Meticulous Academy Contact Number –

79799 92932, 79797 62083,

74881 90177

. Accounting for Partnership .

Fundamental
TOPICS COVER .
1. Profit and loss Appropriation Account
2. Calculation of Interest on Capital
3. Interest on Drawings
4. Past Adjustments
According to Section – 4 of Indian Partnership Act, 1932
“Partnership is the relations between two or more persons who have agreed to share profits of a business carried
on by all or any of them acting for all.”

 Partnership Deed__________________________________________________________________________________________________________
▪ Since partnership is the outcome of an agreement it is essential that there must be some terms and conditions
agreed upon by all the partners. Such terms and conditions may be either written or oral. The law does not make
it compulsory to have a written agreement.
▪ However, in order to avoid all misunderstanding and dispute, it is always the best course to have a written
agreement duly signed and registered under the Act.
▪ The partnership deed is a written agreement among the partners which contains the terms of agreement.
It is also called ‘Articles of Partnership’
▪ It generally contains the details about all the aspects affecting the relationship between the partners including
the objective of the business, contribution of capital by each partner, ratio in which the profit and the losses will
be shared by the partners and entitlements of partners to interest on capital, interest on loan etc .

Rules Applicable in the Absence of Partnership Deed__________________________________________________________________

In the absence of partnership deed, the relevant provisions of the Indian Partnership Act, 1932 shall become applicable which
are as follows:
» The partners shall share firm’s profits or losses equally
» If any partner has given some loan to the firm, he is entitled to take interest on such loan @ 6 % p.a.
» No interest is allowed to partners on the capital invested by them.
» No interest will be charged on drawings made by the partners.
» No partner is entitled to get remuneration such as salary, commission etc. from the firm.

Transaction of the Partnership__________________________________________________________________________________________________

▪ Income and Expenses shows in the profit and loss account and assets and Liabilities in the Balance Sheet.
▪ Profit and Loss Appropriation Account is an Account which is prepared to carry out adjustments of Partners’
right and obligations such as salary payable, commission, interest on capital, interest on Drawings and
distribution of profit among the partners.
▪ Profit and Loss Appropriation Account is prepared to show the distribution of profit among partners as per
the provisions of partnership Deed (or a per the provisions of Indian Partnership Act, 1932 in the absence
Partnership Deed). It is an extension of profit and loss account. It is nominal account in nature. It records
entries for interest on capital, interest on Drawings, salary to partners and division of profit among the
Partners.

Difference between Profit and Loss Account and Profit and Loss Appropriation Account .

No. Basis Profit and Loss A/C Profit and Loss Appropriation A/c
Prepared to ascertain net profit or loss Prepared to distribute net profit to the partners.
1 Objectives during the year
2 Preparation Prepared after Trading Account Prepared after Profit and Loss Account.
Income and Expenses charged against profit Shows items of appropriations such as interest on
3 Items is shown. capital, drawings, salary etc.
4 Usage It is prepared by all business concern It is prepared by partnership firms only.

Accounting for Partnership – FUNDAMENTAL 1

 Meticulous Academy Contact Number –
79799 92932, 79797 62083,
74881 90177

1. PROFIT AND LOSS APPROPRIATION ACCOUNT_________________________________________

Format of Profit and Loss Appropriation Account__________________________________________________________________________
Dr. Profit & Loss Appropriation A/c Cr.
Particular Amount Particular Amount
To Profit and Loss A/c (Net Loss) ×××× By Profit and Loss A/c (Net profit) ××××
To Interest on Capital ×××× By Interest on drawings ××××
A ×××× A ××××
B ×××× ×××× B ×××× ××××
To Partner's Salary ×××× By Capital A/c (if loss)
To Partner's Commission ×××× A ××××
To Reserve (transfer) ×××× B ×××× ××××
To Capital A/c - Share of profit
A ××××
B ×××× ××××
×××× ××××

Journal Entries for preparation of Profit and Loss Appropriation Account .

1. Transfer of Profit of Profit and Loss Account . 2. For interest on Capital____________________________

Profit & Loss A/c _______________ Dr. Interest on Capital A/c _____________ Dr.
To Profit & Loss Appropriation A/c To Partners’ capital/Current A/c (individually)
(Being Profit transfer to Profit & Loss App. A/c) (Being interest charged on capital)

Transfer of Loss of Profit and Loss A/c . Transfer to profit & Loss appropriation A/c .

Profit & Loss Appropriation A/c _______ Dr. Profit & Loss Appropriation A/c ___________ Dr.
To Profit & Loss A/c To Interest on Capital A/c
(Being loss transfer to Profit & Loss Appropriation A/c) (Being Interest transfer to Profit & loss Appropriation A/c)
3. For Partners’ Salary/Bonus/Commission etc. . 4. For Interest on Drawings .

Partners’ Salary/Bonus/Commission __________ Dr. Partners’ capital/Current A/c (individually) _______ Dr.
To Partners’ capital/Current A/c (individually) To Interest on Drawings
(Being partners’ Salary etc. transfer to capital A/c) (Being interest on drawings charged on capital)

Transfer to profit & Loss appropriation A/c .

Transfer to profit & Loss appropriation A/c___________
Profit & Loss Appropriation A/c ___________ Dr. Interest on Drawings ______________ Dr.
To Partners’ Salary/Bonus/Commission To Profit & Loss Appropriation A/c
(Being Salary transfer to Profit & loss Appropriation A/c) (Being Interest On drawings transfer to Profit & loss Appropriation A/c)
5. For Transfer to Reserve____________________________ 6. For transfer of partners’ profit after appropriation___________
Profit & Loss Appropriation A/c ___________ Dr. Profit & Loss Appropriation A/c ___________ Dr.
To Reserve A/c To Partners’ Capital/Current A/c (individually)
(Being transfer of reserve to profit & loss Appropriation A/c) (Being transfer of profit to partners’ capital A/c)
• For loss reverse entry is to be made
7. For allowing Interest on Loan________________________ For transferring intt. on loan to Profit & Loss A/c_________________
Interest on Partners’ loan A/c ______________ Dr. Profit & Loss A/c ____________ Dr.
To Partners’ Loan A/c To Interest on Loan A/c
(Being intt. on loan allowed @ _____ % p.a.) (Being interest on loan transferred to P & L A/c)

CAPITAL ACCOUNT
Fluctuating Capital Capital A/c

Capital A/c
Capital A/c
Fixed Capital
Current A/c

Accounting for Partnership – FUNDAMENTAL 2

 Meticulous Academy Contact Number –
79799 92932, 79797 62083,
74881 90177

Difference between Fixed capital Account and Fluctuating Capital Account

No Basis
1 Number of accounts
2 Adjustments
3 Fixed balance
4 Credit balance
Fixed Capital Account
Under this method two separate accounts are
maintained for each partner viz. capital
account and current account
All adjustments for drawings, salary, interest
on capital etc. are made in the current
account and not in capital account.
The capital account balance remains
unchanged unless there is addition to or
withdrawal of capital.
The capital account always shows a credit
balance.
Fluctuating Capital Account
Each partner has one account i.e. capital
account under this method
All adjustments for drawings, salary,
interest on capital etc. are made in the
capital accounts.
The balance of the capital account
fluctuates from year to year.
The capital account may sometime show
a debit balance.

Format of Fluctuating Capital .

Dr. Partners' Capital Account Cr.

Particulars A B Particulars A B
To Drawings A/C ×××× ×××× By Opening balance ×××× ××××
To Interest on drawings ×××× ×××× By Addition to capital ×××× ××××
To Share of loss ×××× ×××× By Interest on capital ×××× ××××
To Withdrawal of capital ×××× ×××× By Salary ×××× ××××
To Closing balance By Commission/Bonus
×××× ×××× ×××× ××××
By Share of profit
××××
×××× ×××× ×××× ××××

Format of Fixed Capital Account .

Dr. Partners' Capital Account Cr.

Particular A B Particular A B
To Cash/Bank A/c ×××× ×××× By Balance b/d ×××× ××××
(if permanent withdrawal of (opening Balance)
capital) By Cash/Bank A/c ×××× ××××
To Balance c/d ×××× ×××× (If capital is contributed initially)
(Closing Balance)

×××× ×××× ×××× ××××

Dr. Partners' Current Account Cr.

Particular A B Particular A B
To Balance b/d (Opening Bal.) ×××× ×××× By Balance b/d ((Opening Bal.) ×××× ××××
To Drawings A/c` ×××× ×××× By Interest on Capital A/c ×××× ××××
To Interest on Drawings A/c ×××× ×××× By Salary A/c ×××× ××××
To Profit & Loss Appropriation ×××× ×××× By Commission/Bonus A/c ×××× ××××
A/c(Share of Loss) By Profit & Loss Appropriation
×××× ××××
To Balance c/d (Closing Bal.) A/c(Share of Profit)
×××× ××××
×××× ×××× ×××× ××××

2. CALCULATION OF INTEREST ON CAPITAL_____________________________________________

If there is addition and withdrawal, following points will be born in mind while calculating the interest on capital
1. On the opening balances of capital accounts of partners, interest is calculating for the whole year,
2. On the additional capital brought in by any partner during the year, interest is calculated from the date of
introduction of capital to the last day of the financial year.

Accounting for Partnership – FUNDAMENTAL 3

 Meticulous Academy Contact Number –
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74881 90177

3. On the amount of capital withdrawn (other than usual drawings) during the year interest for the period from
the date of withdrawal to the last day of the financial year is calculated and deducted from the total of the
interest calculated under point 1 and 2 above.
4. No interest is allowed on the balance of partners’ current account.

Alternatively, it can be calculated with respect to the amount remained invested for the relevant periods .

On the opening balance Interest is calculated for the whole year

On additional capital
On the capital withdrawn
Interest is calculated from the date of introduction of additional capital to the last
Add
day of the financial year
Interest for the period from the date of withdrawal to the last day of the financial year
Less
is calculated.

Charging of interest on capital .

A. As an appropriation of profit .

Where there is loss
In case of sufficient profit
In case of insufficient
profit
Interest on capital is not allowed because it is an appropriation and will be paid only when there is
some profit.
Interest on capital is allowed in full. All partners are entitled for interest on capital at an agreed
rate or rate of interest on capital already mentioned in the partnership deed.
Interest on capital is allowed only to the extent to the profit in the ratio of capital of each partner. In
this case partners do not get full amount of interest.

B. As a charge against Profit. – interest on capital allowed in full irrespective of amount of profit or loss
Interest on capital is always calculated on the opening capital. If opening capital is not given, it should be
ascertained as follows –
Particulars Amount
Capital at the end xxxx
Add : Drawings xxxx
Interest on Drawings xxxx
Losses during the year xxxx xxxx

Less : Additional Capital Introduced xxxx

Profit during the year xxxx (xxxx)
Opening Capital xxxx

3. INTEREST ON DRAWINGS______________________________________________________________
✓ Interest on drawings is to be charged from the partners, if the same has been specifically provided in the
partnership deed.
✓ Interest on drawings is to be calculated with reference to the time period for which the money was withdrawn.
✓ In the absence of any particular date of withdrawal, it is assumed that withdrawal is made evenly throughout
the year. Hence, interest is charged for the average of the period of the year i.e. for six months.

 There are following conditions for interest on Drawings_________________________________________________________________

A. When date of Drawings is given in % p.a.
1. When date of Drawings is not given – Interest is calculated for a period of 6 months
𝑹𝒂𝒕𝒆 𝟔
Interest on Drawings = 𝑻𝒐𝒕𝒂𝒍 𝑫𝒓𝒂𝒘𝒊𝒏𝒈𝒔 × ×
𝟏𝟎𝟎 𝟏𝟐

2. When date of Drawings is given

𝑹𝒂𝒕𝒆 𝑻𝒊𝒎𝒆 𝑳𝒆𝒇𝒕 𝒂𝒇𝒕𝒆𝒓 𝒅𝒓𝒂𝒘𝒊𝒏𝒈𝒔
Interest on Drawings = 𝑻𝒐𝒕𝒂𝒍 𝑫𝒓𝒂𝒘𝒊𝒏𝒈𝒔 × 𝟏𝟎𝟎
× 𝟏𝟐

B. When different amount is withdrawn on different date

We have the following two methods to calculate the amount of interest on drawings –

Accounting for Partnership – FUNDAMENTAL 4

 Meticulous Academy Contact Number –
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74881 90177

1. Simple Interest Method – In this method, interest on drawing is calculated for each amount of drawing
individually on the basis of periods for which drawing is made.
2. Product Method – In this method, the amount of drawings is multiplied by the product for which is remained
withdrawn during the period. There are following steps involved in this method
a. Calculate the period of each drawings from the date of drawings to the closing date of accounting year.
b. Then each amount of drawings is multiplied by this period
c. Then added the total of step b above and calculate the interest at the given rate

Interest on drawing can be calculated using either Product Method or Direct Method
Direct method is used only if all the following three conditions are satisfied –
1. Amount should be same throughout the period
2. Date of drawings should be same throughout the period
3. Drawings should be made throughout the period regularly without any gap.

C. When an equal amount is withdrawn regularly

𝑹𝒂𝒕𝒆 𝑻𝒊𝒎𝒆 (𝒊𝒏 𝒎𝒐𝒏𝒕𝒉𝒔) 𝒇𝒐𝒓 𝒘𝒉𝒊𝒄𝒉 𝒊𝒏𝒕𝒆𝒓𝒔𝒕 𝒊𝒔 𝒕𝒐 𝒃𝒆 𝒄𝒉𝒂𝒓𝒈𝒆𝒅
Interest on Drawings = 𝑻𝒐𝒕𝒂𝒍 𝑫𝒓𝒂𝒘𝒊𝒏𝒈𝒔 × ×
𝟏𝟎𝟎 𝟏𝟐

1. Fixed amount is withdrawn every month .

a) If amount is withdrawn during the month (implicitly assumed to be in the middle of the moth), interest is
calculated for six months ;
Interest on Drawing = Total Drawing × Rate % × 6/12

b) If withdrawal is made in the beginning of the month, interest is calculated for 6 ½ months (six and half
months), or is can be calculated as Average period = (Total period in months + 1)÷2
Interest on Drawing = Total Drawing × Rate % × 6.5/12

c) If withdrawal is made at the end of the month, interest is calculated for 5 ½ months (five and half months),
or is can be calculated as Average period = (Total period in months – 1) ÷2
Interest on Drawing = Total Drawing × Rate % × 5.5/12

2. If amount is withdrawn at each quarter .

a) If withdrawal is made in the beginning of each quarter, interest is calculated for 7 ½ months (seven and
half months), or is can be calculated as Average period = (Total period in months + 3)÷2
Interest on Drawing = Total Drawing × Rate % × 7.5/12

b) If withdrawal is made in the end of each quarter, interest is calculated for 4 ½ months (four and half
months), or is can be calculated as Average period = (Total period in months – 3)÷2
Interest on Drawing = Total Drawing × Rate % × 4.5/12

c) If withdrawal is made in the middle of each quarter

Interest on Drawing = Total Drawing × Rate % × 6/12

Calculation of time (in moths) for which interest is to be charged_______________________________________________________

Monthly drawings for Quarterly drawings for Half yearly drawings for Monthly drawings for
Conditions 12 months 9 months 12 months 9 months 12 months 9 months 6 months
When drawings are made
in the Beginning of each 6.5 5 7.5 6 9 7.5 3.5
period
When drawings are made
at the middle of each 6 4.5 6 4.5 6 4.5 3
period
When drawings is made
at the end of each period 5.5 4 4.5 3 3 1.5 2.5

Accounting for Partnership – FUNDAMENTAL 5

 Meticulous Academy Contact Number –
79799 92932, 79797 62083,
74881 90177

3. Commission to Partners .

Partners would be entitled to get commission only when partnership deed provides for it. Commission payable
to a partner may be calculated in either of two ways –
1. Commission on net profit before charging such commission
𝑹𝒂𝒕𝒆 𝒐𝒇 𝑪𝒐𝒎𝒎𝒊𝒔𝒔𝒊𝒐𝒏
Commission = 𝑵𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 𝒃𝒆𝒇𝒐𝒓𝒆 𝒔𝒖𝒄𝒉 𝒄𝒐𝒎𝒎𝒊𝒔𝒔𝒊𝒐𝒏 × 𝟏𝟎𝟎

2. Commission on net profit after charging such commission

𝑹𝒂𝒕𝒆 𝒐𝒇 𝑪𝒐𝒎𝒎𝒊𝒔𝒔𝒊𝒐𝒏
Commission = 𝑵𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 𝒃𝒆𝒇𝒐𝒓𝒆 𝒔𝒖𝒄𝒉 𝒄𝒐𝒎𝒎𝒊𝒔𝒔𝒊𝒐𝒏 × 𝟏𝟎𝟎 + 𝑹𝒂𝒕𝒆 𝒐𝒇 𝑪𝒐𝒎𝒎𝒊𝒔𝒔𝒊𝒐𝒏

4. PAST ADJUSTMENTS___________________________________________________________________
✓ Sometime a few adjustments or errors in the recordings of transection or the preparation of summary
statements are found after the final accounts have been prepared and the profits distributed among the
partners.
✓ The omission may be in respect of interest on capital, interest on drawings, interest on partners’ loan, partners’
salary, partners’ commission or outstanding expenses. There may also be some changes in the provision of
partnership deed or system of accounting having impact with retrospective effect.
✓ The adjustments can also be made directly in the partners’ Capital Account without preparing a Profit and
Loss Appropriation Account. In such a situation, we shall prepare a statement to find out the net effect of
omission and commission and then to debit the capital account of the partner who had been credited in excess
and credit the capital account of the partner who had been debited in excess.
Pass necessary adjustment or rectifying entry .

Partners’ capital (individually) A/c ______________ Dr. (who received more)

To Partners’ Capital (individually) A/c (who received less)
(Being adjustment entry made)

Statement showing adjustments in Capital Account .

Particulars A B
1) What amount partner should get xxxx xxxx
(Salary + Interest + Commission + Profit etc.)

2) Less : Amount already received (wrong Profit) (xxxx) (xxxx)

xxxx xxxx

5. CHANGE IN PROFIT SHARING RATIO___________________________________________________

 Any change in relation of partner will result in reconstruction of partnership firm. Existing agreement comes to
end and new agreement takes place. The firm is said to be reconstructing when :
1) Change in profit sharing ratio
2) Admission of new partner
3) Death of a partner
4) Amalgamation of two or more partnership firm
 Change in profit sharing ratio________________________________________________________________________________________________
When there is change in profit sharing ratio of existing partners without admission or retirement of old partner.
This change is mostly made when there is change in capitals of the partner. As a result of this change in the profit-
sharing ratio, one or more partner may get extra share of profit whereas other may loss. Gaining partner
compensate the losing or sacrificing partner.
Gaining partner – whose profit ratio has increased
Sacrificing or Losing partner – whose sharing ratio has decreased
▪ Sacrificing Ratio – the ratio in which the old partner agrees to sacrifice their share of profit in favour of the
incoming partner is called sacrificing ratio.
▪ Sometime, the partner of a firm decides to change their existing profit-sharing ratio without any admission or
retirement of a partner. This result in a gain additional share in future profits of the firm for some partners
while a loss of a part thereof for other partners.

Accounting for Partnership – FUNDAMENTAL 6

 Meticulous Academy Contact Number –
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Sacrificing Ratio = old Share of profit – New share of Profit

▪ Gaining Ratio – Whenever as a result in change in profit sharing ratio, one or more partner get some portion
of other partners’ share of profit, is called gaining ratio.
Gaining Ratio = New Share of profit – Old share of Profit
In short – Take the result of new ratio minus old ratio. If the result is negative it is sacrificing and positive it is gain.
 Revaluation of Assets and Reassessment of Labilities___________________________________________________________________
» At the time of change in profit sharing ratio, Admission of partner, retirement or death of partner, Assets and
liabilities of a firm be revalued because actual realizable value of assets and liabilities may be different from
their book values.
» Revaluation of assets and liabilities is completed with the help of “revaluation account”. This account is also
known as “Profit and loss Adjustment Account”.
» Increase in the value of an Asset and Decrease in the value of Liability results in Profit (credited to this A/c)
» Decrease in the value of an Asset and Increase in the value of Liability results in Loss (Debited to this A/c)
» All Losses due to revaluation are shown in debit side of this account and all gains due to revaluation are
shown in credit side of this account
Following journal entries are recorded on revaluation of assets and re-assessment of Liabilities
1) For increase in the value of Assets 5) When unrecorded Assets are recorded
. .

Assets A/c _____________ Dr. Assets A/c __________ Dr.

To Revaluation A/c To Revaluation A/c
2) For decrease in the value of Assets 6) When unrecorded Liabilities are recorded
. .

Revaluation A/c _________________ Dr. Revaluation A/c _____________ Dr.

To Assets A/c To Liabilities A/c
3) For increase in the value of Liabilities 7) When profit on revaluation transferred to old Partners
. .

Revaluation A/c ________ Dr. Revaluation A/c ________________ Dr.

To Liabilities A/c To old Partners’ Capital A/c
4) For decrease in the value of Liabilities 8) When loss on revaluation transferred to old Partners
. .

Liabilities A/c _____________ Dr. Old Partners’ Capital A/c ___________ Dr.
To Revaluation A/c To Revaluation A/c

Performa of Revaluation Account_______________________________________________________________________________________________

Revaluation Account
Particulars Amount Particulars Amount
To Assets A/c (Decrease in value) xxxx By Assets A/c (increase in value) xxxx
To liabilities (increase in value) xxxx By liabilities (decrease in value) xxxx
To unrecorded liabilities xxxx By unrecorded Assets xxxx
To Profit xxxx To Loss xxxx
(transferred to old partners’ capital a/c) (transferred to old partners’ capital
a/c)
xxxx xxxx

 Adjustment of Goodwill_______________________________________________________________________ ________________________________

A change in profit sharing ratio basically implies that some partners will gain in future while other will lose.
Therefore, the gaining partner must compensate the sacrificing partner by paying the proportionate amount of
Goodwill in their sacrificing ratio. It means the amount of Goodwill so paid be equal to the share gained by him.
Accounting treatment
✓ Calculate sacrificing / gaining share of partner
✓ Calculate gaining partner share of goodwill i.e. share gained x Goodwill
✓ Then pass following journal entry to make adjustment for goodwill
Gaining Partners’ Capital A/c ___________________ Dr.
To Sacrificing Partners’ capital A/c
(Being adjustment for goodwill is made due to change in ratio)

END

Accounting for Partnership – FUNDAMENTAL 7