Partnership- basic concepts

-TEAM A
DEVIKA, NEHA , NANDINI
 PARTNERSHIP is the relation
between persons who have agreed to
share the profits of the business
carried on by all or any of them
acting for all.
 The persons who own the
partnership business are individually
called ‘partners’ and collectively
they are called as ‘firm’
FEATURES
 Two or more persons
 Agreement
 Business
 Mutual agency
 Sharing of profits
 Unlimited liability
Provisions of Partnership Deed

In the absence of a Partnership Deed,

 Profit sharing ratio – Shared equally
 Interest on Capital – Not allowed
 Interest on Drawings – Not charged
 Interest on Loan – Charged at the rate of 6% per annum
 Remuneration – Not allowed
According to Indian Contract Act ,1872, every
person except the following is competent to
contract :

a) Minor

b) Persons of unsound mind

c) Persons disqualified by any law

 INTEREST
0N
PARTNERS
CAPITALS
ADDITIONAL CAPITAL
FOR EG: Ram was a partner in a firm . On 1st april , 2018 , the capital account of ram
showed a credit bal of RS 60,000 respectively. On 30th September 2018 ,he
introduced an additional capital of RS 10,000 . The rate of interest on capital is
6% p.a . The accounting year closes on 31st March 2019 .

ANS: For Ram

i) on RS 60,000 for full year = RS 3,600
ii) on RS 10,000 for 6 months = RS 3OO
TOTAL INTEREST ON CAPITAL= RS 3,900
WITHDRAWAL OF CAPITAL
FOR EG: Raj was a partner in a firm . On 1st april , 2018 , the capital account of ram
showed a credit bal of RS 5,00,000 respectively .. On 1st January 2019 ,he
withdraws RS 1,00,000 . The rate of interest on capital is 10% p.a .

ANS: For Raj

i) on RS 5,00,000 for 9 months = RS 37,500
ii) on RS 4,00,000 for 3 months = RS 10,000
TOTAL INTEREST ON CAPITAL= RS 47,500
PROVISION RELATING TO INTEREST ON CAPITAL
JOURNAL ENTRIES
 * INTEREST ON CAPITAL WHEN PROFIT AVAILABLE FOR
APPROPRATION IS INADEQUATE

FOR EG: Interest on capitals to partners sahil and sunil is

RS 5,000 and RS 6,000 respectively . They are also to get salary
of RS 6,000 each . The amount of profit 11,500 will be
distributed between sahil and sunil in ratio RS 11,000:RS12,000
or 11:12 .
Thus RS 5500 and 6000 being the total appropriations for sahil
and sunil respectively.
OPENING CAPITAL
QUESTION : A and B are partners in a business and their capitals
at the end of the year were RS7,00,000 and RS 6,00,00 respectively.
Calculate their opening capitals considering the following
information:

(a) drawings of A and B for the year were RS 75000 and RS 50,000
respectively.
(b) B introduced capital of RS 1,00,000 during the year.
(c) interest on capital credited to the capital accounts of A and B
were RS 15,000 and RS 10,000 respectively
(d) interest on drawings debited to the capital accounts of A and B
were RS 7,500 and 5,000 respectively
(e) share of profit credited to capital accounts was RS1,00,000
each
 INTEREST ON DRAWINGS

When Rate of Interest on Drawings is Interest on Drawings is calculated on flat

given in % rate irrespective of period.

When Rate of Interest on Drawings is

given in % p.a.
(1)When date of Drawing is not given
(2)When date of drawings is given
calculated for 6 months
(assuming drawings have been done
evenly)
calculated for period left after drawings

When different amounts are withdrawn Direct Method

on different dates Int on drawings=amount of drawings x
rate x period of interest
Product Method
Int on drawings=sum of the product x rate
of interest x 1/12
When an equal amount is withdrawn at regular intervals
Average Period Method
Avg period= no of months left after first withdrawal + no of months left after last withdrawal
2

Int on drawings= total drawings x rate x avg period

 BASIS BEGINNING MIDDLE END
MONTHLY 6.5 6 5.5
QUATERLY 7.5 6 4.5
HALF 9 6 3
YEARLY
6 MONTHS 3.5 3 2.5
BASIS

Withdrawal on:
Monthly basis : drawings x 12
Quarterly basis : drawings x 4
Half yearly basis : drawings x 2
6 months basis : drawings x 6
QUESTIONS
 Ajay is a partner who withdrew ₹ 30,000 during the year 2018. Interest on
drawings is charged at 10% per annum. Calculate interest on drawings on 31st
December, 2018.

Ans:
Amt withdrawn by Ajay= 30000
Given rate = 10%
interest on drawings=Amt of drawings x rate x period of int
= 30000 x 10/100 x 6/12
= ₹ 1500
  Ravi is a partner in a partnership firm. As per the partnership deed, interest on
drawings is charged at 12% p.a. During the year ended 31st December 2018 he
drew as follows:
DATE ₹

March 1 6000
June 1 4000
Sept 1 5000
Dec 1 2000

Ans:
Date of Amt Period up to Product
drawings withdrawn Dec 31
Mar 1 6000 10 60000
June 1 4000 7 28000
Sept 1 5000 4 20000
Dec 1 2000 1 2000
Sum of product 110000

Int on drawings= sum of product x rate x 1/12

= 110000 x 12/100 x 1/12
= ₹1100
 P and Q are partners. P draws ₹ 4,000 at the end of each quarter. Interest on
drawings is chargeable at 6% p.a. Calculate interest on drawings for the year
ending 31st December 2018.
Ans:
Total amount of drawings = 4,000 x 4 = ₹ 16,000
avg period = 4.5 [9 + 0 / 2]
Interest on drawings = Total amount of drawings × Rate of interest × Average period
= ₹ 16,000 6/100 x 4.5/12 = ₹ 360
 Int on drawings is charged to avoid the excessive withdrawal by the partners in a
firm.
 No int on drawings should be charged in the absence of partnership deed
 Int on drawings: an income to the firm and an expense for the partners
 Journal entry
Partners capital/ current A/c Dr.
To Int on drawings
(int on drawings charged)
Int on drawings A/c Dr.
To P & L Appropriation A/c
(Being int on drawings transferred to P&L Appropriation A/c)
PROFIT AND LOSS APPROPRIATION
A/C

*MEANING
*FORMAT
*ILLUSTRATIONS
 P & L App A/C (Meaning)
Profit and Loss Appropriation Account shows how the
profits are appropriated or distributed among the
partners . All adjustments in respect of partner’s salary ,
commission , interest on capital, interest on drawings ,
etc are made through this account.
Profit & Loss Appropriation A/C (FORMAT)
Dr. Cr.
Particulars Amount Amount Particulars Amount Amount
Interest on Capital xxx Profit & Loss a/ c xxx
X's capital a/c xx ( Net Profit b/d )
Y’s capital a/c xx Interest on Drawings xxx
Salary to Partners xxx X’s capital a/c xx
Commission to Partners xxx Y’s capital a/c xx
Reserve a/c xxx
Interest on Partner’s loan xxx
Profit transferred to xxx
X’s capital a/c xx xxx
Y’s capital a/c xx

xxx xxx
 Illustrations
Richard and Rizwan started a business on 1st January 2018 with capitals
of ₹ 3,00,000 and ₹ 2,00,000 respectively.
According to the Partnership Deed
a)     Interest on capital is to be provided @ 6% p.a.
b)    Rizwan is to get salary of ₹ 50,000 per annum.
c)     Richard is to get 10% commission on profit (after interest on capital and
salary to Rizwan) after charging such commission.
d)    Profit-sharing ratio between the two partners is 3:2.
During the year, the firm earned a profit of ₹ 3,00,000.
Prepare profit and loss appropriation account. The firm closes its accounts on 31st
December every year.
Solution:
Illustrations
Working Note