6. PARTNERSHIP ACCOUNTING Question: Write a note on provisions when Partnership Deed is silent (S.13) Answer:
1 2 3 4 5
Provisions Remuneration Remuneration Profit and loss ratio Interest on capital Interest on drawings Interest on partners’ loan
Treatment if deed is silent No remuneration Equal share No interest on capital No interest on drawings 6% on the loan
Note: Partner is not entitled to interest on loan after the date of dissolution of firm if the deed is silent. Note: Assume 6% rate of interest when interest on capital is allowed in deed without rate of interest. Note: Assume 5% rate of interest when interest on drawings is allowed in deed without rate of interest.
Question: What is profit and loss appropriation account? Answer: P&L Appropriation Account shows the distribution of Net Profits among the partners by way of Interest on Capital, Salary, and Commission to partners, and Transfer to Reserves
Profit and Loss Appropriation A/c
To
Particulars
₹
Interest on capital a/c
××××
Partners’ Salary
××××
By
Particulars
₹
Profit and Loss a/c [Net profit]
××××
Interest on Drawings
××××
Partners’ Commission Commission ×××× Share of profit a/c
×××× ××××
××××
Question: Write a note on interest on drawings. Answer: is to be charged from partners only when partnership agreement agreement provides for the same
Formula for Calculating Interest on Uniform Drawings at Uniform Time – Time – Interval Interval
1
Middle
Monthly drawings × Rate of drawings × 13/2
2
Beginning
Monthly drawings × Rate of drawings × 12/2
3
End
Monthly drawings × Rate of drawings × 11/2
Note1: if the total Period Period is 6 months, then then half of the above above number can can be taken Note2: Interest Interest @ 10% means means interest is to be calculated calculated without any reference reference to time time period.
Interest on Capital: is to be allowed to partners only when partnership agreement provides for the same
Financial Accounting
6.1.1
Calculation of Opening Capital In case of Fixed Capitals
A
Closing Capital
In case of Fluctuating Capitals
xxx
Closing Capital
xxx
B
Add
Withdrawals of Capital
xxx
Add
Drawings
xxx
C
Less Less
Additional Capital introduced
xxx
Less
Withdrawal of Capital
xxx
Opening Capital
xxx
Add
Share of Profit
xxx
Less
Additional Capital
xxx
Opening Capital
xxx
D E F
How to calculate Interest on Capital
A
Interest on Opening Capital from the beginning of accounting period to the end of xxx accounting period
B
Add:
Interest on Additional Additional Capital from the date of introduction to the end of the xxx accounting period.
C
Less:
Interest on on Capital withdrawn from the date of withdrawal to the end of the xxx accounting period
D
Total Interest on Capital (A + B – C) – C)
xxx
Nature of Interest on Partner’s Capital: is an appropriation out of profits and not a charge against the profits. Hence it is debited to Profit & Loss Appropriation A/c If Profit is less than Interest: than the total t otal amount of interest on capital, the available profits should be distributed in the ratio of interest claims claims of partners. partners. Nature of Interest on Partner’s Loan: is a charge against the profits and debited to Profit & Loss A/c even loss Salary or Commission to Partners: is an appropriation and allowed only on agreement agreement Two methods of maintaining partners’ capital accounts:
1. Fluctuating Capital Method and [All transactions relating to a partner are recorded in Capital A/c] 2. Fixed Capital Method [Transactions relating to introduction or withdrawal of capital are recorded in Capital a/c and other transactions are recorded in Current A/c] Guarantee: assurance to give a minimum amount of profit to a partner by other partners. The deficiency (i.e. excess of guaranteed amount over actual share of profit) is debited to guaranteeing partners in their guarantee guarantee ratio ratio and is credited credited to the guaranteed guaranteed partner.
PRACTICAL PROBLEMS P/L Appropriation Accounts Question 1: A, B and C are partners in a firm with capitals of ₹50,000, ₹40,000 and ₹20,000 respectively. They share profits and losses as: (i) Up to ₹10,000, in the ratio of 4:3:3 (ii) Above ₹10,000 equally. The net profit of the firm for the year ended 31st December, 2002 is amounted to ₹40,200 and the drawings of the t he partners were: A-₹ A-₹6,000, ₹B-5,000, C-₹ C-₹3,000.
Partnership Accounting
6.1 .2
You are required to prepare the Profit and Loss Appropriation A/c for the year ended 31.12.2002 and Capital Accounts of the partners assuming: (a) partners capitals are fixed; and (b) partners’ capitals are fluctuating, after considering the following adjustments:
1. 2. 3. 4.
interest on partners’ capitals to be paid @ 10% p.a., interest on drawings to be charged @ 5% p.a. A to receive salary of ₹5,000 p.a.; and B and C to get commission @ 10% each on the net profit.
Answer: Profit and Loss Appropriation A/c for the year ended 31-12-2002 Particulars
To
₹
₹
Interest Interest on capital a/c
Particulars
11,000
By
₹
P/L P/L a/c – a/c – Net Net profit
40,200
A:
5,000
Interest on Drawings
B:
4,000
A:
150
C:
2,000
11,000
B: 5
125
A’s Salary Salary
5,000
C: 3
Commission a/c
8,040
B:
4,020
C:
4,020
₹
75
350
8,040
Share of profit a/c A:
6,170
B:
5,170
C:
5,170
16,510 40,550
40,550
(a) Fixed capital method: Partners Capital A/c Particulars
To
Balance c/d
A
B
C
Particulars
50,000
40,000
20,000
50,000
40,000
20,000
By
A
B
50,000
40,000
20,000
50,000
40,000
20,000
Int. on Capital
5,000
4,000
2,000
Salary
5,000
---
----
---
4,020
4,020
6,170
5,170
5,170
16,170
13,190
11,190
Balance b/d
C
Partners Current A/c
To
Drawings a/c
6,000
5,000
3,000
150
125
75
10,020
8,065
8,115
Interest on Drawings Balance c/d
By
Commission a/c Share of profit
16,160
13,190
11,190
(b) Fluctuating capital method: Partners Capital A/c Particulars
To
A
Drawings a/c Interest
on
Financial Accounting
B
C
Particulars
6,000
5,000
3,000
150
125
75
By
Balance b/d Interest
on
A
B
C
50,000
40,000
20,000
5,000
4,000
2,000
6.1.3
Drawings
Capitals
Balance c/d
60,020
48,065
28,115
Salary
5,000
---
----
---
4,020
4,020
6,170
5,170
5,170
66,160
53,190
31,190
Commission a/c Share of profit 66,160
53,190
31,190
Working Note: 1 Profit is shared as under
Total
A
B
C
Up to ₹10,000 shared as 4:3:3
10,000
4,000
3,000
3,000
6,510
2,170
2,170
2,170
16,510
6,170
5,170
5,170
Above ₹10,000 Total
Past adjustments Question: What is past adjustment? Answer: Past adjustments refers to those adjustments which affect the distribution of past profits like omission or commission in respect of Interest on Capital / Drawings or change in the deed with retrospective effect. This is adjusted either through P&L Adjustment A/c or Capital Accounts of the concerned partners by passing single entry. Question 2: A and B started a partnership on 1.1.2001 with respective capital contributions of ₹1,20,000 and ₹40,000. Their Capital Account balances as on 31.12.2002 were: A-₹ A-₹2,09,500 and B90,500. The transactions recorded in the Capital Accounts during these two years were interest on capital @ 10% p.a. on initial investments and allocations of incomes. On 31.12.2002, it was further discovered that drawings of ₹42,000 by A and ₹30,000 by B had been wrongly treated as business expenses. You are required to a pass a single journal entry to adjust the partners’ Capital Accounts correctly on 31.12.2002. Answer: Working Note 1: Ascertainment of Total Profit for 2 years Particulars
Balance of capital as on 1.1.2001 Add
Add
Interest on Capital for 2 Years @ 10% p.a.
Profit credited for 2 years (Balance) Balance of capital on 31.12.2002
A
B
Total
1,20,000
40,000
1,60,000
24,000
8,000
32,000
144,000
48,000
1,92,000
65,500
42,500
1,08,000
2,09,500
90,500
3,00,000 3,00,000
Working Note 2: Ascertainment of Correct Profit Particulars
Profits already credited (WN1) (₹ (₹65,500 + 42,500) Add
Drawings shown as expense (₹ (₹42,000 + 30,000)
Partnership Accounting
₹
1,08,000 72,000
6.1 .4
Corrected profits to be shared equally(Answer: ₹90,000 and B: ₹90,000)
1,80,000
Working Note 3: Ascertainment of Correct Capital Balances Particulars
Balance of capital as on 1.1.2001 Add
Add
Less
A
B
Total
1,20,000
40,000
1,60,000
24,000
8,000
32,000
144,000
48,000
1,92,000
90,000
90,000
1,80,000
2,34,000
1,38,000
3,72,000
42,000
30,000
72,000
1,92,000
1,08,000
3,00,000
Interest on Capital for 2 Years @ 10% p.a.
Adjusted profit for 2 years (WN2)
Drawings Corrected capital on 31.12.2002
Working Note 4: 4: Adjustment of partners’ capital A/c Particulars
Less
A
B
Capital Balances as on 31.12.2002 (given)
2,09,500
90,500
Corrected balances as on 31.12.2002 (WN4)
1,92,000
1,08,000
Required adjustment: excess (+) / short (-)
(+)17,500
(-)17,500
Required Journal Entry
A’s Capital A/c
Dr
17,500
To B’s B’s Capital A/c
17,500
(Being the partners’ capital account adjusted)
[CMA INTER D03, 16 Marks] Question: Profit and loss appropriation: A, B, C and D are partners in a garage comprising, (i) petrol sales, (ii) Repairs and servicing, and (iii) Second-hand Second-hand car dealing. A is responsible for petrol sales, B for repairs and servicing, and C for second-hand car dealing, while D acts purely in an advisory capacity.
The partnership agreement agreement provides for the following: a) Each partner is to receive commission commi ssion of the net profit of the partner’s own department department as under – A – 10%; 10%; B – B – 15% 15% and C – C – 20%. 20%. b) A total salary of ₹11,000 is payable to D which is to be allocated among the above three departments in the ratio 3 : 4 : 4 respectively. c) 50% of the net profit of each department department after charging commission and salary will be di stributed to A, B and C as under – under – Petrol Sales A, B and C – C – Equally Equally
Repairs and Servicing A:B:C=2:2:1
Second-hand Car Dealing A:B:C=3:2:1
d) The balance of the profit of the firm will be shared equally.
Financial Accounting
6.1.5
e) The profits for the year ended 31.12.2002 were as under: Petrol sales: ₹20,000; Repairs and Servicing – Servicing – ₹40,000; Secondhand-car dealing – dealing – ₹50,000. f) The partner’s capitals are: A are: A - ₹40, 000; B – B – ₹30,000; C – C – ₹25,000; D – D – ₹10,000. g) Interest on capital is payable @ 10% You are required to prepare the Profit and Loss Appropriation Account for the year ended 31.12.2002. Answer: Profit & Loss Appropriation A/c
To
Particulars Appropriated Profit [WN2] Capital A Capital B Capital C Capital D
₹
By 31,000 31,000 28,500 19,500
Particulars Net Profit Petrol Repair & Servicing Second Hand Car
20,000 40,000 50,000
1,10,000
1,10,000 1,10,000
1,10,000
WN1
Less Less
₹
Department
Total
Petrol
Repair
Second-hand
Profit
20,000
40,000
50,000
Commission [10%, 15% & 20%] on profit Salary of D [₹11,000 shared in the ratio of 3:4:4] Balance Profit First Half of the Profit Balance Interest on Capital [10% on total capital] Balance after interest on capital
2,000 6,000 3,000 4,000 15,000 30,000 7,500 15,000 7,500 15,000
WN2
Commission [WN1] Salary Interest on Capital [@10%] Sharing First Half of the Profit [WN1] Petrol [1:1:1] Repair [2:2:1] Second-hand Second-hand [3:2:1] Sharing balance profit [Equally]
A 2,000
4,000
10,000 4,000 36,000 18,000 18,000 40,500 10,500 30,000
Capital B C 6,000 10,000 3,000
D
11,000 2,500 1,000
2,500 2,500 2,500 6,000 6,000 3,000 9,000 6,000 3,000 7,500 7,500 7,500 7,500 31,000 31,000 28,500 19,500
[CMA INTER D05, 6 Marks] Question: Past adjustments: adjustments: Ram and Rahim agreed to share profits as follows:
First ₹8,000 to Ram and the balance in 2 : 1. The profits for the year are ₹11,600; the capitals being Ram ₹40,000 and Rahim ₹36,000. Interest on capital had been omitted from the books and is to t o be allowed at 5% p.a. Adjust.
Partnership Accounting
6.1 .6
Answer:
Calculation of Profit
(actual) (Error)
Net profit Interest on capital
Share of Profit Total [Profit + Interest]
Ram
2,000
Rahim
1,800
11,600
3,800
Profit to be actually divided
7,800
11,600
Ram Rahim Ram
7,800 9,800
10,400 1,200 10,400
600 Dr
Rahim
1,800
1,200
600 Cr
Rams’ A/c To Rahim’s A/c
Financial Accounting
11,600
Dr.
600 600
6.1.7
