introduced additional capital of ` 10,000 on 01-07-2011. What will be the amount of interest for the year ending 31-03-12, if rate of interest is 12%. Solution: i. Interest on Arjun’s capital will be calculated as under 12 12  a. Arjun’s Old Capital = 20,000  = ` 2,400 100 12 12 3  b. Arjun’s New Capital = 15,000  = ` 450 100 12 Total Interest on Arjun’s Capital = 2,400 + 450 = ` 2,850 ii.

Interest on Kailash’s Capital will be calculated as under a.

Kailash’s Old Capital

= 30,000



b.

Kailash’s New Capital

= 10,000



Total Interest on Kailash’s Capital = 3,600 + 900 =

`

12 100 12 100





12 12 9 12

= ` 3,600 = ` 900

4,500

Q.4. Bunty has a capital of ` 50,000 and Chunky has a capital of ` 30,000 as on 01-04-11. If the rate of interest is 12% and Bunty had reduced his capital to ` 30,000 on 01-10-11, what will be interest on their capital as on 31-03-2012. Solution: Interest on Bunty’s Capital will be calculated in two parts: i. Interest on ` 30,000 for 12 months 12 12  30,000  = 3,600 100 12 ii. Interest on ` 20,000 for 6 months 20,000 

12

6

= 1,200 100 12 Total Interest on Bunty’s capital = 3,600 + 1,200 = ` 4,800. 

Interest on Chunky’s Capital 12 30,000  = ` 3,600. 100

8



Q.5. Calculate the Interest on Drawings at the rate of 10% per annum in the following situations: Drawings of Laxman ` 2,000 p.m. i. Made at the beginning of the month. ii. Made during the middle of the month. iii. Made at the end of each month. iv. If problem is silent about the date of withdrawal. Solution: i. If ` 2,000 p.m. is withdrawn at the beginning of each month then interest will be calculated for 6.5 months. 10 6.5  2,000  12  = ` 1,300 100 12 ii.

If ` 2,000 p.m. is withdrawn during the middle of the month then interest on drawing will be calculated for 6 months. 10 6 2,000  12  = ` 1,200  100 12

iii.

If ` 2,000 p.m. is withdrawn at the end of each month then interest on drawing will be calculated for 5.5 months. 10 5.5  2,000  12  = ` 1,100 100 12

iv.

If the problem is silent about the date of drawings then interest on drawings will be charged for 6 months. 10 6  2,000  12  = ` 1,200 100 12

Q.6. Gross profit of the firm is ` 60,000 and Vijay is paid 10% commission on gross profit then what will be his commission? Solution: Vijay’s Commission will be: 10 60,000  = ` 6,000 100 Q.7. Net Profit of the firm is ` 18,000 after paying commission at the rate of 10% to Raman, a partner. What is his commission and what is the profit before commission? Solution: Profit before commission (100) = Net Profit (90) + Raman’s Commission (10) 100 = 18,000  = ` 20,000 90 10 Raman’s Commission = 20,000  = ` 2,000 100 Q.8. Rahul and Sumit are partners sharing profits and losses in the ratio 2:1. On 1 st April, 2012 their Capital balances are Rahul ` 60,000 and Sumit ` 30,000, their drawings are ` 6,000 and ` 4,000 respectively. According to the partnership deed, 10% interest is allowed on partners capital and 12% interest is charged on their drawings. Rahul gets salary of ` 3,000 per month and Sumit is entitled to receive commission @ 5% on sales which is ` 5,00,000. The profit of the firm is ` 30,000. Prepare Partners Capital Account and Partners Current Account for the year ended 31 st March, 2013 in the below situations: A. Fixed Capital Method B. Fluctuating Capital Method

9



Solution: A. Fixed Capital Method: Partner’s Capital Account Dr. Rahul

Particulars

Sumit

Particulars

By Balance b/d To Balance c/d

60,000

30,000

60,000

30,000

Rahul

Cr. Sumit

60,000

30,000

60,000

30,000

Partner’s Current Account Dr. Rahul

Particulars

To Drawings A/c To Interest on Drawings A/c

6,000 360

To Balance c/d

B.

Sumit

4,000 240

55,640

33,760

62,000

38,000

Particulars

By Interest on Capital A/c By Salary A/c By Commission A/c By Profit & Loss A/c

Rahul

6,000 36,000

Cr. Sumit

3,000 

20,000

25,000 10,000

62,000

38,000



Fluctuating Capital Method: Partner’s Capital Account

Dr. Particulars


To Balance c/d

Working Notes: i. Dr. Particulars

To Interest on Capital A/c Rahul Sumit To Rahul’s Salary A/c To Sumit Commission A/c To Net Profit c/d Rahul (2/3) Sumit (1/3)

10

Rahul

6,000 360

Sumit

4,000 240

1,15,640

63,760

1,22,000

68,000

Particulars

By Balance b/d By Interest on Capital A/c By Salary A/c By Commission A/c By Profit & Loss A/c

Rahul

60,000 6,000 36,000

Cr. Sumit

30,000 3,000 

20,000

25,000 10,000

1,22,000

68,000

Amount

Cr. Amount

360 240

600



Effects to Profit and Loss Account Amount

6,000 3,000

20,000 10,000

Amount

9,000 36,000 25,000

30,000

Particulars

By Interest on Drawings A/c Rahul Sumit

Target Publications Pvt. Ltd. ii.


Interest on Capital: Rahul = 60,000



Sumit = 30,000



10 100 10 100

= ` 6,000 = ` 3,000

iii.

Interest on Drawings: 12 6  Rahul = 6,000  = ` 360 100 12 12 6  Sumit = 4,000  = ` 240 100 12 [ Note: When the amounts of total drawings are given but date of withdrawals are not given then for calculation of interest on drawings, the period would be taken as six months.] iv.

Rahul’s Salary = 3,000  12 = ` 36,000

v.

Commission on sales to Sumit 5 5,00,000  = ` 25,000 100

vi.

Distribution of Profits: Rahul’s Share = 30,000



Sumit’s Share = 30,000



2 3 1 3

= ` 20,000 = ` 10,000

Q.9. Sona and Mona are partners. They started their business on 1-04-2012 on which date they contirbuted 3,00,000 each as their capital. On 1-07-2012, Sona purchased furniture of ` ` 60,000 for the firm from her personal resources. On 1-10-2012, Mona supplied her own Machinery Costing ` 70,000 for the business of the firm. On 1-01-2013 Sona and Mona had withdrawn ` 30,000 & ` 40,000 respectively for their personal use. The Partnership Deed provides for Interest on Capital @ 7% p.a. and Interest on Drawings @ 10% p.a. Sona is to get salary of ` 2,000 per month starting from 1-07-2012 and Mona is to get commission on sales @ 10%. Sales for the year is ` 2,00,000 and Net Profit for the year is ` 50,000. Prepare Capital and Current Account of the Partners in the following situations: A.

Fixed Capital Method

B.

Fluctuating Capital Method

Solution: A. Fixed Capital Method: Partner’s Capital Account Dr. Particulars

Sona

Mona

Particulars

By Cash/Bank A/c By Furniture A/c By Machinery A/c To Balance c/d

3,60,000

3,70,000

3,60,000

3,70,000

Cr. Mona

Sona

3,00,000 60,000

3,00,000 

70,000



3,60,000

3,70,000

11


Std. XII (Commerce): Book-Keeping & Accountancy Partner’s Current Account

Dr. Particulars


To Balance c/d

B.

Sona

Mona

30,000 750

40,000 1,000

36,400

27,450

67,150

68,450

Particulars

By Interest on Capital A/c By Salary A/c By Commission A/c By Profit & Loss A/c

Cr. Mona

Sona

24,150 18,000

23,450 

25,000

20,000 25,000

67,150

68,450



Fluctuating Capital Method: Partner’s Capital Account

Dr. Particulars


To Balance c/d

Sona

Mona

30,000 750

40,000 1,000

3,96,400

3,97,450

4,27,150

4,38,450

Particulars

By Cash/Bank A/c By Furniture A/c By Machinery A/c By Interest on Capital A/c By Salary A/c By Commission A/c By Profit & Loss A/c

Working Notes: i. Interest on Capital: a. Calculation of Interest on Capital for Sona 7 12  Opening Capital = 3,00,000  = ` 21,000 100 12 7 9  Additional Capital = 60,000  = ` 3,150 100 12 Total Interest on Capital payable to Sona = 21,000 + 3,150 = ` 24,150

b.

ii.

iii. iv.

Calculation of Interest on Capital for Mona 7 12  Opening Capital = 3,00,000  = ` 21,000 100 12 7 6  Additional Capital = 70,000  = ` 2,450 100 12 Total Interest on Capital payable to Mona = 21,000 + 2,450 = ` 23,450 Interest on Drawings: 10 3  a. Sona = 30,000  = ` 750 100 12 10 3  b. Mona = 40,000  = ` 1,000 100 12 Sona’s Salary: 2,000  9 = ` 18,000 Mona’s Commission: 10 2,00,000  = ` 20,000 100

12

Cr. Mona

Sona

3,00,000 60,000 

24,150 18,000

3,00,000 

70,000 23,450 

25,000

20,000 25,000

4,27,150

4,38,450





Objective Type Questions I.

Answer in one sentence only:

[1 mark each]

*1. What is partnership? Ans: Partnership is an association of two or more persons who agree to combine their financial resources and managerial abilities to conduct a business and share profits and losses in an agreed ratio *2. How many persons are required to form partnership business? Ans: Minimum two persons are required to form partnership business. *3. What is the liability of partners? Ans: The Liability of Partners is Unlimited, Joint and Several. *4. What is the relation between the partners? Ans: The relationship between partners is that of Principal and Agent. *5. Who is called nominal partner? Ans: A partner who lends his name to the firm but does not have any interest in the business is known as a Nominal Partner. *6. Who is called Minor partner? Ans: A partner of less than 18 years in age is called Minor Partner. 7. What is the liability of the partner in profit only? Ans: The Liability of a Partner in Profit only is Unlimited. 8. Who is a Partner by Estoppel? Ans: The person who is not actually a partner but, represents himself as a partner in front of third parties is known as Partner by Estoppel.

*9. What is partnership deed? [Mar 12, Oct 11] Ans: Partnership Deed is the written agreement between or among the partners that lays down the terms and conditions of partnership and the rights, duties and obligations of partners for the internal management of the firm. *10. Why is partnership deed prepared? Ans: Partnership deed is prepared to resolve future conflicts and disputes among partners. *11. Which act is applicable to partnership business? Ans: The Indian Partnership Act, 1932 is applicable to partnership business. 12.

At what rate is the Interest on Partner’s Loan is paid in the absence of provision in partnership deed? Ans: In the absence of a provision in partnership deed, Interest on Partners Loan is paid at 6% p.a.

*13. What are the methods of maintaining Partners Capital Account? Ans: Fixed Capital Method and Fluctuating Capital Method are the two methods of maintaining Capital Account of partners. *14. What do you mean by Fixed Capital Method? OR What is Fixed Capital Method? [Mar 11] Ans: Fixed Capital Method is a method of maintaining Capital Account of partner, where the capital is kept fixed and all the other transactions are recorded by preparing Partner’s Current Account except, when additional capital is introduced in the business or capital is withdrawn by a partner. *15. What is Fluctuating Capital Method? Ans: Fluctuating capital method is where all the transactions related to partners are recorded through Partners Capital Account and there is no requirement to prepare Partner’s Current Account. In this method, the capital of the partner is fluctuating. *16. When is Partner’s Current Account opened? Ans: Partner’s Current Account is opened under Fixed Capital Method.

13

Target Publications Pvt. Ltd. II.


Write the word/ term/ phrase which can substitute each of the following statements:

[1 mark each]

*1.

An association of two or more persons to carry on business.

*2.

A partnership agreement between the partners in written form.

3.

Written terms of agreement between the partners.

4.

The maximum number of partner in banking business.

*5.

To close the business of partnership firm.

6.

The relationship between partners.

*7.

A partner who is engaged in day to day activities of the business.

8.

Active partner is also called as.

*9.

A partners who contributes only capital for the business but does not take any active part.

*10. A partner who provides only his name to the partnership firm. [Mar 08] *11. A partner below the age of 18 years. 12.

A partner whose liability is limited.

*13. The partner who is entitled to share profits only. *14. A partner who acts and behaves like a partner, but he is not a partner of the firm. *15. A amount contributed by the partners into the business. *16. An amount withdrawn by partner from the business for his personal use. *17. Under this method capital balances of partner remains constant. *18. Capital method in which Partner’s Current Account is opened. 19.

Capital method in which both, Capital Account and Current Account are maintained for each partner.

*20. Method of capital account in which capital balances of partners changes every year. 21. Ans: 1. 3. 5. 7. 9. 11. 13. 15. 17. 19. 21. III.

Capital Method under which only Partner’s Capital Account is maintained. Partnership 2. Partnership Deed Partnership Deed 4. Ten Dissolution 6. Principal and Agent Active Partner 8. Working Partner Sleeping Partner/Dormant Partner 10. Nominal Partner Minor Partner 12. Minor Partner Partner in Profit Only 14. Partner by Estoppel Partner’s Capital 16. Drawings Fixed Capital Method 18. Fixed Capital Method Fixed Capital Method 20. Fluctuating Capital Method Fluctuating Capital Method

Select the most appropriate alternative from those given below and rewrite the statements: [1 mark each] *1. Partnership is an association of _______ or more persons. (B) seven (A) two (C) ten (D) twenty

2.

3.

14

Partnership business must be _______. (A) lawful (C) voluntary

(B) (D)

illegal immoral

Minimum _______ persons are required to form a partnership. (A) one (B) two (C) three (D) seven



*4.

Maximum _______ persons are required to form a partnership having trading business. (B) fifty (A) twenty (C) seven (D) ten

*5.

Maximum _______ persons are required to form a partnership having banking business. (A) two (B) seven (D) twenty (C) ten

*6.

The liability of the partner in a firm is _______. (A) zero (B) (D) (C) unlimited

limited proportionate

Partners are _______ liable for the debts of firm. (A) individually (B) (C) several (D)

jointly personally

7.

*8.

A partner who provides only capital to the firm is called as _______. (A) active (B) nominal (D) minor (C) sleeping

9.

A partner who does not take active part in the management of business is known as _______. (A) Working Partner (B) Sleeping Partner (C) Nominal Partner (D) Partners in Profit only

*10. A partner who lends only his name to the firm is called as _______ partner. (A) partner in profits only (B) partner by estoppel (D) minor (C) nominal *11. A partner below 18 years of age is called as _______ partner. (A) active (B) sleeping (C) nominal (D) minor 12.

In the absence of partnership deed the partner’s share profits and losses in the _______ ratio. (A) capital (B) equal (C) 1 : 2 (D) initial contribution

*13. The Indian Partnership Act is in force since _______. [Mar 10, Oct 10] (B) 1956 (A) 1932 (C) 1960 (D) 1984 *14. The Interest on capital of a partner is credited to _______ Account. (A) Trading (B) Profit and Loss (D) Cash (C) Partner’s Capital *15. The drawings of partners are transferred to _______ Account. (A) Trading (B) Profit and Loss (D) Balance Sheet (C) Partner’s Capital *16. The interest on drawings is transferred to _______ side of Partner’s Current Account. (B) credit (A) debit (C) asset (D) liability *17. If dates of drawings are not given interest on drawings is charged for _______ months. (A) three (B) six (C) nine (D) twelve *18. Under fixed capital method, Capital Account and _______ Account is opened for each partner. (A) Partner’s Drawing (B) Partner’s Salary (D) Partner’s Commission (C) Partner’s Current *19. Under Fixed Capital Method, salary or commission to partner is credited to _______ Account. (A) Partner’s Capital (B) Partner’s Current (C) Partner’s Drawings (D) Partner’s Salary

15



*20. A debit balance of Partner’s Current Account will appear on the _______ side of the Balance Sheet. (B) Liability (A) Assets (C) Debit (D) Credit

IV.

21.

The balance of Capital Account fluctuates under _______ Capital Method. (A) Blocked (B) Fluctuating (C) Fixed (D) Semi Blocked

22.

Under _______ Capital Method only Capital Account of partners is opened. (A) Fixed (B) Fluctuating (C) Single (D) Double

State whether the following statements are TRUE or FALSE:

[1 mark each]

*1.

Partnership is an association of two or more persons.

*2.

Partnership firm is a trading concern.

*3.

Partnership agreement must be in written form.

*4.

There is no limit to maximum number of partners in a firm.

5.

There can be partnership firm with 25 partners.

6.

There can be partnership only for the sharing of loss.

*7.

Partner must share profits and losses equally.

*8.

If the partnership deed is silent, partners share profits and losses equally.

9.

Each partner has a right to take part in the conduct of business.

10.

Partners not taking an active part in the business is called sleeping partner.

11.

The liability of the sleeping partner is limited.

*12. A partner who provides only capital to the firm is called as nominal partner. 13.

A partner who gives only his name to the business is called nominal partner.

*14. The liability of minor partner is limited. 15.

Partnership deed must always be in written form.

16.

Partnership firm in India is governed according to Indian Partnership Act 1932.

*17. The interest on drawings is an income of the partnership firm. *18. An interest on capital is an expenditure of the partnership firm. *19. Partners are entitled to get salary or commission. *20. The balance of capital account remains constant under fixed capital method. *21. Partner’s Current Account is opened when fluctuating capital method is adopted. *22. Partners current account always shows credit balance. *23. Capital Account always shows credit balance. 24. Ans: 1. 5. 9. 13. 17. 21.

16

Adjustments to partner’s capital are passed through Current Account when the capitals are fluctuating. True False True True True False

2. 6. 10. 14. 18. 22.

True False True True True False

3. 7. 11. 15. 19. 23.

False False False True False False

4. 8. 12. 16. 20. 24.

False True False True True False


Chapter 01: Introduction to Partnership Quick Review

Types of Partners

i. ii. iii. iv. v. vi.

Active Partner Sleeping Partner Nominal Partner Minor Partner Partner in Profits only Partner by Estoppel


Fixed Capital Method

Partner’s Capital Account Transactions i. Amount contributed by a Partner at the beginning. ii. Additional Capital introduced by a Partner during the Year. iii. Part of Capital amount Withdrawn during the year.

Partner’s Current Account

i.

ii.

iii. iv. v.

vi.

Transactions Amount withdrawn by Partners from the business for their personal use i.e. Drawings in form of Cash. Goods taken over by Partners from the business for their personal use. i.e. Drawing in form of Goods. Interest on Partners Capital. Interest on Partners Drawings. Salalry or Commission to Partners. Distribution of Net Profit or Net Loss of the firm.

Fluctuating Capital Method

Partner’s Capital Account Transactions i. Amount contributed by a Partner at the beginning / Opening Capital Balance of Partners. ii. Additional Capital brought by Partners. iii. Salary or Commission Payable to partners. iv. Interest on Capital. v. Drawings and Interest on Drawings. vi. Withdrawal of Capital amount. vii. Distribution of Net Profit or Net Loss of the firm.

17

12th Commerce Book Keeping Accountancy

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