Notes of 10+2 Accountancy (Crash Course)

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1 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, Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all. 2) Features/Characteristics of Partnership (i) Two or more persons (ii) Agreement (iii) Business (iv) Mutual agency (v) Sharing of Profits (vi) Unlimited liability Note: Minimum no. of partners in a partnership business must be 2 & according to Section 464 of the Companies Act 2013, maximum no. of partners shall not exceed the limit as specified in rules, subject to a maximum of 100. Presently the limit is 50. Topic No. 2 Provisions/Rules Applicable in the Absence of Partnership Deed (i) Sharing of Profits/Losses - Equally (ii) Interest on Capital - Not Allowed (iii) Salary/Commission to a Partner - Not Allowed (iv) Interest on Drawings - Not charged (v) Interest on Partners Loan - 6% p.a. Notes: Loan by a relative is not a loan from partner. Hence, on such loan, this provision will not apply. In the absence of partnership deed profits are to be shared equally irrespective of the type of partner (active, sleeping) or the amount of capital contributed by them. As per Sec.16 (b) of The Indian Partnership Act, 1932, if a partner carries on any business competing with that of the firm, he/she shall account for and pay to the firm all profits made by him/her in that business. Delivering Success Not Lectures 1

2 Topic No. 3 Treatment & Calculation of Interest on Capital CASES AS PER PARTNERSHIP AGREEMENT/DEED INTEREST ON CAPITAL 1 SILENT NOT ALLOWED 2 Agreement Provides Interest on Capital If there is a LOSS Sufficient Profits INSUFFICIENT PROFITS (No Interest on Drawings will be Charged in this Case) 3 Agreement provides Interest on Capital as a CHARGE AGAINST PROFITS (EVEN IF LOSS) NOT PROVIDED FULLY ALLOWED Profits to be distributed in the RATIO OF INTEREST ON CAPITAL (PROFITS = IOC) FULLY ALLOWED Note 1: - Interest on capital is calculated on the opening capital of partner. If closing capital is given in question, then firstly opening capital will be calculated: Opening Capital = Closing Capital + Drawings Share of Profit + Share of Loss Additional Capital. Note 2:- Interest on Capital = Amount of Capital * Rate of Interest * Months Remaining Journal Entries of Interest on Capital 1. Interest on Capital A/c Dr. To Partners Capital A/c (Being Interest on Capital provided to partner) 2. Profit & Loss Appropriation A/c Dr. To Interest on Capital A/c (Being Interest on Capital debited to P & L Appropriation A/c) Delivering Success Not Lectures 2

3 Practice Questions on Interest on Capital Ques.1 A and B are partners sharing the profits and losses in the ratio 3:2 with Capitals of Rs.2,00,000 and Rs.1,00,000 respectively. Show the distribution of the profits in each of the following alternative cases: a) If the partnership deed is silent and profits earned for the year Rs.1,00,000. b) If the partnership deed is silent and profits earned for the year Rs.1,00,000 before manager s salary of Rs.20,000 and rent of Rs.1,000 p.m. which is payable to Mr. B for the use of his premises by the firm. c) If the partnership deed is silent and loss arises for the year Rs.1,00,000 before manager s salary of Rs.20,000 and rent of Rs.1,000 p.m. which is payable to Mr. B for the use of his premises by the firm. d) If the partnership deed provides interest on p.a. and the profits for the year Rs.50,000. e) If the partnership deed provides interest on p.a. and the profits for the year Rs.15,000. Ques.2 From the following Balance Sheet of X and Y, Calculate the interest on p.a. payable to Mr. X & Mr. Y for the year ended 31 st March, 2017: Liabilities Rs. Assets Rs. X s Capital Y s Capital Profit and Loss Appropriation A/c 10,000 8,000 4,000 22,000 Sundry Assets X s Drawings 20,000 2,000 22,000 During the year Y s drawings were Rs.3,000 and profits during were Rs.6,000. ADJUSTED CAPITALS & CAPITAL RATIO Ques.3 A and B started business on 1 st Jan, 2017 with the Capitals of Rs.60,000 and Rs.40,000 respectively. They decided to share profits in the capital ratio. The books are closed on 31 st Dec You are required to Calculate Adjusted Capitals & Capital Ratio. Capital Introduced A B Capital Withdrawn A B 1 st March 1 st Oct. 1 st Dec , , , ,000 Delivering Success Not Lectures 3

4 Topic No. 4 Treatment & Calculation of Interest on Drawings Case 1 When Fixed Amount is Withdrawn at Fixed Intervals Interest on drawings = Annual drawings * Rate of Interest * Average Period (Note) Note: - Average Period means Circumstances Monthly drawings for 12 months Quarterly drawings for 12 months Half Yearly drawings for 12 months Monthly drawings for 6 months In the Beginning of each period In the Middle of each period In the End of each period Case 2 When Unequal Amount is Withdrawn at Different Intervals i) Simple Method Interest on drawings = Amount of drawings * Rate of Interest * Months Remaining ii) Product Method Interest on drawings = Total Product * Rate of Interest * Note 1: - When the rate of interest is given without the suffix per annum, interest will be charged without considering time or date of drawings. Note 2: - If the question is silent regarding the time period of drawings, then interest on drawings is calculated for a period of 6 months. Journal Entries of Interest on Drawings 1. Partners Capital/Current A/c Dr. To Interest on Drawings A/c (Being Interest on drawings charged) 2. Interest on Drawings A/c Dr. To Profit & Loss Appropriation A/c (Being Interest credited to P & L Appropriation A/c) Delivering Success Not Lectures 4

5 Practice Questions on Interest on Drawings Ques.4 X & Y are partners sharing profits & losses in the equal ratio. Interest on drawings are charged from p.a. Calculate Interest on Drawings in each of the following cases :- a) If X withdraws Rs.2,000 at the beginning of each month. b) If X withdraws Rs.1,000 at the middle of each month. c) If X withdraws Rs.3,000 at the end of each month. d) If X withdraws Rs.48,000 at the beginning of each quarter. e) If X withdraws Rs.24,000 at the middle of each quarter. f) If X withdraws Rs.36,000 at the end of each quarter. g) If X withdraws Rs.2,000 at the beginning of each month for 6 months. h) If X withdraws Rs.1,000 at the beginning of each month for 6 months. i) If X withdraws Rs.3,000 at the end of each month for 6 months. j) If X withdraws as per 1 st August Rs.5,000; 31 st December Rs.10,000 & 31 st March Rs Delivering Success Not Lectures 5

6 Topic No. 5 Preparation of Profit & Loss Appropriation Account Maintenance of Capital Accounts of Partners a) Distribution of Profit among Partners i.e. Profit & Loss Appropriation Account Particulars Rs. Particulars Rs. To Interest on Capital To Partners Salaries To Partners Commission To Transfer to Reserves To Profit transferred to Partners Capital account (as per profit ratio) By Profit & Loss Account (Distributable Profit) (Note 1) By Interest on Drawings Notes 1. Distributable Net Profit to Partners : Net Profit after Charges (i.e. Managers Salary etc.) Interest on Loan to Partners - Rent paid or payable to partner. 2. Interest on Loan to Partner s is always CHARGED AGAINST PROFITS not an appropriation of profits. Hence, it must be transferred to the debit side of Profit & Loss Account not on debit side of Profit & Loss Appropriation Account. 3. Salary or Commission Payable to Manager is always CHARGED AGAINST PROFITS not an appropriation of profits. Hence, it must be transferred to the debit side of Profit & Loss Account not on debit side of Profit & Loss Appropriation Account. Note: - Salary or Commission payable to Partner s is an appropriation of profits & shown on debit side of Profit & Loss Appropriation Account. It is allowed only if there are profits. 4. Rent paid to a partner s always CHARGED AGAINST PROFITS not an appropriation of profits. Hence, it must be transferred to the debit side of Profit & Loss Account not on debit side of Profit & Loss Appropriation Account. Delivering Success Not Lectures 6

7 b) Maintenance of Capital Accounts of Partners Capital Accounts of partners can be maintained by the following two methods: - 1. Fixed Capital Account Method TWO ACCOUNTS are maintained namely Partners Capital Account and Partners Current Account. (Only Two Adjustments will be done in Partners Capital A/c) Transactions related ONLY TO INTRODUCTION (ADDITIONAL CAPITAL) & WITHDRAWAL OF CAPITAL on a permanent basis are recorded in capital accounts, rest of the transactions are recorded in current accounts. Capital account will always have credit balance & current account may have credit or debit balance. Partners Capital Account Particulars Rs. Particulars Rs. To Cash/Bank A/c (Withdrawal Of Capital) To Balance c/d By Balance b/d By Cash/Bank A/c (Additional Capital Introduced) Partners Current Account Particulars Rs. Particulars Rs. To Balance b/d To Drawings A/c To Interest on Drawings A/c To P & L Appropriation A/c (If Loss) To Balance c/d By Balance b/d By Interest on Capital A/c By Commission A/c By Salary A/c By P & L Appropriation A/c (If Profit) By Balance c/d Delivering Success Not Lectures 7

8 2. Fluctuating Capital Account Method: ONLY ONE ACCOUNT is maintained i.e. partners capital account. All transactions including introduction and withdrawal of capital are recorded in Single Capital Account. Partners Capital Account Particulars Rs. Particulars Rs. To Balance b/d To Drawings A/c To Interest on Drawings A/c To P & L Appropriation A/c (If Loss) To Balance c/d By Balance b/d By Cash/Bank A/c (Additional Capital) By Interest on Capital A/c By Commission A/c By Salary A/c By P & L Appropriation A/c (If Profit) By Balance c/d Practice Question on Maintenance of Partners Capital Accounts Ques.5 Mr. Singh & Mr. Kumar are partners in a firm sharing profits and losses in the ratio of 3:2. The capitals contributed by them Rs.13,00,000 and Rs.8,00,000 respectively. Mr. Singh was given a salary of Rs.10,000 p.m. and Mr. Kumar Rs.80,000 p.a. Mr. Singh advanced a loan to a firm Rs.2,00,000 without any agreement about the rate of interest in deed, while in deed rate of interest on capital was p. a. & interest on p.a. Profits for the year are Rs.1,42,000 before any interest but after salary of both partners. The drawings of Mr. Singh Rs.15,000 at the end of each quarter & Mr. Kumar drawings are as follow :- 1 st May Rs.5,000 1 st December Rs.3, th September Rs.8, st March Rs.4,000. Prepare - a) Profit & Loss Appropriation Account. b) Partner Capital Account & Current Account. c) Partner Capital Account (If Capitals are fluctuating). Delivering Success Not Lectures 8

9 Topic No. 6 Past Adjustment/Rectifying Entry If after closing the accounts of a partnership firm, some errors or omissions are discovered in the accounts e.g. interest on capital or drawings may not have been allowed or charged, charged or allowed at a higher or lower rate. Such errors or omissions are rectified by recording an adjustment entry. Statement Showing Adjustment to be Made Particulars X Y A. Amounts which should have been recorded (Correct Distributable Profits) Interest on Capital Interest on Drawings Salary or Commission to Partner Share of Profit ( ) ( ) B. Amounts already recorded (Incorrect Distributable Profits) Interest on Capital Interest on Drawings Salary or Commission to Partner Share of Profit C. Net Effect (A B) ( ) ( ) Journal Entry Gaining Partners Capital Account (Who received excess) Dr. To Sacrificing Partners Capital Account (Who received short) (Being adjustment entry passed) Delivering Success Not Lectures 9

10 Practice Question on Past Adjustment/Rectifying Entry Ques.6 A and B are partners in a business in the ratio of 3:2. Their capitals at the beginning of the year were Rs.48,000 and Rs.36,000 respectively. Interest on 12% p.a. & interest on 6% p.a. During the year , A s drawings were Rs.8,000 and B s drawings were Rs.12,000 respectively. Profit earned during the year Rs.30,000 already distributed among partners without providing interest on capital & charge interest on drawings. Pass Single Adjustment Entry. b) If Capitals at the end are Fixed Capitals, then Pass Adjustment Entry. c) If Profit of Rs.30,000 is not given in question, then Pass Adjustment Entry. Ques.7 Ram, Shyam & Mohan are partners in a firm sharing profits & losses in the ratio of 2:1:2. Their fixed capitals were Rs.3,00,000, Rs.1,00,000 and Rs.2,00,000 respectively. Interest on capital for the year ending 9% p.a. instead of 10% p.a. The profits for the year after charging interest on capital was Rs.2,50,000. Pass Adjustment Entry. Topic No. 7 Guarantee of Profit to Partner (Only For CBSE Students) Cases Guarantee by a Firm Guarantee by one partner to another Guarantee by partner to the Firm Simultaneous Guarantee by the Firm to the Partner and by the Partner to the Firm Treatment Share of Profit firstly paid to guaranteed partner & then other partners. Deficiency of guaranteed partner borne by the partner giving guarantee. Minimum amount of profit earned by partner for the firm. Guarantee given to the firm by the partner firstly applied. If the profit earned by the partner falls short of the guaranteed amount, then the deficiency will be debited to the Delivering Success Not Lectures 10

11 partner and credited to the Profit & Loss Appropriation Account of the firm. Practice Questions on Guarantee of Profit to Partner Ques.8 A & B were partners in a firm in a ratio of 3:2. They admit C for 1/6 th share in profits and guaranteed that his share of profits will not be less than Rs. 25,000. Total profits of the firm for the year ended were Rs.90,000. Calculate share of profits for each partner when a) Guarantee is given by firm. b) Guarantee is given by A. c) Guarantee is given by A & B equally. Ques.9 Ahmad, Bheem & Daniel are partners in a firm. On 1 st April, 2016 the balance of their capital accounts stood at Rs.8,00,000, Rs.6,00,000 & Rs.4,00,000 respectively. They shared profits in the ratio of 5:3:2 respectively. Partners are entitled to interest on p.a. and salary to Rs.3,000 p.m. and a commission of Rs.12,000 to Daniel as per the provisions of the partnership deed. Ahmad s share of profit, excluding interest on capital, is guaranteed not less than Rs.25,000 p.a. Bheem s share of profit, including interest on capital but excluding salary, is guaranteed at not less than Rs.55,000 p.a. Any deficiency arising on that account shall be met by Daniel. The profits of the firm for the year ended 31 st March, 2017 amounted to Rs.2,16,000. Prepare Profit & Loss Appropriation Account. Delivering Success Not Lectures 11

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

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