HAPPY LEARNING ACADEMY

CLASS:- 12th SUBJECT:Accountancy

CHAPTER 01 :- FUNDAMENTALS OF PARTNERSHIP FIRM

Partnership Deed/Articles of Partnership:

❖ Written Agreement
❖ Terms & conditions (Agreed by all partners)
❖ To avoid misunderstanding & disputes
❖ Not compulsory under law (Voluntary in nature)

Rules applicable in the absence of Partnership Deed/ If the Partnership agreement is done but it is
silent about the following items:

Profit Sharing Ratio
Interest on Capital
Interest on Drawing
Salary/Commission
Interest on Partners loan
: Equally( Use if there is Two Partners- /Three Partners-
: Not allowed
: Not charged
: Not Entitled
: Allowed @6% p.a.

Dr. PROFIT AND LOSS ACCOUNT for the Cr.

year ended……………..
Particulars Amount Particulars Amount
To Loss for the year/loss before By Profit for the year/Profit before
interest* Xxx interest* Xxx
To Interest on Partners loan
A xxx
B xxx Xxx
To Rent : Partners Name Xxx
To Manager’s Commission Xxx
To Net Profit transferred to Profit and
Loss Appropriation A/c xxx
xxx Xxx
*If item relating to “Interest on Loan” is present.

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Dr. PROFIT AND LOSS APPROPRIATION ACCOUNT Cr. for the year
ended……………
Particulars Amount Particulars Amount
To Salary/commission/Bonus: By Profit and loss A/c (Profit transferred xxx
To Interest on capital: By Interest on drawings
xxx By Loss transferred to:
To Reserve/General Reserve A/c A’s Capital A/c/Current A/c** xxx
To Provision for Donation A/c B’s Capital A/c/Current A/c** xxx

To Profit transferred to:

A’s Capital A/c/Current A/c** xxx
B’s Capital A/c/Current A/c** xxx xxx
Xxx Xxx

**If Partners capital is Fixed.

Important Note:-
1 Profit and loss appropriation A/c is a nominal account in which we records transaction related to
Partners i.e. any sum due to partners and any sum due from partners.
2 Charge against profit indicates expenses to be deducted from profits while calculating profit and
loss. It is debited to P & L A/c. It is necessary to make charges against profits even if there is loss.
3 If Interest on capital is given as charged against profit it should be recorded in Profit and Loss A/c.
4 Commission of Manager is written in Profit And Loss A/c whereas commission of Partners is
recorded in Profit and Loss Appropriation A/c.
Manager’s Commission is calculated as follows:
(a) On profits before charging such commission:

(b) On profits after charging such

commission:

In the absence of any information, manager’s commission will be calculated on profit before any
adjustment is made according to partnership deed.
5 Rent (for using property) and Interest on Partners loan (for providing loan to the firm) is an
expense. Hence, it is a charge against profit and will be debited to Profit & Loss Account even if the
firm incurs a loss.

Dr. Rent Payable A/c Cr.

Date Particulars Amount Date Particulars Amount
To Balance c/d Xxx By Rent A/c xxx

Dr. Partner’s Loan A/c Cr.

Date Particulars Amount Date Particulars Amount
To Balance c/d Xxx By Balance b/d xxx
By Interest on Partner’s Loan A/c xxx

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If the firm incurs losses than we will distribute the loss in Profit & Loss A/c only and no item of
Appropriation will be distributed (Like Interest on Capital, Salary, Commission etc):

Dr. PROFIT AND LOSS ACCOUNT Cr. for the year ended……………..
Particulars Amount Particulars Amount
To Loss for the year/loss before By Profit for the year/Profit before
interest* Xxx interest* Xxx
To Interest on Partners loan By Net Loss transferred to:
A xxx A’s Capital A/c/Current A/c** xxx
B xxx Xxx B’s Capital A/c/Current A/c** xxx
To Rent : Partners Name Xxx Xxx
To Manager’s Commission Xxx

Xxx Xxx
*If item relating to “Interest on Loan” is present.
**If Partners capital is fixed.

Exception to the above point: Even if the firm incurs losses than we have to prepare Profit & Loss
Appropriation A/c, if Item relating to Interest on Drawing is present in the question. But no item of Appropriation
will be distributed (Like Interest on Capital, Salary and Commission etc).
Dr. PROFIT AND LOSS APPROPRIATION ACCOUNT Cr.
for the year ended……………..
Particulars Amount Particulars Amount
To Profit and loss A/c (Loss transferred By Interest on drawing: xxx
from Profit & loss A/c) A xxx
B xxx
By Loss transferred to:
A’s Capital A/c/Current A/c** xxx xxx
B’s Capital A/c/Current A/c** xxx
Xxx Xxx
**If Partners capital is Fixed.

When Appropriations are more than Profits:

In case where appropriations such as interest on capital, salary of partner etc, are more than available
profits, than the profits will distributed in the ratio of appropriations(IOC: Salary: Commission etc).

Calculation of Interest on Capital: Interest on capital is always provided on the opening capitals of the
partners. Interest is allowed only when there is profit in the firm.

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Calculation of Opening Capital:
Particulars X Y Z
Closing capital Xxx Xxx Xxx
(+)Drawings Xxx Xxx Xxx
(+)Loss during the year Xxx Xxx Xxx
(-)Profits already Credited Xxx Xxx Xxx
(-) additional Capital (if any) Xxx Xxx Xxx
Opening capital Xxx Xxx Xxx
Interest on Capital = Opening Capital X Rate/ 100

Calculation of Interest on Drawing:

(a) Simple Method: Used when there is single amount and date is given**

** If the date of drawing is not given in the question or if the drawing is done during the year than use
6 months for calculating interest on drawing.

(b) Product method: This method is used when drawing is done at unequal intervals and the
amount of drawing is different. Following chart is used

S.no. Date of Drawing Months upto 31st march Amount of Drawing Product
from the date of drawing
(1) (2) (3) (4) (5) = (3) X (4)

TOTAL OF PRODUCT XXX

𝑅𝑎𝑡𝑒 1
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑜𝑛 𝑑𝑟𝑎𝑤𝑖𝑛𝑔 = 𝑇𝑜𝑡𝑎𝑙 𝑜𝑓 𝑃𝑟𝑜𝑑𝑢𝑐𝑡 𝑋 𝑋
100 12

(c) When the rate of interest on drawing is given without the suffix per annum, interest will be
charged without considering time or date of drawing.

(d) In case of same amount have been withdrawn monthly we use Average basis months, which
are as follows:
PERIOD 12 MONTHS 9 MONTHLY 6 MONTHS QUARTERLY
BEGINNING 6.5 5 3.5 7.5
MIDDLE 6 4.5 3 6
END 5.5 4 2.5 4.5

Journal Entries
Interest on Capital

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On allowing Interest on Capital: On closure of Interest on Capital A/c:
Interest on Capital A/c Dr. Profit & loss Appropriation A/c Dr.
To Partner’s Capital A/c To Interest on Capital A/c
Interest on Drawings
On Charging Interest on Drawings: On closure of Interest on Drawing A/c: Interest
Partner’s Capital A/c Dr. on Drawing A/c Dr.
To Interest on Drawing A/c To Profit & loss Appropriation A/c
Salary/Commission
On allowing Salary/Commission payable to a partner: On closure of Salary/Commission account:
Partner’s Salary/Commission A/c Dr. Profit & loss Appropriation A/c Dr.
To Partner’s Capital A/c To Partner’s Salary/ Commission A/c
Interest on Partner’s Loan
On allowing Interest on partner’s loan: On closure of Interest on partner’s loan account:
Interest on Partner’s Loan A/c Dr. Profit & loss A/c Dr.
To Partner’s Loan A/c To Interest on Partner’s Loan A/c

Rent
On allowing Rent payable to a partner: On closure of Rent account:
Rent A/c Dr. Profit & loss A/c Dr.
To Rent Payable A/c To Rent A/c
Reserve
For Transferring a part of Profit to Reserve:
Profit & loss Appropriation A/c
To Reserve/General Reserve A/c
Transferring the Balance
For transferring the credit balance: For transferring the Debit balance:
Profit & loss Appropriation A/c Dr. Partner’s Capital/Current A/c Dr.
To Partner’s Capital/Current A/c To Profit & loss Appropriation A/c or Profit & Loss A/c

Capital Accounts of a Partner

(a) Fixed Capital Accounts
(b) Fluctuating Capital Accounts

A- In case of Fixed Capital

PERFORMA OF
Dr. PARTNERS CAPITAL ACCOUNTS (When the Capital are fixed)
Cr.
Particulars A B Particulars A B
To Balance b/d Xxx Xxx By Balance b/d Xxx Xxx
(Opening balance-Debit) (Opening balance-credit)
To Cash/Bank A/c* By Cash/Bank A/c* Xxx Xxx
(Permanent withdrawal of capital) Xxx Xxx (Additional Capital introduced)
To Balance c/d By Balance c/d xxx Xxx
(Closing Balance- if Cr. Balance is in xxx xxx (Closing Balance-if Dr. Balance is
excess of Dr. Balance) in excess of Cr. Balance)
xxx Xxx xxx Xxx

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 PERFORMA OF
Dr. PARTNERS CURRENT ACCOUNTS (When the Capital are fixed) Cr.
Particulars A B Particulars A B
To Balance b/d Xxx Xxx By Balance b/d Xxx Xxx
(Opening balance-Debit) (Opening balance-Credit)
To Drawing A/c Xxx Xxx By Interest on capital A/c Xxx Xxx
To Interest on Drawing A/c Xxx Xxx By Salary A/c Xxx Xxx
To P & L A/c / P & L Xxx Xxx By Commission A/c Xxx Xxx
Appropriation A/c** By P & L Appropriation A/c
(Share of loss, in case of loss) (Share of profit, in case of
To Balance c/d xxx xxx profit) Xxx Xxx
(Closing Balance- if Cr. By Balance c/d
Balance is in excess of Dr. (Closing Balance-if Dr. Balance
Balance) is in excess of Cr. Balance) xxx xxx
xxx xxx xxx Xxx

B- In case of fluctuating capital

PERFORMA OF
Dr. PARTNERS CAPITAL ACCOUNTS (When the Capital are fluctuating) Cr.
Particulars A B Particulars A B
To Balance b/d Xxx Xxx By Balance b/d Xxx Xxx
i
(Opening balance-Debit) (Opening balance)
To Cash/Bank A/c* Xxx Xxx By Cash/Bank A/c* Xxx Xxx
(Permanent withdrawal of (Additional Capital introduced)
capital) By Interest on capital A/c Xxx Xxx
To Drawing A/c Xxx Xxx By Salary A/c Xxx Xxx
To Interest on Drawing A/c Xxx Xxx By Commission A/c Xxx Xxx
To P & L A/c / P & L Xxx Xxx By P & L Appropriation A/c
Appropriation A/c** (Share of profit, in case of
(Share of loss, in case of loss) profit) Xxx Xxx
To Balance c/d xxx xxx By Balance c/d
(Closing Balance- if Cr. (Closing Balance-if Dr. Balance
Balance is in excess of Dr. is in excess of Cr. Balance) xxx xxx
Balance)
xxx Xxx xxx Xxx

*What to use- Cash A/c or Bank A/c? Write that item which is present in the Balance sheet.
If Balance Sheet is not given, than use whatever you want.
** Check through which Account you have distributed the Loss.

Adjustment of outstanding expenses and incomes:

Particulars A B
Share of Partners in outstanding Expenses X Dr. X Dr.
Share of Partners in Accrued Interest X Cr. X Cr.
Net Effect X X

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Adjustment in the Closed Accounts/Past Adjustments: In Case where the accounts have been closed
but there have been some errors or omissions in the accounts. Then in such case we pass an adjusting
entry instead of altering accounts.

Journal Entry:
Gaining Partner’s Capital/Current** A/c Dr. (who received excess)
To Sacrificing Partner’s Capital/Current** A/c (who received short)
To General Reserve/ Manager’s Commission outstanding A/c (if any) **
Use Current A/c in case Partner’s capital is fixed.
TABLE SHOWING ADJUSTMENTS
PARTICULARS A B C TOTAL
Interest on Capital (IOC) Cr. Xxx Xxx Xxx Xxx
Salary/Commission Cr. Xxx Xxx Xxx Xxx
Remaining Profit(Profit before Interest on capital
-IOC-Salary-commission + IOD) in P.S.R Cr. Xxx Xxx Xxx Xxx
Interest on Drawing (IOD) Dr. (xxx) (xxx) (xxx) (xxx)
Xxx Xxx Xxx xxx Distribution of Profit/Loss in P.S.R. or Cr./Dr. xxx xxx xxx xxx
Profit already distributed or credited in wrong PSR Dr.
Net Effect Xxx Xxx Xxx Xxx

Adjustment of Reserve/Manager’s Commission Dr. xxx xxx xxx Xxx

Net Effect xxx xxx xxx Xxx
Cr.

Guarantee of profit to a partner:

It means that if his share of profit is less than that of guaranteed profit, then he would
be paid the guaranteed share of profit either by (i) any one of the partner, or (ii) by all
the partners in a particular ratio.

A) In Case of Profit:
Dr. PROFIT AND LOSS APPROPRIATION ACCOUNT Cr.
Particulars Amount Particulars Amount
To Profit transferred to Capital A/c: By Profit and loss A/c (Profit transferred xxx
A xxx from Profit & loss A/c)
Less: Trf to C (xxx) Xxx
B xxx
Less: Trf to C (xxx) Xxx
C xxx
Add: Trf From A xxx
Add: Trf From B xxx
xxx
Xxx Xxx

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Journal Entry:

I)Transfer of Profit I)Transfer of Loss

Profit & Loss A/c Dr. In case of loss balance of Profit and loss should not
To Profit & Loss Appropriation A/c be transferred to P & L Appropriation A/c
II)Profit distributed amongst all partner’s Profit II)Loss distributed amongst all partner’s
& Loss Appropriation A/c Dr. All Partner’s Capital/Current A/c Dr.
To All Partner’s Capital/Current A/c To Profit and loss A/c
(with the actual amount of profit that have to be distribute without any adjustments)
III)Deficiency of guaranteed partner to be bring in
by old partner in the ratio specified in question:
Gaining Partner’s Capital/Current A/c Dr.
To Sacrificing Partner’s Capital/Current A/c
Note: If the share is more than the guaranteed amount, then there is no need for any adjustments.

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