Partnership deed : It is a written agreement among partners of partnership firm containing terms and condition of partnership

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Sharon Nicholson
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1 Chapter - 1 ACCOUNTING FOR PARTNERSHIP FIRM FUNDAMENTAL Meaning When two or more person join together to carry on a business under Indian partnership Act 1932 & agree to share profit & loses is partnership. Partnership deed : It is a written agreement among partners of partnership firm containing terms and condition of partnership In the absence of partnership deed, Provision of Indian partnership Act, 1932 applies. Particular of Partnership deed & Provision of Indian partnership Act,1932. S.NO Particulars Partnership deed exist 1. Sharing of Profits/Losses As mentioned 2. Interest on Capital As mentioned 3. Interest on Drawings As mentioned 4. Remuneration to partners As mentioned If silent, Provisions of Indian Partnership Act, 1932 applied Profit/Losses are shared equally by the partners. No Interest on capital is paid to partners. No Interest on drawings is charged from partners. No Remuneration (salary, commission, etc,) is paid (allowed) to any partner. 5. Interest on Advances Loan by a Partner As mentioned Interest on loans is 6% p.a. Interest is payable even if there is a loss. Profit & loss Appropriation Account. Profit & loss appropriation a/c is prepared to show distribution of available profit among partner. It is prepared after Profit & Loss It shows item of appropriation of profit Note : Interest on partner s advance loan is charge against profit, hence shown under Profit & loss a/c 1

2 PROFIT & LOSS APPROPRIATION ACCOUNT. Particular Rs. Particular Rs. To Interest On Capital By P & L (Net Profit) To Partner s Salary By Interest On drawing To Partner s Commission By loss transfer to Partner capital or Partner Current To Reserve To Profit transfer to Partner capital / Partner Current Differentiate between Change against profit VS Appropriation out of profit. Change against profit & Appropriation out of profit. 1 Consider under P & L & Consider under P & L Appropriation 2 It is provided whether there is & It is provided only if there is profit profit or loss. Ex: 3 Rent paid, interest on partner s, & Interest on partner s capital, Advance loan, Manager salary partner s salary 2

3 1. Preparation of Partner s capital Account. Partners capital Account can be maintained by two method : 1) Fixed capital methood Under this method two accounts are prepared: a) Capital Accounts Capital remain unaltered, unless there is addition or withdrawl of capital. Dr PARTNERS CAPITAL ACCOUNTS Cr Particulars X Y Z Particulars X Y Z To Cash/Bank (Withdrawal out of Capital) By Balance b/d To Balance c/d* By Cash/Bank A/C (Additional Capital) *The balance may be on the opposite (Credit) Side also. 3

4 b) Current Accounts Record all other transaction, other than addition or withdrawl of capital. Dr. PARTNER S CURRENT ACCOUNTS Cr. Particulars X Y Z Particulars X Y Z To Balance b/d (In case of debit opening balance) By Balance b/d (In case of credit opening balance) To Drawings (withdral from firm) To Interest on Drawings To Profit and Loss App. (Loss) To Balance c/d* By Interest on Capital By Commission By Salary By Profit and Loss App. (Profit) *The balance may be on the opposite(credit) Side also. c) Fluctuating capital methood Under this method only one accounts is prepared. Capital Accounts It Record all the transaction. 4

5 Dr. PARTNER S CAPITAL ACCOUNTS Cr. Particulars X Y Z Particulars X Y Z To Balance b/d (In case of debit opening balance) By Balance b/d (In case of credit opening balance) To Drawings To Interest on Drawings To Profit and Loss App. (Loss) To Balance c/d* *The balance may be on the opposite (Credit) Side also. By cash/ bank a/c By Interest on Capital By Commission By Salary By Profit and Loss App. (Profit) 2. Interest on Drawing. Interest on drawing = Total Drawing Rate of Interest 100 Avg. Period 12 Total drawing =? Avg. period = Time left after first drawing + Time left after last drawing 2 Particular Begining Middle End Amount withdrawn every month Amount withdrawn every quarter Amount withdrawn for 6 month

6 3. Interest on partner s capital. Interest on partner s capital is calculated on opening capital. If Que is silent regarding Interest on partner s capital, then Provision of Indian partnership Act, 1932 applies. When closing capital is given, then we have to calculate opening capital. Calculation of opening capital Capital at the end Add : Loss during the year Drawing & interest on drawing Less : Profit during the year Additional capital (if any) Interest on capital Opening capital 4. Salary or commission to partner Commission is calculated under two methood: a) Percentage of Net Profit before charging commission : Net Pro it (before commission) b) Percentage of Net Profit after charging such commission. Net Pro it (before commission) 5. Interest on partner s advance Loan. Interest on loan is charge against profit & it is debited to P & L If, Que is silent, then Interest is 6% p.a. 6

7 PAST ADJUSTMENT. Sometime after closing books of accounts of partnership firm, there were some error or omission in books of accounts like : a) Omisssion of Interest on capital b) Wrong distribution of Interest on capital c) Wrong distribution of Interest on drawing d) Distribution of profit in wrong ratio Then, we have to pass an entry to rectify these error. 6. Guarantee of profit I. Sometime a partner may admitted in the firm on guarantee of minimum profit from business. Such guarantee can be given even to an existing partner also. II. Such guarantee is given by either by : i) All the partner in agreed ratio ii) Specific partner III. If actual profit is more than guaranteed profit, then actual profit is provided to partners We have to calculate following two amount of guaranteed partner. 1. Share of profit as per profit - sharing ratio 2. Minimum guaranteed profit The higher of the above two is to be given to that partner. 7

Notes of 10+2 Accountancy (Crash Course)

Notes of 10+2 Accountancy (Crash Course) Chapter: - Fundamentals of Partnership Topic No. 1 Basic Discussion of Partnership 1) Partnership: According to Section 4, of The Indian Partnership Act, 1932,