Gu We Lat LEARNING OBJECTIVES The study of this Chapter would enable students to understand: Meaning and Definition of Partnership 4 Gi Essential Features or Characteristics of Partnership 12 G Rights of Partners 12 ‘Partnership Deed: Meaning, Clauses and Importance 13 Provisions of the Partnership Act, 1932 Affecting Accounting Treatment in the Absence of Partnership Deed 14 1 Interest on Loan by the Partner to the Fitm and by the Firm to the Partner 16 0 Distribution of Profit among Partners: Profit & Loss Appropriation Account 141 Special Aspects of Partnership Accounts: 1.22 «Partners! Capital Accounts under Fixed and Fluctuating Methods @ Salary or Commission to Partners @ Interest on Partners’ Capitals @ InterestonPartners'Drawings © Adjustments for Incorrect Appropriations of Profits in the Past (Past Adjustments) © Guarantee of Profit MEANING/AND/DEFINITION/OF PARTNERSHIP Partnership is defined by Indian Partnership Act, 1932, Section 4, as follows: “Partnership is the relation betzeen persons who have agreed to share the profits of a business carried on by all or any of them acting for all.” A partnership, thus, is a business relationship between/among two or more persons to share profits and losses of the business, carried on by all or any of them acting for all. Partners, Firm and Firm Name: The persons who have entered into a partnership with one another individually are called partners and collectively a firm. The name under which the business is carried is called firm name. Nature of Partnership Partnership, from the legal viewpoint, is not a separate legal entity from its partners since firm’s debts are payable from personal assets of the partners, ifthe firm is unable to repay its liabilities. However, Partnership is a separate business entity from the accounting viewpoint.r 1.2 Double Entry Book Keeping—CBSE Xl! ee Ue Pelagia tnership are: ‘The essential characteristics of part e More Persons: There must be at least two persons 1 ee persons must be competent (0 contract. According yo Indign 2 Pathe all such perorscept the fllowing is competent to contract, tg, elie ind, and "i ) Persons of unsound mind, "s q ‘ Persons disqualified by any law. () Z Number of Partners: The Partnership Act, 193 ornihinee res of partners in a firm. However, the Com en the Central Government to prescribe number of empows of 100 partners. The Central Government has Preseribed yi fis sind aan a firm to be 50 vide Rule 10 of the Companies (Migeap @%'™umy ina rarer a partnership frm cannot have more than 50 partners OHS) Rare aie asa Pariner: A minor can be 2 partner in the firm but on Y iis Sg fam and oot in sss. A rior partner on becoming major choutg I" Profs srtnership in the firm within 6 months. If he/she does not so ae mt ora i Peple forall the actions since he/she became partner. i = Agreement: Partnership comes into existence by an agreement, either yx the bass of elationship among partners, which may be for a particular vertu, Toh 7 1OT a Der. or at will, The written agreement among the partners is known as Partnershi . ership is established for a business. P Deeg 0 for 2 does i Not Panies Act, 201. PPS Partners in a ¢ Section y ten 0, Business: A partnt Profit Sharing: The agreement between/among the partners should be and losses of the business. Busines can be Carried on by All or Any of the Partners Acting for All the partnership can be carried on by all the partners or by any of them partners. In other words, partners are agents as well as the principals, Asan agent, he represents other partners and thereby, binds them through his acts As a principal, he is bound by the act of other partners PEO) aU ay Every partner has the right to participate in the management of the business, Every partner has the right to be consulted about the business matters. Every partner has the right to inspect the books of account and have a copy of it. Every partner has the right to share profits and losses in the agreed ratio. In case pro sharing ratio is not agreed, profits and losses are shared equally as is provided in th Pattnership Act, 1932. Ifa partner has advanced loan, he has the right to receive interest thereon at an agree Tate of interest. In case the rate of interest is not agreed, interest is paid at the al Provided in the Indian Partnership Act, 1932, which is 6% p.a. © share prog a ousiness acting for aig 1 2 f .3 4. aChapter 1+ Accounting for Partnership Firms-—Fundamentals 1.3 6. A partner has the right to take decisions in the interest of the business. 7. ¥ partner has the right not to allow the admission of a new partner. 8. After giving notice, a partner has the right to retire from the firm. PARTNERSHIP DEED. Agreement either oral or written, is the basis of partnership. It is always better to have written agreement to avoid any dispute, This written document, known as Partnership Deed details the terms and conditions of partnership, It is a legal document signed by all the partners and normally has clauses on the following: (i) Description of the Partners Names, description and addresses of the partners. (ii) Description of the Firm: Name and address of the firm. (iii) Principal Place of Business: Address of the principal place of business. (iv) Nature of Business: Nature of business that the firm shall carry on. (v) Commencement of Partnership: Date of commencement of partnership. (vi) Capital Contribution: The amount of capital to be contributed by each partner, whether the Capital Accounts shall be fixed or fluctuating. Interest on Capital: Rate of interest, if allowed, on capital. Interest on Drazvings: Rate of interest, if to be charged, on drawings. Profit-sharing Ratio: Ratio in which profits or losses are to be shared by the partners. Interest on Loan: Rate of interest on loan by a partner to the firm and interest on loan to a partner by the firm. (viii) (ix) it) (x) Renumeration to Partners: Amount of salary, commission, etc, if agreed, to be paid. (xii) Valuation of Goodwill: Method by which goodwill of the firm will be valued at the time of reconstitution of the firm, ie,, change in profit-sharing ratio, admission, retirement or death of a partner. (xiii) Valuation of Assets: The manner in which assets of the firm shall be valued at the time of its reconstitution. (xiv) Settlement of Account: The manner in which accounts of partner(s) shall be paid in case of his (their) retirement or death or at the time of dissolution of the firm. (xv) Accounting Period: The date on which accounts shall be closed every year. Normally, accounts are closed on 31st March every year because every entity must submit the returm of income for its income for the period or year ended on 3st March every year. Rights and Duties of Partners: The rights and duties of partners are defined. Duration of Partnership: The period of partnership, i., whether it is for a specified period or for a venture or at will. (vid (xvii) (xviii). Bank Account Operation: How shall the Bank Account be operated? Whether it shall be operated by any of the partners or jointly. (xix) Death of a Partner: Whether the firm will continue on the death of a partner. (x). Settlement of Disputes: Disputes, if any, among the partners—how they shall be settled.1.4 Double Entry Book Keeping—CBSE xil Importance of Partnership Deed Partnership Deed is an important legal document which de ae { partners. It is important to have written Partnership Deed so that dig "Ship 1 case, they still arise they can be resolved on the basis of Partnership Dees (8 de aa . i 1. It governs the rights, duties a Misuse “\ 2. Disputes arising, if any, amon the partners are settled on the basis oy : it being a written agreement ; ; arte, 3, If the Partnership Deed does not exist or where it exists but does not PO ee vcular matter, the provisions of the Partnership Act, 1932 appy have a g Parti car id does not allow salary to partners, salary wij] Y- For ea, tse Foe oa 1932 does not allow salary to partner’ P& Paid ip Act use the Partnership Act, eer has given loan to the partner and the Partnership Deed ig will pay interest on loan by ns Affecting Accounting Trt rtnership Deed or where it does not have a clause in reg ‘sof the Indian Partnership Act, 1932 apply: fines 5 d liabilities of each partner, * Ant 2 partner @ 6% p.a. as is provided in the peat On inten Pe \ers| a tetas, eatment in the Absence of Partners hip Ag we IP Dey ed PEC Of the fa Provisior In the absence of a Pat matters, the provision: the Indian Parti . Interest on loan by partner is paid (alowed) @ 69, pa, Interest on loan by partner is a charge against whether the firm earns profit or incurs loss, Loan by a Partner |. Interest on Advance/! profit means res 7], Sharing of Profits/Losses Profits/Losses are shared equally by the partners 3, Interest on Capital Interest on capital is not paid (allowed) to partners, ; Interest on Drawings Interest on drawings is not charged from partners, 5, Remuneration to Partners Remuneration (salary, commission etc.)isnotpaldolonedioam ‘New partner cannot be admitted unless all the batinevageeme 6. Admission of Partner Important Provisions of the Indian Partnership Act, 1932 (/ if all the partners agree, a minor may be admitted for the benefit of] [Sc partnership. ‘A person may be admitted as a partner either with the consent of all the | [Sec 3 existing partners or in accordance with an agreement among the partners. Gi A partner may retire from the firm either with the consent of all the other | [Sec. partners or in accordance with an agreement among the partners. Registration of the firm under the Partnership Act, 1932 is optional and) [Sec not compulsory. (v)| Unless otherwise agreed by the partners in the Partnership Deed, a firm t is dissolved on the death of a partner. Gi) (iv) (Sec. The partners may change the Partnership Deed to include or change any of the clauses o Partnership Deed as and when considered appropriate by them.Chapter 1 becounting for Partvership Fiera—Funddamnentals 1.5 Liabilities of Partners Subject 10 agreement among the partners, 1. Ifa partner carries on a business in competition with the firm without the consent of other partners and earns profit from it, the profit earned from such business shall be paid to the firm, However, losses incurred, if any, are borne by him alone. Ifa partner earns profit for himself from any transaction of the firm or from the use of firm's property or business connection, the profit so cared shall be paid to the firm. For example, a partner gets commission from the buyer of goods on goods sold by the firm, the commission so earned shall be paid to the firm. Illustration 1 (Provisions of the Indian Partnership Act, 1932). ‘Amar, Lalit and Charu are partners in a firm and they do not have a Partnership Deed. (i) Amar had invested more capital than other partners and asks for interest on capital at 10% p.a. But Lalit and Charu do not agree with him. (ii) Lalit devotes more time in handling the business and demands a salary of & 5,000 p.m. But Amar and Charu do not agree with him. (ii) Charu demands interest on the loan of % 50,000 given by her @ 12% pa. (iv) Amar withdrew % 10,000 from the firm for his personal use. Lalit and Charu demand that interest on drawings be charged from him @ 10% pa. (v) Profit for the year before the above claims was % 50,000. Amar demands profits to be distributed in the capital ratio, (vi) Lalit wants to introduce his son Inder as partner. Charu objects to his proposal. How will be the above issues resolved? Solution: The partners do not have a Partnership Deed. Therefore, provisions of the Indian Partnership Act, 1932 will apply to resolve the matters: (i) Interest on capital is not to be allowed to the partners. Therefore, Amar will not be allowed interest on the capital. i) Remuneration is not payable to the partners. Therefore, Lalit will not get salary. (iii) Interest on Loan by Partner is payable @ 6% p.a. Therefore, Charu will get interest 73,000 (ic, % 50,000 x 6/100) and not @ 12% pa. (iv) Interest on drawings by Amar will not be charged. (©) Profitafter Interest on Loan by Charu, ie, & 47,000 (850,000 ~ 3,000) will be distributed equally. (vi) A partner cannot be admitted without the consent of all the partners. Therefore, Inder cannot be admitted as partner because Charu has objected to it. Mlustration 2 (Oral Agreement). Harry and Ganry are partners in a firm, They co not have Partnership Deed but had agreed on following: (i) Salary to be paid to Harry @ & 10,000 per month. (ii) Garry to get commission @ 10% of Net Profit, Interest to be allowed on capitals @ 10% p.a.1.6 Double Entry Book Keeping—CBSE XIl (iv) Interest to be charged on drawings @ 10% p.a, iv s (v) Partner How will be 1. Garry dem: 2, Harry demands that Solutic Partnership agreement may be written of oral. Therefore, Harry and Garry isa valid agreement. 1. The demand of Garry to be paid salary equal to the sal, view of agreement of payment of commission. 2. Sherry will not be admitted as partner because Garry hj a partner. Charge against Profit and Appropriation of Profit Charge against Profit means that itis an expense for the firm and is profit or incurs loss. Interest on Loan by Partner, Rent Payable to a partner and Mana; charge against profit and are payable whether the firm earns profi Appropriation of profit means distribution of net profit and interest on Dr, as Salary/Remuneration, etc. and transfer to reserves. in Sherry be admitted as parte oat ot his share af profs. Garry does not agree to Sherry’ 942 6 sha Ssion .r cannot be admitted unless both the partners agree, the following disputes between Harry and Garry ands salary in liew of commission equal to the TeSOlveqy Salary T for 250 ty, the terms agte 5 objected tg Paid whether the f, Frm ey Ber’s Com, § Commiss, Lor incurs loge loss,” swings PMO Paty Salary(Commission to partners, interest on capitals and transfer of profit io py Se appropriations of profit. It is an expense hence deducted from revenue to Cetermine net profit o loss forthe year. Difference between Charge against Profit and Appropri It means distribution of net among partners under ditfere Partnership Deed. Prot for the it heads aspe, IRis debited to Profit & Loss Account. [tis allowed before Appropriation of Prof. Wis ebheto Polos Rent paid to a partne, interest on loan by partner, etc Salary to partners, interest on capital tase, Profit to General Reserve, ete. | Ui SS Co Mo LENA AUN Sy OTK Wish fala MLCon Ts lalla Interest on Loan by Partner to the Firm If a partner has given loan or advance to the firm, interest will be paid to the partner att | agreed rate as written in the Partnership Deed or as agreed otherwise. In the absence of { agreement, the Indian Partnership Act, 1932 will apply and the lending partner will be pa interest @ 6% p.a. on loan amount. Nature of Interest on Loan by Partner | Interest on loan by partner is a charge against profit. It means that interest will be paid to! { Partner on the loan amount whether the firm earns profit or incurs loss.Chapter 1» Acounting for Partnership Firms—Fundamentals 1.7 Accounting Treatment Interest on loan by partner is credited to his Loan Account. Journal entries passed are: (i) On allowing interest on Loan by Partner: Interest on Loan by Partner Alc Dr. To Loan by Partner Ale (il) On payment of interest: Loan by Partner A/c Dr. To Cash/Bank Alc (il) To cose the interest on Loan by Partner Ae: Profit & Loss Ac Dr To Interest on Loan by Partner A/c Loan Account and Capital Account of a partner are separately maintained in the books of account because: 1. As per the Indian Partnership Act, 1932, loan by a partner is repayable before repayment of capital to partners at the time of dissolution of the firm; and 2. In the absence of an agreement, partners get interest @ 6% p.a. on loan or advance given by him whereas they do not get interest on capital Illustration 3. Akhil and Bharat are partners sharing profits and losses in ratio of 2 : 3 with capitals of % 2,00,000 and & 1,00,000 respectively. On Ist October, 2022, Akhil and Bharat gave loans of % 4,00,000 and % 2,00,000 respectively to the firm. The partners have not agreed to the rate of | interest payable on theloanby partner. Determine the amount of profitor lose forthe year ended 31st March, 2023 in each of the following cases to be distributed between the partners: Case 1. If the Profit before interest for the year is € 25,000. | Case 2, If the Profit before interest for the year is & Case 3. If the Loss before interest for the year is ¥ 25,000. Solution: In the absence of Partnership Deed or Agreement, interest on loan by partner is allowed at the rate given in the Indian Partnership Act, 1932, iv., © 6% paa Case 1. Distributable Profit/Loss = Profit before Interest - Interest on Loan by Partners | = € 25,000 -& 18,000" = & 7,000. “Interest on Loan by Akhil (¥ 4,00,000 x 6/100 x 6/12) Interest on Loan by Bharat (& 2,00,000 x 6/100 x 6/12) } Total Case 2. Distributable Profit/Loss = Profit before Interest — Interest on Loan by Partners = © 15,000 — & 18,000 = & 3,000 (Loss). Case 3. Distributable Profit/Loss = Loss before Interest + Interest on Loan by Partners = % 25,000 + & 18,000 = € 43,000 (Loss).1,8 oviaie Entry BOOK Krappang CAEN sienna pratits and Loss Amt, Bimal anal Charman are partners Sharing PTS & nel losses equally, Ami g : ret Dato, 2H OFF LOWCOD and 7 1,50,000 Ml Ch, agave hears te the firm on 40) Tespectiggg My oc na with by paid on loan. Books of ACCOUNT OF the fj Ne agrand that interest © Te : sal went MT are ale hy Stet March every year tnteeest cn toa is yet 0 Be pal as on JTS March, 2023, “seq a Yass Journal entries in the Jenks of acount of the fim and prepare Loan Accounts of th ™ 2 he py cof Amit, Bimal and Chaman Mtn Solution: bomen om, Date Retcas ee in = Dr. TS Bt 1 BRAC t To tosnty Amt AC : ,e Loan by Chaman AC 009) [oan temparnes Anand heme _______| 1500 = } 7 D ach 31 besten toanty Panes AC Dr. 11250 | To Loanby AmRA'C Fo Laan dy Craman Ac 450 interest on loan by partners provided @ 98.) 695 March 31 | Prof & Loss Or. 1250 ‘To interest on Loan by Partners A/c F reareston Loan by Partners count transferred to Profit & Loss Account) 1.259) oe LOAN BY AMIT ACCOUNT Date | Pericles % [Date | Particulars ; & mms ft 2022 March 31| To Bolancecld 104s00 Joct. 1 | By Bank Ave vita | 2023 i March 31 | By Interest on Loan by i Partners Ae Pe, | 1,04500 Tipe 2023 oS [aprt__1|By Balance bid 1.0450 Oe. LOAN BY CHAMAN ACCOUNT a Date | Particulars [ate | Particulars z (2023 2022 March 31} To Balance c/d 1,56,750 | Oct. 1 | By Bank A/c 150,000 203 * March 31 | By Interest on Loan by Partners A/c 6750, 156,750 156750 2023 3 S31 ‘April 1] By Balance b/d 156750)Chapter §. hecenwnting ton trevnar igs ro A emcees NID Musteation 8. Vijay, Alay and Suresh are partners sharing pective equally, Viksy had gjvers emrs te fers cs Ist September, 2022 of 8 2,00,000) fr wane Agere that interest will ber paid @ 32% pa. leterest was paid by cheque up to February, 2023 cn fat March, 2009 amet balance was paid on 5th April, 2023. Pass the Journal entries for interest om Ioan by pattriet for the year enced Dist Match, 2723 Solution: Date _| Particulars [ol am | @e 2B { March 1] Interest on Loan by Pastner A/c Naa | To Bank Ne on , oe (interest pod for si months up to February. 2025) \ | Pg rd mat March —31| Interest on Loan by Partner Alc aie To Loan by jay Ave | 7: (Interest for March, 2023 provided) j I ay rr | ee March 31 Profit & Loss Alc Oe | 4.006 | To Interest on Loan by Partner Ac | | {Interest on Loan by Vijay transferred to the debit of | j j Profit &Loss Account) iE, Interest on Loan by the Firm to Partner A firm may give loan to a partner. Interest on Loan by the firm to a partner is charged if it is agreed by the partners to charge interest, It is charged at the agreed rate of interest. Thus, ifthe Partnership Deed does not provide for charging interest on loan given or agreement to charge interest does not exist, interest is not changed on the loan given by the firm to a partner. Ifitis agreed to charge interest on loan by the firm to a partner, amount of interest charged is transferred to the credit of Profit & Loss Account and debited to Partner's Capital Account (ln case of Fluctuating Capitals) or Partner's Current Account (In case of Fixed Capitals). The Journal entries are: (0) For Charging interest on Loan to Partner: Partner's Capital/Current A/c To Interest on Loan to Partner A/c (Given? Ail) IFinterest on Loan to Partner is received CashiBank Mic To. Partner's Capital/Current Ave Ali) For Transfer of interest on Loan to Partner Account to Profit & Loss A/c: Interest on Loan to Partner Ave Dr. To Profit & Loss AveYr 4.10 Double Entry Book Keeping—CBSE XI! Mlustration 6. : i prem are partners sharing profits equally. Prom had tal N lo; Dev, Jaspal and ; on Ist ual 3023 of ® 500,000. What Journal entries will be passed jg |" from, rest is not agreed; and ty " {a) Rate of inte be charged is agreed @ 10% p.a.? (b) Rate of interest (0 Solution: : / (a) In the absence of agreement, interest will not be charged on Loan to p, : JOURNAL f Partner, (b) a Date | Particulars 203 Dr, March 31| Prem Capital Alc ‘To Inteeston Loan o Partner A/c (interest charged for three months uP to March, 2023) interest on Loan to Partner AC > To Profit Loss Ne Amireston za to Prem transfered tothe cect of Profit Los Acount) March 31 Mlustration 7. 1 euray and Kabir are partners in a firm, Kabir hadl been given loan by oy | le | Rakesh, ist October, 2022 of © 6,00,000. Interest was agreed to be charged @ 10% p.a. Intere: o by cheque up to February, 2023 by Kabir on 10th March, 2023 and balance was a Was pai) by him. © be pai Pass the Journal entries for interest on loan by partner for the year ended 31st March 20 | Solution: oe Date Particulars LE 2023 March 10) Bank A’c Dr. To Interest on Loan to Partner A/c (iterst paid by Kabir for five months up to February, 2023) March 3t [Rabi Capital AC ~Dr To Interest on Loanto Partner Alc | {Unterest for March 2023 charged) | March 31! Interest on Loan to Partner A/c Dr. To Profit&Loss Alc ‘interest on Loan to Kabir transferred to the credit of Profit & Loss Account) Rent Paid or Payable to a Partner 7 Rent paid or payable toa partner, is a charge against profit. It is a charge against profit because reiél a4 toa partner for letting the firm use his personal property for business. Rent may be paid (either i : a cheque) during the year to the partner or it may have become due but is not yet paid, ie,’ payable. When itis paid or payable, it is debited to Rent Account and credited to Cash/Bank Account or Rent a penal Account, At the end of the year, Rent Account is transferred to the debit of Prot &Chapter 1+ Accounting for Partnership Firrns—Fundamentals 1.11 Journal entries inthis case will be as follows; {When rents pain cath or by cheque: Rent Ave To Cash/Bank Ale (Rent paid in cash/cheque for.) (il). When rent is payable: lent Ale To. Rent Payable A/c (Rent payable for...) Dr, (il) When Rent Account is transferred to Proft& Loss Account: Profit & Loss Alc To Rent Alc (Rent Account transferred to Profit & Loss Account) Dr, Ilusteation 8 (Rent paid and Rent payable, Arun and Raman are partners sharing profits equally. Raman has given his property on rent to the firm on Ist Apri, 2022 at a monthly rent of 85000. The firm paid him rent from April, 2023 to February, 2023 by cheque on Ist March, 2023. Rent for the ‘month of March was yet to be paid. Pass the Journal entries for the above transactions, Solution: JOURNAL Date _| Particulars ur ow) | ce 2023 March 1] Rent Me Dt 55,000 To Bank Alc 55,000 {Cheque issued for rent for the months, ‘April, 2022 to February, 2023) ‘March 31] Rent A/c Dr. 5,000 To Rent Payable A/c 5,000 (Rent payable for the month of ‘March, 2023) March 31) Profit & Loss A/c Dr 60,000 To Rent Nic my (Rent Account transferred to Profit & Loss Account) Manager's Commission Manager is an employee of the firm. Therefore, the amount due to him as commission is Payable whether the firm eams profit or incurs loss, Mana; iger’'s Commission is a charge against Profit and is transferred to the debit of Profit & Loss Account. PE Tule ola a Tea) chy. Gunlsicesls oan ‘& LOSS APPROPRIATION ACCOUNT: A firm prepares Trading Account, Profit & Loss Account and Balance Sheet. In addition, a Partnership firm prepares Profit & Loss Appropriation Account to which net profit or net loss as Per the Profit & Loss Account is transferred. Net Profit or Loss is distributed (ie, appropriated bbetween/among pariners as per the Partnership Deed or agreement,1.12 Double Entry Book seeping —CBSE XT riation Account is ane ion of the Profit & Loss Account. After trang att & Loss Accound) iis further credited with the weg “i dbited with interest on the capitals of the por e Profit & Loss Apprep! Net Profit or Net Loss (from interest on drawings of the part commissions, etc. : «the amount of profit forthe year available for distrinukg {er of net loss and credit of interest charged on q,,.”* Win, ners an partners’ salaries and Profit is appropriated up & 1s, if after trans! ‘Account, the balance is loss, appropriation is not mag, 8 in their profit-sharing ratio. But if it resuatts jn © The Prof Divisible Profit. Thu to Profit & Loss Appropriation distributed among the partners loss is mount of profit. appropriation is made up to the a sriners may decide to transfer amount to reserve (say, General Reserve) out of fh forte i fit, Divisible Profit Pe Prog percentage of Net Profit, Divisible Profit or Net Divisible p,.! ofit for the year. It may be a aoe Die eee lh ‘Amount transferred to reserve 1S: also an appropriation of profit, 1., is debited to Prost & Log Appropriation Account. saa Pofts the prot cored by an enterprise from its opeeting and non-operating activites. Its the nt of operating and non-operating revenues ‘and other incomes and expenses that are charge against prog, determined by preparing Profit & Loss Account. Divisible or Distributable Prof isthe proft that is availble fr distribution among partners ater alloy ‘euneraton (Solr, Comision et) topartnes intrest on capitals transfer to reserve and charging intereten drawings tis determined by preparing Profi & Loss Appropriation Account. ec Iti Calculation of Amount transferred to Reserve Account (a) Amount Calculated as Percentage of Net Profit In case, the question prescribes that amoun, be transferred to reserve as a percentage (say 10%) of net profit, percentage is applied tg net profit transferred {rom Profit & Loss Account o Profit & Loss Appropriation Account For example, Net Profit is€ 1,00,000 and the question prescribes that 10% of Net Profit is to be transferred to General Reserve, 10,000 (10% of € 1,00,000) will be transferred to General Reserve. (&) Amount Calculated as a Percentage of Divisible Profit:In this situation, amount transferred to Reserve is percentage (say 10%) of net profit pls interest on drawings, if any, less amount of appropriation (interest on capital, remuneration, etc.). For example, 10% of Distributable Profit is to be transferred to General Reserve. Amount of net profit is €1,00,000. Salary allowable to partners is € 50,000. Amount transferable to reserve will be 10% of € 50,000 (& 1,00,000 ~ & 50,000), i.., € 5,000. () Amount Calculated as a Percentage of Net Distributable/Divisible Profit: In this situation, amount transferred to reserve is percentage (say 10%) of net profit plus interest on drawings less appropriations including reserve,Chapter - Accounting for Partnership Firms-—Fundamentals 1.13 For example, 10% of Net Distr butable Profit j . a Met profit is € 1,00,000, int Tofit is to be transferred to General Reserve. Nel S*ston drawings is 1,000 and interest on capital is 4,000. Amount transferred to Gener a 10 ‘ ral Reserve will be Tio * 7 56000( % 1,00,000 + 2 19,000-2 44,000) =% 6,000. ‘Prepared for the year and isan extension of Profit & Loss Account. Net Profit lor Net Loss as per Profit & Loss Accounts transferred é fo Profit & Loss Appropriation Account. Following are appropriations of Profit, unless stated to be a charge against profit. They are transferred (posted) to the debit of Profit & Loss Appropriation Account: (0) Salary/Remuneration/Commission to Partners; (i) Interest on Capitals of Partners; and (iii) Transfer to Reserves, Interest charged on Drawingsis transferred (posted) to the credit of Profit & Loss Appropriation Account, Specimen of the Profit & Loss Appropriation Account PROFIT & LOSS APPROPRIATION ACCOUNT De forthe year ended G Particulars % | Particulars z ‘To Profit & Loss Ale ~ [By ProftaLoss Are - (Net Loss* transferred from (Net Profit transferred from Profit &Loss Account) Profit &Loss Account) To Interest on Capital: By Interest on Drawings: Abhay Abhay = Bhaskar . ai Bhaskar =-|73 To Partners Salaries Remuneration By Loss transfered to: To Partners’ Commissions s * Abhay’ Capital Ac - To Reserve = **(or Abhay’s Curent Ae) To Profit* transferred to: *Bhaskar’s Capital Alc =| Ss *Abhay’s Capital Alc = **(or Bhaskars Current A/c) **(or Abhay’s Current Ale) *Bhaskar’s Capital A/c Either of the two will exist, "Under Fluctuating Capital Accounts Method “*Under Fixed Capital Accounts Method ' Remember: Amount payable to a partner (except interest on loan and rent) such as interest on ‘capital (if not specified } to.be Profit & Loss Account 4,80,000_ ‘ [ 1275000} hast De PROFIT & LOSS ACCOUNT forthe year ended 37st March, 2023 a Pariculas & | Particulars & Fo Salary and Wages 780,000 | By Gross Profit—transferred = | ‘To Managers Commission 12250] _ fromTrading Account 480,000 \ 3 (96 of 12,25,000) By Interest on Loan to Ayub | (Ho: Rent 110,000 600 | ‘Add: Outstanding Rent 10,000 | 1,20,000 | | to General xpenses 34400 | i To Interest on Loan by Amit 1,200 | | To Depreciation on: ii To Furniture and Fixtures 10,000 | To Computers 44,000 | to Machinery 30900} 84,000 [net rot ] |. fe Net Profit transferred to Profit & Loss ‘Appropriation Account 48,750 480,600 (aateal PROFIT & LOSS APPROPRIATION ACCOUNT ha forthe year ended 31st March, 2023 & | ear & | Paniculrs z 1 0 i ‘on Capital As: By Profit & Loss A/c (Net Profit) 78750 | as 24900 |) To prota poy i It nsferred to: Distributable | i “yubs Capt Ae = 7" okt i Amit’s Capital A/c 825| 1,650" | i! i 48750 rere ii SS |Chapter 1 Accounting for Partnership Firms—Fundamentals 1.17 BALANCE SHEET os ot 1st March, 2623, ‘lables taste g Capital Acs: [Furniture and Fixtures 50,000 Ayub Less: Depreciation topo | 40000 Add: Interest on Capital Computers 720.000 share of Profit _835| Less: Depreciation 4000 | 1.76000 424825 Machinery 390000 ess: Drawings 60,000 | 364825 | Less: Depreciation 30900 | 2.70000 Amit 5000 Sundry Debtors 2.90000 ‘Add: Interest on Capital 2,100 Loan to Ayub 10.000 Share of Profit 5 Closing tock 00, 408925 Cashat Bank Bay Less: Drawings 30,000 | 3,58,925 | Cash in Hand 15,000 Sundry Creditors 70000 Loan by Amit 20,000 Manager's Commission Payable 12,250 ent Outstanding 10,000 | 836000 836000 Bead , Illustration 10. ‘Tom and Harry entered into partnership on Ist April, 2022 without any Partnership Deed. They introduced capitals of & 5,00,000 and & 3,00,000 respectively. On Ist November, 2022, Tom gave Joan to the firm of € 2,00,000 without an agreement as to interest. Harry took loan of € 1,00,000 on Ist November, 2022 which was also without an agreement as to interest. Profit for the year ended 31st March, 2023 before interest on loans was ® 4,30,000. The partners could not agree on the rate of interest on loan to be allowed or charged and the basis of division of profit. Pass a Journal entry for distribution of the profit between the partners and prepare Capital Accounts of both the partners and Loan Account of Tom. Solution: JOURNAL, Date Particulars th] De | aR 2003 March 31 | Profit & Loss Appropriation Alc 425,000 To Tomis Capita Ale 2.12500 To Harrys Capital Alc 212,500 (Profit distributed between partners equally) (WN 3) or. PARTNERS’ CAPITAL ACCOUNTS ‘ ae Date [Particulars Tom | Hany |Date | Particulars Tom Harry z z z x 2028 2022 March 31 |To Balance c/d 712500) 5,12,500] April 1 | By Bank A/c 590000] 3,00,000, 2023 March 31 | By Profit&Loss Appropriation Alc | 212,500] 2,12,500, (Profit) 7.12500| _5.12,500) I 7,42,500| 512,5001.18 Double Entry Book Keeping—CBSE NII Or, LOAN BY TOM ACCOUNT Date | Particulars a poate | Particulars 1 2033 302 ¢ March 31{ To Balancect 295,000 | Nov. 1] By Bank Arc > 2023 March 31 By Interest on Loan by Xan Tom A/c (WN 1) 205/000 5 Working Notes: : Be 5. 6* 1. Interest on Loan by Tom = % 2,00,000 x T2100 = 75,000 “Interest on Loan is to be paid @ 6% p.2. 2. Interest on foan to Harry will not be charged, in the absence of agreement. Inthe absence of agreement between partners forinterest on loan by partnersand loan to part Indian Partnership Act, 1932 will apply. t prescribes that Interest on Loan by Partners jg par" Prova does not provide for charging of interest on loan to partner. able: Cin 4. Net Proft after Interest on Loan by Tom =% 430,000 ~® 5,000 =8 4,25.000, which is shared g ‘ih ‘ually p e the profit-sharing ratio is not given. E Mastration 11 (Rent Payable to.a Partner and Preparation of Profit & Loss Appropriatio, Mae ‘Aman and Boman are partners sharing profits equally. Business is being cami property owned by Aman ona yearly rent of € 24,000. Aman is to get salary of 1 cae from | Boman is to get commission @ 5% of net sales, which during the year was % 30,09, 0 Past) the year ended 31st March, 2023 before providing for rent was €5,00,000. 1900. Prof, a | Prepare Profit & Loss Appropriation Account for the year ended 31st March, 2023, | Solution: PROFIT & LOSS APPROPRIATION ACCOUNT i | Or. for the year ended 31st March, 2023 | Particulars | Particulars j To Aman’s Capital A/c (Salary) 7,20,000 | By Profit & Loss A/c (Net Profit) q | To Beman's Capital Alc (Commission) 1450000} 5,00,000-% 24,090 (Rent) 476s) To Profit transferred to: ‘Aman’ Capital Mc 103,000 Boman’s Capital A/C 1,93,000 | 2,06,000 476000 = 476000 | Illustration 12 (Profit and Profit & Loss Appropriation Account). | Aseem and Nihar started business on Ist April, 2022 with capitals of ® 3,00,000 and ® 2,009 respectively. According to the Partnership Deed, Nihar is to get salary of € 5,000 per mont ‘Aseem is to get 10% commission on Profit after allowing salary to Nihar and interest is tobe allowed on capitals @ 6% p.a. Profit-sharing ratio between the two partners is 3: 2. Aseem gave loan of 1,00,000 to the firm on 1st April, 2022. Interest on loan was agreed tobe allowed @ 8% p.a. Nihar was given loan of € 2,00,000 on 1st October, 2022 on which interest was charged @ 8% p.a. Manager was to be allowed commission of ¥ 3,000. Profit of the fim before these adjustments was ¥ 2,50,000. Pass Journal entries for distribution of. i iati Ir profit and prepare Profit é& Loss Appropriation Account. The firm closes its books of account on 31st March every year. iChapter 1 Accounting for Partnership Firms—Fundamentals 1.19 Solution: JOURMAL Date | Particulars Tu] Dee | eR) 103 ~ y | March 31 | Profit & Loss A/c aE | zero | To Profi & Loss Appropriation Alc | | | 24nm0 {Transeo ne ft Profit oss pezour (2 i | March 31 Nihar’ Salary Ale “ej | 99000] To Nihar's Capital Ae tt | 60900 [sii uetiaetseopemoay | ‘March 31 | Aseem’s Commission Ale | | 19900 To Aseems Capital Nc Ve | | March 31 | Profit & Loss Appropriation A/c soe] | | To. Nia’ Salary Ac | ome To Aseem’s Commission A/c } | | 19000 (Salary and commision to Partners transferred to Proft & Loss 1 | Appropriation Account) |= March 31 | Interest on Capital Alc =D} | 30000] To Aseem’s Capital A/c | } | 18000 To Nihar’s Capital A/c | | | 12,000 (interest on capitals allowed to partners @ 6% pa) i \ March 31 | Profit & Loss Appropriation lc ~D.| | 30000 To Interest on Capital Ac ek 30,000 (interest on capitals transferred to Profit & Loss Appropriation | i sont | | March 31 | Profit & Loss Appropriation A/c aD | 138,000; To Aseems Capital A/c 1.38000 x 3/5) | 82800 To Nihar’s Capital Ac ( 1,38,000 x 2/5) | 55,200 (Oistrbution of profit among the partners) i PROFIT & LOSS APPROPRIATION ACCOUNT forthe year exded 31st Morch, 2023 G Particulars | Particulars z To Salary—Nihar’s Capital Alc 160,000 | By Profit & Loss Ac Net Profit) 247,000 To Commission—Aseem Capital Alc 19000 To Interest on Capital—Aseem’sCaptal Alc | 18,000 To Interest on Capital Nina’ Capital Alc 12.000 To Profit transferred to: ‘seem’ Capital Ac (3/5) 82800 Nihar’s Capital Arc (2/5) 35,200 |_ 138,000 247,000 247,000 Working Notes: a6 1. Interest on Loan toNihar = €2,00,000%—— x7 =% 8,000 2 2. Net Profit forthe year = €2,47,000 (% 250,000 3,000) (Managers Commission) -% 8,000 {Interest on Loan bby Partner) + % 8,000 (Interest on Loan to Partner).1.20 double Entry Book Keeping—CBSEX! ‘ali 1). ati age Loss Appropriation Accom Mustation 13 (Los and Prt . te et 7022 with capitals of € 5,00,000 each, a, X and ¥ stated business 09 MA ot monty salary of € 10000 each and artnership Deed, both X and are: X— ¥ 3,000 and Y—% 5,000, a loss of € 2,00,000, capitals is % 50,000 each. Interest on Daigo xs During the year ended 31st March, 2023, the 20 uring the year ended Seen hey year. et Pass Journal entries for the above and prepare counts on 3st March every closes its accounts oF AL tt Mteracy he % Solution: LET Dr Date —_| Particulars * ® Lees hea i Dr. 2mm | ‘March 31 | Profit & Loss Appropriation A/C 00,000 To Profit & Loss AC 209, (Transfer of net loss) 1049 March 31 [xs Capital Ale 3,000 Ys Capital Ae 5,000 To Interest on Drawings A/c . {interest charged on Grawings) 3.00) March 31 | Interest on Drawings Alc ~Dr. 8000 To Profit & Loss Appropriation A/c . , {Interest on drawings transferred to Profit & ‘Loss Appropriation A/c) 3,009 ‘March 31] Xs Capital A/c 96,000 Ys Capital Ale 96,000 To Profit &Loss Appropriation A i“ {toss transferred to Partners Capital Accounts) 92.009 PROFIT & LOSS APPROPRIATION ACCOUNT i) Dr for the year ended 31st March, 2023 Particulars 7 _ [Particulars [as "To Profit & Loss Ac Net Loss) 2,00,000 | By Interest on Drawings A/cs: —_ x 3,000 t 5,000 By Loss transferred to: Bao Xs Capital Alc 06,000 ¥'s Capital A/c 96,000 2,00,000 = Note: Salary to partners and interest on capitals are not allowed because the firm has incurred loss, Appropriations as per Partnership Deed or Agreement are more than Available Profit There may be a situation where total amount of appropriation as per the Partnership Deed or Agreement is more than the amount of profit available for appropriation. In this situation, Profit available for distribution among partners is distributed in the ratio of total appropriation as per the Partnership Deed or Agreement to be made to each partner. The ratio of appropriation is determined as follows: (Determine the amount payable as appropriation to each partner as per the Partnership Deed (ignoring the pro avalible or itbution among partners). For example, slg remuneration payable, commission payable and interest on capital, ater s deeaaet Payé capital, etc., payable to eachChapter 1» Accounting for Partnership Firms—Fundamentals 1.21 (ii) Total the amount of appropriation (as per Step (i)) for each partner separately. (ii) Ratio of the Appropriations (as per Step (ii) above) is the ratio in which distributable profit, £e,, net profil plus interest on drawings is appropriated. It should be kept in wind that no particular itent like salary, renumeration, commission, interest on capital, elc, has priority over other items of appropriation. Let us take an example for better understanding, Atul and Amit are partners in a firm. As per the Partnership Deed the partners are to get salary of € 1,00,000 and % 1,20,000 p.a. respectively and interest on capital @ 10% p.a, which is€ 20,000 and % 40,000 respectively. Net profit for the year €2,10,000 will be appropriate in the ratio of 3: 4, calculated as follows: Atul @) Amit @) Salary 1,00,000 120,000 Interest on Capital 20,000 40,000 Total Amount of Appropriation 120,000 160,000 Therefore, the Ratio of Appropriation is %1,20,000: 7 1,60,000 Or oF 4 Thus, % 90,000 (ie, 3/7 of & 2,10,000) and ® 1,20,000 (ie, 4/7 of & 2,10,000) being the total of appropriations for Atul and Amit respectively. Ilustration 14 (Appropriations as per Partnership Deed or Agreement are more than Distributable Profit) Ajay and Vijay are partners sharing profits in the ratio of 3:2. Ajay is a non-working partner and contributes ® 20,00,000 as his capital. Vijay is a working partner of the firm. The Partnership Deed provides for interest on capital @ 8% p.a. and salary to working partner of € 8,000 per month, Profit before providing for interest on capital and partners salary for the year ended 31st March, 2023 was € 80,000. Show the distribution of profit. Solution: PROFIT & LOSS APPROPRIATION ACCOUNT Or forth year ended 31st March, 2023 & Particulars | Particulars z To Ajay’ Capital A/c Interest on capital) 50,000 | By Profit &Loss A (Net Profit) 80,000 To Wiays Capital Ne (Salary) 30000 20,000 80,000 Note: Interest on Ajays Capital = & 20,00,000 x 8/100 = % 1,60,000; Salary to Vijay = % 8,000 x 12 = & 96,000; ‘Thus, Interest on Ajay’s Capital + Salary to Vijay = €1,60,000 + & 96,000 = 2,56,000. Since both interest on capital and salary to partners are appropriations and distributable profit is ® 80,000, ie, less than the amount of appropriations to be made, the distributable profits distributed in the ratio cof appropriations to be made to Ajay and Vijay, ie, 160,000 [interest on capital): % 96,000 (salary), or 5:3,