SAI KRIPA

Fundamental of Partnership Firm

By: - CA RAKESH KALRA

Topics to be covered
 Meaning and term in partnership.
 Calculation of interest on drawing.
 Calculation of interest on capital.
 Preparation of profit and loss appropriation account.
 Preparation of capital account.
 Computation of capital ratio.
 Past adjustments.
 Guarantee to a partner

Topic – 1
Meaning and Terms

Meaning of partnership firm

According to section.4 of the Indian partnership Act,1932, “partnership is the relation between 2 or
more person who have agreed to share the profit of the business carried on by or any of them acting
for all”.

PARTNER DEED AND CONTAINED OF DEED

The document, containing the agreement in writing amongst partners is called partnership deed.
Partnership deed contained the following particular:-
✓ Description of the partner and firm.
✓ Principal palace of business.
✓ Nature of the business.
✓ Commencement of partnership.
✓ Capital contribution.
✓ Interest on capital and interest on drawing.
✓ Profit sharing ratio.
✓ Interest on loan.

PROVISITION IN LIEU OF PARTNERSHIP DEED

In lieu of partnership deed following provisions are following:
✓ No salaries given to any partner.
✓ No interest on capital is allowed.
✓ No interest on drawing is charge.
✓ Interest on loan is allowed at 6% P.A.
✓ Profit sharing equally.

Topic – 2
Calculation of Interest on Drawing
A partner can for his own personal use withdrawn a cash from the partnership firm and same is term
is drawing of a partner and every partner has to pay interest on their drawing to the partnership
firm.
Interest on drawing is expenses of a partner and income of a firm. A partner can withdraw cash in
any pattern as per their need such as they can withdraw monthly, quarterly, half or annually year in
such case we have to charge interest on the basis of amount retain by the partner.

1
 DRAWING BY THE PARTNER

MONTHLY QUARTERLY HALF YEARLY

Beginning Middle End Beginning Middle End Beginning Middle End

6.5 6 5.5 7.5 6 4.5 9 6 3

INTEREST ON DRAWING = DRAWING x RATE x MONTH

Example – 1
A PARTNER MAKES A DRAWING OF Rs 1000 under the partnership deed interest to be charge at 15%
P.A What is the interest that should be charge to the partner if drawing is made:

a. In the beginning of the every month.

b. In the middle of the every month.
c. At the end of the month.
d. In the beginning of the every quarter.
e. In the middle of the every quarter.
f. At the end of the quarter.
g. In the beginning of the every half year.
h. In the middle of the every half year.
i. At the of half year.

Solution

2
PRODUCT METHOD

3
Sometime partner withdrawn cash in uneven partner i.e. some time he withdrawn cash in the
beginning month, then middle of month and then some time no cash withdrawn in such case we
have to use PRODUCT METHOD.

Format of Product method

DATE DRAWING MONTHSS UTILIES PRODUCT

Interest on Drawing = Total Product x Rate x 1

12

Example – 2
Mr A and B are partner sharing profit and loss in the ratio of 3:2 respectively. As per their
partnership deed interest on drawing is charge @ 12% P.A, Mr A withdrawn Rs. 500 in the end of
each month however B withdrawn as following:
DATES AMOUNT
1.1.2009 1000
31.3.2009 2000
30.6.2009 1500
30.9.2009 1000
30.11.2009 500
31.12.2009 1500

Solution

Interest on drawing of Mr A =

Product Method for Mr B

Dates Drawing Month Utilize Product

Interest on Drawing of Mr B =

4
Topic – 3
Calculation of Interest on Capital
As per accounting entity concepts,a partner and a partnership firm are different, so as amount
invested by partner in the firm is treated as amount leading by partner in the firm and firm has to
pay interest on the amount invested by the partner and same become expanses of the firm and
income of the partner.

Interest on capital= Capital x rate + interest on additional capital.

Example – 3
A and B stated business on 1.1.2009 with capital of Rs 80,000 and Rs 20,000 respectively. During the
year A introduce Rs 20,000 as additional capital on 1.7.2009 and B introduced Rs 30,000 as
additional capital on 1.10.2009 interest on capital is to be allowed at 10% P.A. calculate the interest
on capital payable to A and B for the year ended 31.12.2009.

Solution

5
Topic – 4
Preparation of Profit and loss appropriation Account
Profit & loss appropriation account is prepared to calculated devisable profit of the partners and it is
prepared on the basis of partnership firm only. It includes NET PROFIT AND NET LOSS incurred from
profit and loss account and it include all the expenses and income of partnership firm related to its
partner such as Salary to partner, Commission to partner, Interest on capital, Interest on Drawing,
Interest on loan, etc.
Format of Profit and loss appropriation Account
PROFIT AND LOSS APPROPRIATION ACCOUNT
Particulars Amount Particulars Amount

To interest on capital By Net profit

A xxx By interest on drawing
B xxx XXXX A xxx
To salaries B xxx XXXX
A xxx
B xxx XXXX
To commission
A xxx
B xxx XXXX

To profit distributed
A xxx XXXX
B xxx

XXXX

XXXXXX XXXXXX

Example – 4
Ram and Mohan are partners in a firm sharing profit and losses in the ratio of 7:3 according to the
partnership deed, ram was to be paid salaries of Rs 5000 per month and Mohan was to get a bonus
of Rs 40,000 P.A interest on capital was to be allowed @10% P.A interest on drawing was to be
charge @8% P.A. interest on ram drawing was Rs 3000 and on Mohan’s drawing Rs 2000, ram is
entitled to a commission of 20% on profit after charging all expanses including such commission
their capital were Rs400,000 and Rs 150,000 respectively the firm earned as profit of Rs 250,000for
the year ended 31.4.2004. Prepare profit and loss appropriation account.

Solution
PROFIT AND LOSS APPROPRIATION ACCOUNT
Particulars Amount Particulars Amount

6
Working Note
Note – 1
Calculation of Interest on Capital

Note – 2
Calculation of Ram’s Commission

Topic – 5
PREPARATION OF CAPITAL ACCOUNT
Partner capital account is prepared to calculate closing capital of the partner. It should be noted that
IF ANY AMOUNT IS GIVEN TO PARTNER THEN HIS CAPITAL IS INCREASED AND AMOUNT IS TAKEN

7
FROM PARTNER THEN HIS CAPITAL IS DECREAED. Partner capital account can be prepared by two
methods:-

Method of partner account

1. Fixed capital.
2. Fluctuating capital account.

Fixed capital method

Under fixed capital account method two set of account are prepared first is partner capital account
with opening and closing balance of capital and all their transaction like interest on capital, interest
on drawing, drawing, salaries to partner, interest on loan, profit etc. it transferred to partner current
account.
CAPITAL ACCOUNT
Particulars Amount Particulars Amount
To bank balance (permanent Xxx By balance b/d Xxx
withdrawal)
By bank (permanent addition) Xxx
To balance c/d Xxx

CURRENT ACCOUNT
Particulars Amount Particulars Amount
To drawing Xxx By balance b/d Xxx
To interest on drawing Xxx By interest on capital Xxx
By salaries Xxx
By profit Xxx
By commission Xxx
By balance c/d Xxx By interest on loan Xxx

Xxx Xxx

Fluctuating capital account method

Under fluctuating capital account method only one account is prepared known as partner capital
account and all the transaction will be transferred to such account.

CAPITAL ACCOUNT
Particulars Amount Particulars Amount
To drawing Xxx By balance b/d Xxx
To interest on drawing Xxx By interest on capital Xxx
By salaries Xxx
By profit Xxx
To balance c/d Xxxx By commission Xxx
By interest on loan Xxx
Xxx Xxx

8
Example – 5
Shyam and Mohan are partner in a firm sharing profit and loss in the ratio is 3:2. According to
partnership deed Shyam was to be paid salaries were Rs10,000 per month and Mohan were get a
commission of 10% on gross turnover of the firm. Interest on capital were allowed 10% P.A and
interest on drawing was to be charges were 8% p.a. Interest on Shyam’s drawing were Rs 3000 and
Mohan drawing were Rs 2000, Shyam is entitled to a commission of 10% on profit after charging all
expanses including such commission. Their capital was Rs 500,000 and Rs 250,000 respectively. The
firm earned a profit Rs 350,000 on 31.3.2004. Firm annual turnover is Rs 500,000.
Prepare profit and loss appropriation account and partner capital account.

Solution

PROFIT AND LOSS APPROPRIATION ACCOUNT

Particulars Amount Particulars Amount

CAPITAL ACCOUNT
Particulars Shyam Mohan Particulars Shyam Mohan

9
Working Note
Note – 1
Mohan Commission

Note – 2
Shyam’s Commission

Example – 6
A and B are partner in the firm sharing profit in the ratio 3:2. According to the partnership deed, A
and B will get salaries of Rs 20,000 each. A advance a loan of Rs 200,000 to firm on which he is
untilled to get interest 6% p.a. interest capital was to be allowed @ 8% p.a. drawing of A and B are
Rs 50,000 and Rs 40,000 respectively. Partner to decided transfer 10% of divisible profit in general
reserve. Their fixed capitals were Rs 400,000 and Rs 200,000 respectively and their current account
shown a balance of Rs 10,000 and Rs 15,000 respectively. The firm earn a profit Rs 400,000 for the
year ended 31.3.2004.
Prepared profit and loss appropriation account and partner capital account as per fixed capital
account

Solution
PROFIT AND LOSS APPROPRIATION ACCOUNT
Particulars Amount Particulars Amount

10
 CAPITAL ACCOUNT
Particulars A B Particulars A B

Current ACCOUNT
Particulars A B Particulars A B

Working Note
Note – 1
A’s Interest on Loan

11
Topic – 6
COMPUTATION OF CAPITAL RATIO
sometime partner decided to share profit and loss on the basis of the capital contributed by them in
the firm, however during the year partners may introduce a further capital of withdraw cash from
capital so in such case we use weightage method to compute capital ratio of partner such as :-

DATE AMOUNT OF CAPITAL MONTH AVAILABLE PRODUCT

Xxx Xxx Xxx Xxx

Xxx Xxx Xxx Xxx
Xxx Xxx Xxx Xxx
Xxx Xxx Xxx Xxx

Example – 7
A and B are partner in a firm. They decided to share profit and loss on the basis of the capital i.e.
capital ratio at the end. Both partner started business on the 1.1.2009 with the capital Rs 400,000
and 300,000 respectively. During the year they have withdrawn and introduced following amount
such as:-
A B
Date Introduced Withdraw Introduced Withdraw
1.2.2009 20000 - 50000 -
31.3.2009 - 10000 - -
30.4.2009 50000 - - 30000
30.6.2009 20000 - - -
31.8.2009 - - - 10000
31.10.2009 - 20000 20000 -
31.11.2009 10000 - - -

Solution
For A:
Dates Amount of capital Month available Product

For B:

12
 Dates Amount of capital Month available Product

Capital ratio of partner:

Topic – 7
PAST ADJUSTMENTS
Some times after closing of the account and after preparation of profit and loss appropriation
account and the capital account partner fond out some mistake for which they cannot reopen the
account so an adjustment entry with capital are passed to rectify problems.

Mistake may be of different types such as:

a. Interest on capital can be omitted.
b. Interest on drawing can be omitted.
c. Interest on capital can be wrongly charge.
d. Profit and loss wrongly distribute.
e. Goodwill is wrongly distributed.

To rectify the above mistake we have to consider effect of mistake first on capital and then from
partnership firm, example if partner salaries are not given then to rectify the mistake we have to
increase their capital and decreases firm profit.

Example – 8
A and B are partner sharing profit and loss in the ratio of 3:2 respectively. Their capitals are Rs
500,000 and Rs 300,000. At the end of the year it was found that interest on capital amount to 10%
are omitted from account and partner decided to pass rectify entry the mistake.

Solution

13
Working note
Note - 1
Calculation of Interest on capital

Note 2
Statement of rectification

Partner Dr Cr Dr Cr

Example – 9
A and B are partner sharing profit and loss in the ratio 3:2. There are drawing Rs 20,000 and 50,000
respectively. At the end of the year it was found that interest on drawing amount of 20% are
omitted from account of the partner decided to pass rectify entry.

Solution

Working note
Note - 1
Interest on drawing

14
Note - 2
Statement of rectification
Partner Dr Cr Dr Cr

Example – 10
A and B are partner sharing profit and loss in the ratio of 3:2. Their capitals are Rs 400,000 and
300,000. Drawings are Rs 50,000 and 30,000. At end of the year it was found that interest on
drawing amounted to 10% and interest on capital 10% are omitted from account and partner
decided to pass rectify entry.

Solution

Working note
Note – 1
Calculation of Interest on drawing and capital
Partner Interest on capital Interest on drawing Balance due partner

Note - 2
Statement of rectification
Partner Dr Cr Dr Cr

15
Example – 11
A and B are partner profit and loss sharing are ratio 3:2. Their capitals are Rs 400,000 and Rs
300,000. It found that interest on capital allowed to them @ 10% instead 15% p.a. and partner
decided to pass rectify entry.

Solution

Working note
Note - 1
Interest on capital calculation

Partner Interest Interest Balance due to partner

@ 15% @ 10%

Note - 2
Statement of rectification
Partner Dr Cr Dr Cr

16
Example – 12
A and B are partner sharing profit and loss in the ratio 3:2. Their capitals are Rs 500,000 and Rs
300,000. It was found that interest on capital allowed to them 10% instead 8%. Partner decided to
find rectify entry.

Solution

Working note
Note - 1
Interest on capital calculation

Partner Interest Interest Balance due From

@ 10% @ 8% partner

Note - 2
Statement of rectification
Partner Dr Cr Dr Cr

Example – 13
A and B are partner sharing profit and loss in the ratio of 3:2. It was decided to share to profit and
loss equally. Profit of the year amounted to Rs 50,000 partner decided to pass a rectify entry.

Solution

17
In such take back the profit from partner in the ratio in which it is already given i.e. debit capital in
3:2 and give partner profit new ratio i.e. credit capital is1;1 ratio.

Note - 1
Statement of rectification
Partner Dr Cr Dr Cr

Example – 14
A and B are partner sharing profit and loss in the ratio 2:3. It was decided by partner it share profit
and loss equally retrospectively effect from last four year. Profit of the last four year Rs50,000 Rs
40,000, Rs 35,000(loss) Rs 45,000. Partner decided to pass rectify entry.

Solution
In such case add profit of all four year and then take back the profit from partner in the ratio in
which already given i.e. debit capital 2:3 and give partner profit in ratio is 1:1.

Working Notes
Note – 1
Calculation of Total profit of Four years

Note - 2
Statement of rectification
Partner Dr Cr Dr Cr

18
Example – 15
A and B are partner sharing profit loss in the ratio 1:1. It was decided by the partner to share profit
and loss in the 4:1. Goodwill of the firm Rs 100,000, Partner decided to pass rectify entry.

Solution
In such case take back the goodwill from partner in the ratio in which it already given i.e. capital will
be debited in the ration of 1:1 and give partner goodwill in the new ratio 4:1.

Note - 1
Statement of rectification
Partner Dr Cr Dr Cr

Example – 16
Ram and mohan are partner sharing profit and loss in the ratio of 3:2 respectively. Their capitals are
Rs 100,000 and 80,000 respectively. On 31st march 2012 they decided to make following adjustment
without showing their effect in books of accounts such as: -
 Profit of the year ended 31st march 2012 is Rs 100,000 and is now to be distributed in the
ratio of 1:1 respectively.
 Interest on capital is allowed @ 10%
 Ram is entitled to a monthly salary of Rs 1200
 Interest on drawing is Rs 3000 and Rs 2000 respectively.
 Mohan is entitled to a 5% commission on turnover of Rs 200,000.

19
Solution

Note - 1
PROFIT AND LOSS APPROPRIATION ACCOUNT
Particulars Amount Particulars Amount

Note - 2
Statement of rectification
Partner Dr Cr Dr Cr

20
Topic – 8
GUARANTEE TO A PARTNER
Some time a partner is guaranteed by other partner for minimum share of Profit however if any
amount of deficiency arises than such deficiency has to be bear by other partners in their profit
sharing ratio.

Example – 17
Raja, Ram and Mohan are partner in a firm sharing profit and loss in the ratio is 3:2:1 respectively.
According to partnership deed Raja was to be paid salaries were Rs10,000 per month and Mohan
were get a commission of 10% on gross turnover of the firm. Interest on capital were allowed 10%
P.A and interest on drawing was to be charges were 8% p.a. Interest on Raja’s drawing were Rs
3000, Ram’s drawing were Rs 5000 and Mohan drawing were Rs 2000, Raja is entitled to a
commission of 10% on profit after charging all expanses including such commission. Their capital
was Rs 500,000, Rs 300,000 and Rs 250,000 respectively. Mohan is guaranteed by other partners
that his share of profit in any year shall not be less than Rs 15000. The firm earned a profit Rs
350,000 on 31.3.2004. Firm annual turnover is Rs 500,000.
Prepare profit and loss appropriation account and partner capital account.

21