ACCOUNTING TUTOR AT KOTA

ACCOUNTING FOR PARTNERSHIP FIRMS FUNDAMENTALS 1

CHAPTER 1 Accounting For Partnership Firms Fundamentals By C.P. Chaudhary

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ACCOUNTING FOR PARTNERSHIP FIRMS FUNDAMENTALS 2

* Nature of partnership firms :Partnership is a relation of mutual trust and faith. Partnership accounts should present a true and fair picture of the partnership business.

* Definition :It is a relationship between persons who have agreed to share the profit of a business. Carried on by all or any of them acting for all (Sec.4 of Indian Partnership Act, 1932) .

* Characteristics of partnership
1. There must be at least two persons to form a partnership maximum 10 persons in banking business and 20 persons in case of other business to form a partnership. 2. Partnership is an agreement between two or more persons. 3. Partners must agree to carry on business. 4. The agreement between the partners must be aimed at sharing the profits of the business. 5. Each partner is an agent as well as partner of the firm. 6. Each partner can participate in the conduct of business.

*Partnership Deed : It Contains following points :1. The name and address of the firm; 2. Names and addresses of the partners. 3. The type and nature of the business the firm proposes to do. 4. Amount of capital [fixed or fluctuating] to be contributed by each partner. 5. The rate of interest is to be allowed on capitals. 6. How much amount withdrawn by partners for personal use. 7. The rate of interest charged on partners drawingss. 8. Formula of valuation of goodwill in case of retirement or admission of a partner. 9. In which ratio profits or losses are to be divided among the partners. 10. Salary to any partner for the work done by him. 11. Accounting period of the firm. Yearly or half-yearly and the date on which accounts are to be closed every year. 12. Safe custody of the books of accounts and other documents of the firm. 13. Whether the firms books will be audited or not? If so, the mode of auditors appointment. 14. Date of commencement of the partnership. 15. The period for which the partnership has been established and the mode of dissolution of partnership. 16. Whether decision in the case of garner vs. Murray is to apply in the case of insolvency of a partner. 17. Account in the bank will be opened in firms name or in some partners na me? Who will have the right to sign the cheques? 18. Rules to be followed in case of admission of a partner. 19. Rules to be followed while settling the accounts on retirement. 20. In case of dispute among the partners. How the dispute will be solved?

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* Importance of Partnership Deed

1. It regulates the rights, duties and liabilities of each partner. 2. It helps to avoid any misunderstanding amongst the partners. 3. Any dispute amongst the partners may be settled easily as the partnership deed may be readily referred to .

* Rules Applicable in the Absence of Partnership Deed

1. Profits Sharing Ratio - Equal 2. Interest on Capital - No 3. Interest on Drawings No. 4. Interest on Partners Loan - @6% p.a. 5. Salary to the Partner No. 6. Without the consent of all existing partners, No new partner can be admitted to the firm. 7. Each partner can participate in the conduct of business. 8. Each partner can inspect the books of firm and can take a copy of the same.

* The journal entries that are passed for various items Shown in the profit and loss appropriation account are as follows :
1. Entry for Interest on Capital (1) On allowing interest on capital Interest on capital A/c Dr To partners capital a/c / current a/c. (interest on capital at -----% p.a.) (2) On closure of interest on capital A/c Profit & loss appropriation A/c Dr To interest on capital A/c (Being interest on capital transferred to P&L Appropriation a/c)

2. Entry for Interest on Drawings (1) On charging interest on drawings Partners capitals A/c /current a/c Dr To interest on drawingss A/c (Interest on drawingss at-----% p.a.) (2) On closure of interest on drawingss A/c Interest on drawingss A/c Dr To profit & loss appropriation a/c

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(Being interest on drawings transferred to P&L Appropriation a/c) 3. Entry for Salary or Commission Payable to a Partner (1) On allowing salary or commission to a partner Partners salary / commission A/c Dr To partners capital A/c / current A/c (2) On closure of salary or commission account Profit & loss appropriation A/c Dr To partners salary / commission a/c. 4. Entry for Transferring a Part of Profit to Reserve: Profit & loss appropriation A/c Dr To reserve A/c 5. Entry for transfer of credit balance of profit & loss appropriation A/c (being profit) Profit & loss appropriation A/c Dr To partners capital or current A/c 6. Entry for Transfer of debit balance of profit & loss appropriation A/c (being loss) Partners capital or current a/c Dr To profit & loss appropriation A/c

Note:
Interest on partners capital, Interest on Drawings, Salary to the partner, Commission to the partner & Transfer of profits to reserve are appropriations and P & L Appropriation a/c record Interest on Partners Loan & Rent paid to partner record charge
P & L a/c

*Calculation of Interest on Drawings

(1) information given then interest on drawing 6 month

ds calculate

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Interest on Drawings = Amount of Drawings (2) drawings Date given

then interest on drawing

calculate

(a) (b)

Simple Method: Interest on Drawings = Amount of Drawings Product Method: then interest on drawings

Interest on Drawings = Total of Products

(3) drawings equal installment & equal time interval should be calculated for the average period: Average Period =

*Rules Regarding Interest on Capital

Case I Case Partnership agreement is silent about the interest on capital Interest on capital allowed but silent on treating interest as a charge or appropriation Provisions No interest allowed

Case II

Case III

a) Loss No Interest b) Inappropriate profit Interest equal to profit in appropriation ratio c) Appropriate profit Full interest Interest on capital as a charge Full interest whether profit or in agreement loss.

*Types of Capital Accounts

(1) Fixed Capital Accounts: record (b) Partners Current Account: account appropriation record account :(a) Partners Capital Account: Capitals, New capital introduced & permanent drawings

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(2) Fluctuating Capital Accounts:

account

Partners

related

transactions record

*Adjustment in the Closed Accounts

(1) Interest on capital or drawings omitted (2) Profits & Losses distributed in wrong ratio (3) Salary or commission payable omitted

Rule:

Debit

Credit

*Guarantee of Profit to a Partner

Guaranteed profit

partners

guarantee

profit

compensate

*Accounts to be Prepared
Particulars To Interest on Capital To Salary to partners To Commission to partners To Resrve To Profit transferred to partners capital account: Xs capital a/c Ys capital a/c Profit & Loss Appropriation Account Amount Particulars By Profit & Loss a/c By Interest on Drawings Amount

Partners Capital Accounts (1) When Capitals are Fixed Partners Capital Account Particulars X Y Particulars To Drawings By Balance b/d (Opening Balance) To Balance c/d By Cash/ Bank A/c (Additional Capital)

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Partners Current Account Particulars To Interest on Drawings To P & L A/c (Loss) To Balance c/d X Y Particulars By Interest on Capital By Salary By Commission By P&L Appropriation A/c X Y

(2) When Capitals are Fluctuating Partners Capital Account Particulars To Drawings To Interest on Drawings To P & L A/c (Loss) To Balance c/d X Y Particulars By Balance b/d (Opening Balance) By Cash/ Bank A/c (Additional Capital) By Interest on Capital By Salary By Commission By P&L Appropriation A/c X Y

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