FUNDAMENTAL
Why
partnership is required
|
Partnership business |
|
|
Advantage
of partnership business 1) Avail. of large
resources 2) Sharing risk 3) Benefit of
specialization |
Disadvantage of Sole proprietary 1)
Less resources 2)
risk can’t be shared 3) lack of specialization
|
In India –
Partnership is
governed by the Indian partnership act 1932
Introduction:
According
to section-4 of partnership act, 1932, “Partnership is the relation between
persons who have agreed to share in the profits of a business carried on by all
or any of them acting for all”.
Features of Partnership
1. Association of two or more persons
A
partnership is said to take place when at least two or more individuals
associate. The Companies Act, 2013 restricts the number of persons to 50 in
case of Partnership business. According to Rule(10) of the Companies
(Miscellaneous) Rules, 2014, no association or partnership shall be formed,
consisting of more than 50 persons. Therefore, the maximum number of partners
is 50.
2. Agreement
There must be an agreement between two or
more persons, either written or oral for a partnership to come into existence.
3. Profit & loss
sharing
The agreement between the partners must be for
sharing of profits. However, it is not necessary that the losses are also
shared by all the members.
4. Mutual agency.
Business
Can be Carried on by All or Any One of the Partners Acting for All: In
partnership, either all partners can take care of the business or they mutually
decide to let one or more of the partners to do so on their behalf. Partners
are agents as well as the principles.
5. lawful Business
The
business for which a partnership is formed must be legal.
Partnership Deed
Partnership Deed: A document, which contains the terms of partnership as agreed among the Partners, is called “Partnership deed”.
Some
major contents of partnership deed are as follows:
1. Name of the firms
2. Name and address of
the partners
3. Nature of business
4. Commencement of
business
5. Capital contribution
6. Interest on drawings
7. Interest on capital
8. Interest on loan
9. Salary
10. Commission
11. Profit
sharing
12. Right
and duties of the partners
In
the absence of partnership deed
Partnership Act 1932 is applicable
which state as follows
|
No Salary /Commission to partners |
|
No
Interest on Capital /Drawing |
|
Profit
should be share equally |
|
Interest
on loan @
6%p.a. |
Profit & Loss Appropriation account
Profit & Loss Appropriation account is an
extension of Profit and Loss Account is which we show how the profit in
distributed among the partner in the name of interest on capital ,salary
,commission etc
Profit & Loss Appropriation
account
For the year ending on…………….
Particulars
|
Amount
|
Particulars
|
Amount
|
|
To
interest on capital A capital/current a/c XXX B capital/current a/c XXX To
partner’s salary: A capital/current a/c XXX B capital/current a/c XXX To
partner’s commission: A capital/current a/c XXX B capital/current a/c XXX To
Transfer to reserve To
profit transfer to : A capital/current
a/c XXX B capital/current
a/c XXX
|
XXX
XXX
XXX XXX XXX
XXX
|
By
profit & loss a/c (Net
profit before any adjustment) By
interest on drawings A capital/current
a/c XXX B capital/current
a/c XXX
|
XXX
XXX |
|
|
XXX
|
|
XXX |
Note :- Interest
on loan
,Rent paid by a partner ,Manager commission are to be shown in the profit and loss account and not in the profit
and loss appropriation
Preparation of Capital
A/c
Capital a/c Capital
a/c & Current a/c
Fluctuating Method
Capital a/c
|
Particulars |
A |
b |
Particulars |
A |
B |
|
To Balance b/d (Dr balance ) To
Drawing To
Interest on drawings To
Profit & Loss App. A/c (loss) To
Profit and Loss A/c (Loss ) To
Cash (Capital withdrawn) To
Balance c/d |
XXX XXX XXX XXX XXX XXX XXX
|
XXX XXX XXX XXX XXX XXX XXX |
By
Balance b/d (Cr Balance ) By
Profit & Loss App ( Profit) By
Interest on capital By
Salary By
Commission By
Cash (Additional capital)
|
XXX XXX XXX XXX XXX XXX
|
XXX XXX XXX XXX XXX XXX |
|
|
XXX
|
XXX
|
|
XXX |
XXX |
Fixed
method of preparing Capital account
Partner’s Capital
a/c
|
Particulars |
A |
B |
Particulars |
A |
B |
|
To
Cash (Capital withdrawn )
To
Balance c/d |
XXX
XXX |
XXX
XXX
|
By
Balance b/d By
Cash (Additional
capital) |
XXX XXX |
XXX XXX |
|
|
XXX |
XXX |
|
XXX |
XXX |
Partner’s Current
a/c
|
Particulars
|
A |
B |
Particulars
|
A
|
B |
|
To
Balance b/d (Dr balance ) To
Drawings To
Interest on drawings To
Profit & Loss App. A/c (Loss) To
Profit & Loss A/c (Loss) To
Balance c/d |
XXX XXX XXX XXX
XXX XXX
|
XXX XXX XXX XXX
XXX XXX
|
By
Balance b/d (Cr balance ) By
Profit & loss App. (Profit
) By Interest on capital By
Salary By
Commission |
XXX
XXX XXX XXX XXX |
XXX XXX XXX XXX XXX
|
|
|
XXX |
XXX |
|
XXX |
XXX |
IF DRAWING ARE
GIVEN IN THE QUESTION THEN WE WILL TAKE THEM IN CURRENT A/C& NOT IN THE
CAPITAL A/C
Difference between Fixed and Fluctuating Capital Accounts
|
Basis |
Fixed capital account |
Fluctuating capital account |
|
Change in Balance of Capital Accounts
|
Balance of capital account normally remains
unchanged, unless some additional capital is introduced or some amount of capital is withdrawn |
Balance of capital account, fluctuates quite
frequently from year to year.
|
|
Number of Accounts
|
Each partner has two accounts, namely Capital
Account and a Current Account.
|
Each partner has only one account namely, Capital
Account.
|
|
Recording of Transactions
|
All transactions
relating to partner's drawings, interest on drawings, interest on capital,
salary, commission, share of profit or loss etc. are not made in Capital A/c
but are entered in separate Current Account.
|
All transactions relating to partner's drawings,
interest on drawings, interest on capital, salary, commission, share of
profit or loss etc. are made directly in the Partners' Capital Accounts |
|
Balance of capital account Capital Accounts
|
Fixed Capital Account always shows a credit
balance.
|
Fluctuating Capital Account may have a credit or
debit balance |
Difference between Capital Account and Current Account
|
Basis |
Capital Account |
Current Account
|
|
Objective
|
The main objective of Fixed Capital Account is
that the fixed amount invested by the partner should remain intact in the
firm.
|
The main objective of current account is that no
partner should withdraw more amount than due to him |
|
Balance of Account
|
The balance of capital account remains fixed year
to year unless additional capital is introduced or permanent withdrawals are
made.
|
The balance of current account goes on changing
from year to year.
|
|
Recording of Transactions
|
In this account, only amount invested by the
partner and the permanent withdrawal of amount are recorded.
|
In this account, other transactions between firm
and the partner such as drawings, interest on drawings, interest on capital,
salary, share of profit etc. are recorded.
|
|
Closing Balance of Account
|
It always shows a credit balance.
|
It may have a credit or debit balance.
|
Journal entries
(1) For interest on
capital
(a) Interest on capital A/c Dr
To Partner’s capital / current
A/c
(b) Profit and Loss Appropriation A/c Dr
To Interest on capital A/c
(2) For salary
(a) Salary A/c Dr
To Partner’s capital / current
A/c
(b) Profit and Loss Appropriation A/c Dr
To Salary A/c
(3)For commission
(a) Commission
A/c Dr
To Partner’s capital / current A/c
(b)
Profit and Loss Appropriation A/c Dr
To Commission A/c
(4) For transfer to
reserve
(a) Profit and Loss Appropriation A/c Dr
To Reserve A/c
(5 )For interest on
drawing
(a) Partner’s capital / current A/c Dr
To Interest on drawing A/c
(b) Interest on drawing A/c
To Profit and Loss Appropriation
A/c
(6) For transfer of share
of profit and loss
(A) For profit
Profit and Loss Appropriation A/c Dr
To Partner’s capital / current
A/c
(B)For Loss
Partner’s capital / current A/c Dr
To
Profit and Loss Appropriation A/c
Important
Note :- We distribute the loss in profit and loss
appropriation A/c only when we have
interest on drawing given in the question, else we will distribute the
loss in the profit and loss account
CALCULATING INTEREST ON DRAWING
Drawings: The amount withdrawn by the partner is called “Drawing.”
DRAWING
Regular Drawing Irregular Drawing
1.
Regular Drawing: -
Those drawings, which are
made with same amount and with equal interval of time. It may be a week, month,
2 months, quarter, half year.
2.
Irregular Drawing: -
When
partner at its own wish withdraws amount from business, as and when required.
METHOD OF CALCULATING INTEREST ON DRAWING
1. Simple
Method.
2. Product
Method.
1.
Simple Method
Amount of Drawing * Rate * Time Period 100 12
2.
Product Method
Total of the Product * Rate * 1 100 12
Product Method table
|
Date |
Amount of drawing |
Period |
Product |
|
|
|
|
|
|
|
|
|
Sum of product |
Formula for the
calculation of interest on regular drawing
= Total Amount of
Drawing * Rate * Average Time Period 100 12
Formula
to Calculate Average Time Period
Average Time period =Time left after 1st drawing + Time left after last drawing
2
1)Month
|
|
2)Half
year |
|
3)Quarter |
Months
|
Beginning
|
Middle
|
End
|
|
1st
January |
15th January |
31st
January |
|
1st
Feb. |
15th
Feb. |
28th Feb. |
|
1st
March |
15th
March |
31st March |
|
1st
April |
15th
April |
30th April |
|
1st
May |
15th
May |
31st
May |
|
1st
June |
15th
June |
30th
June |
|
1st
July |
15th July |
31st
July |
|
1st
August |
15th
August |
31st August |
|
1st
Sept. |
15th Sept. |
30th Sept. |
|
1st
Oct . |
15th Oct . |
31st Oct . |
|
1st
November |
15th November |
30th November |
|
1st
December |
15th December |
31st
December |
Meaning
of Quarter :-
List
of Quarter :-
|
1st
Quarter |
1stjan. – 31st March |
|
2st
Quarter |
1st April - 30thJune
|
|
3st
Quarter |
1st July – 30th
Sept. |
|
4st
Quarter |
1st Oct.- 31st
dec. |
Quarter
|
Beginning |
Middle |
End |
|
1st
January |
15th
Feb. |
31st
March |
|
1st
April |
15th
May |
30th
June |
|
1st
July |
15th
August |
31st
Sept |
|
1st
Oct |
15th
November |
30th
December |
List of half Year :-
|
1st Half Year |
1st Jan. –30thJune
|
|
2nd Half Year |
1st July –31st
Dec. |
Half year
|
Beginning |
Middle |
End |
|
1st
January |
31st March or 1st April |
30th June |
|
1st
July |
30th
Sept. or 1st Oct. |
31st
December |
|
Interval |
Period
|
Average period |
||
|
Beg. |
Middle |
End |
||
|
Every month |
12 months
|
6.5
(12+1) 2 |
6
(11.5+.5) 2 |
5.5
(11+0) 2 |
|
Every Quarter |
12 months
|
7.5
(12+3) 2 |
6
(10.5+1.5) 2 |
4.5
(9+0) 2 |
|
Every half year |
12 months
|
9
(12+6) 2
|
6
(9+3) 2 |
3
(6+0) 2 |
|
Every month |
9 months
|
5
(9+1) 2
|
4.5
(8.5+.5) 2 |
4
(8+0) 2 |
|
Every months |
6
months |
3.5
(6+1) 2
|
3
(5.5+.5) 2 |
2.5
(5+0) 2 |
Note
:-
RULE:
(I)
When
drawing are made at the beginning of each month for the whole year.
Total amount withdrawn for
the whole year * Rate *
6.5
100 12
(II)
When
drawing are made in the middle of each month for the whole year.
Total amount withdrawn for the
whole year * Rate *
6
100 12
(III)
When
drawing are made in the last of each month for the whole year.
Total amount withdrawn for the
whole year * Rate *
5.5
100 12
(IV)
If
equal amount is withdrawn at the beginning of each quarter for the whole year.
Total amount withdrawn for the
whole year * Rate *
7.5
100 12
(V)
If equal amount is withdrawn at the end
of each quarter for the whole year.
Total amount withdrawn for the
whole year * Rate *
4.5
100 12
(VI)
When
drawing are made at the beginning of each half year, for the whole year.
Total amount withdrawn for the
whole year * Rate *
9
100 12
(VII) When drawing are
made at the end of each half year, for the whole year.
Total amount withdrawn for the
whole year * Rate *
3
100 12
NOTE:
1.
When amount is not withdrawn for the whole year,
then these Rules are not
applicable.
2.
If time period is not mentioned with amount
withdrawn then we will take 6/12.
3.
IF p.a. is not written with rate of interest,
then we will not take time period.
Calculation of Commission to Partner
Commission can be Calculated on the profit
|
After
charging such profit |
Before
charging such profit |
|
Net profit * Rate 100+ Rate
|
Net profit * Rate
100 |
Interest on Capital
Provision
relating to interest on capital are given below :-
|
|
Case
|
Provision
|
|
|
Case -I |
When the
partnership Agreement is Silent about the interest on capital |
No interest on capital is provided
|
|
|
Case -II |
When the
partnership Agreement provides for interest on capital but is Silent in
treating interest as a Charge or Appropriation |
Interest on capital will be allowed
only when there is profit
|
|
|
In case of loss
|
No interest on capital is provided
|
||
|
When the profit before
interest on capital is equal to or more than the amount of interest .
|
Full
amount of interest on capital is given
|
||
|
When the profit before
interest on capital is less than the amount of Interest . |
Profit
is divided in the ratio of interest on
capital .
|
||
|
Case
-III |
When
the partnership Agreement provides for treating interest on capital as a
charge
|
Full
amount of interest on capital is given
|
|
Condition
:-1
A and B
are partners sharing profit and loss in the ratio of 3:2 .Their capital are as
follows A Rs 100000 and B Rs 60000
Adj:
Question is silent regarding interest on capital & profit earned during the
year is Rs. 20000. Prepare relevant account
Solution
:-
Profit & Loss Appropriation Account
|
Particular |
Amount |
Particular |
Amount |
|
To Profit
transferred to Capital A/c |
|
By Profit
& Loss A/c |
20,000 |
|
A 20000 x
3/5 |
12000 |
|
|
|
B 20000 x
2/5 |
8000 |
|
|
|
|
20,000 |
|
20,000 |
Condition
:-2
A and B
are partners sharing profit and loss in the ratio of 3:2 .Their capital are as
follows A Rs 100000 and B Rs 60000
Adj :
Interest on capital is to be given @6% p.a. Profit for the year ending is Rs.
20000. Prepare relevant account
Solution
:-
Profit & Loss Appropriation Account
|
Particular |
Amount |
Particular |
Amount |
|
To
Interest on Capital A – 6000 B – 3600 |
9600 |
By Profit
& Loss A/c |
20000 |
|
To Profit
Transferred to Capital A/c |
10400 |
|
|
|
A – 6240 |
|
|
|
|
B – 4160 |
|
|
|
|
|
20000 |
|
20000 |
Condition
:-3
A and B
are partners sharing profit and loss in the ratio of 3:2 .their capital are as
follows A Rs 100000 and B Rs 60000
Adj:
Interest on capital is to be given @6% p.a. Profit for the year ending is Rs.
8000. Prepare relevant account
Solution
:-
Profit & Loss Appropriation Account
|
Particular |
Amount |
Particular |
Amount |
|
To
Interest on Capital A – 8000 x 5/8 |
|
By Profit
& Loss A/c |
8000 |
|
B – 8000
x 3/8 |
5000 |
|
|
|
|
3000 |
|
|
|
|
8000 |
|
8000 |
Working :-
Interest on
Capital
A – 6000 6000 : 3600
B – 3000 = 5: 3
Note:- If
Amount of Profit is Less than Amount of IOC then it will be distributed in the
IOC Ratio.
Condition
:-4
A and B
are partners sharing profit and loss in the ratio of 3:2 .their capital are as follows
A Rs 100000 and B Rs 60000
Adj:
Interest on capital is to be given @6% p.a. & Salary of 200 p.m. is given
to partner B. Profit for the year ending is Rs. 10000. Prepare relevant account
Solution
:- 4
Working
note :-
|
|
A |
B |
|
Interest
on Capital |
6000 |
3600 |
|
Salary |
- |
2400 |
|
|
6000 |
6000 |
Note:-
Amount of profit is less than amount to be given. In that case we will
distribute the profit in the appropriation ratio.
1 :1 = 6000 : 6000
Profit & Loss Appropriation Account
|
Particular |
Amount |
Particular |
Amount |
|
To amount
given as Interest & Salary |
10000 |
By Profit
& Loss A/c |
10000 |
|
A – 5000 |
|
|
|
|
B – 5000 |
|
|
|
|
|
10000 |
|
10000 |
Condition
:-5
A and B
are partners sharing profit and loss in the ratio of 3:2 .their capital are as
follows A Rs 100000 and B Rs 60000
Adj:
Interest on capital is to be given @6% p.a. Loss earned during the year is Rs.
20000. Prepare relevant account
Solution
:-
Profit & Loss Appropriation Account
|
Particular |
Amount |
Particular |
Amount |
|
To Bal
bld |
20000 |
By loss
transferred to Capital A/c A – 12000 B – 8000 |
20000 |
|
|
20000 |
|
20000 |
Condition
:-6
A and B
are partners sharing profit and loss in the ratio of 3:2 .their capital are as
follows A Rs 100000 and B Rs 60000
Adj:
Interest on capital is to be given @6% p.a. even if it involves the firm into
loss. Prepare relevant account
(A)Profit
earned during the year is 20000.
Profit & Loss Account
|
Particular |
Amount |
Particular |
Amount |
|
To
Interest on Capital A- 6000 B- 3600 |
9600 |
By Bal
bld |
20000 |
|
To Profit
& Loss Appropriation |
10400 |
|
|
Profit & Loss Appropriation Account
|
Particular |
Amount |
Particular |
Amount |
|||
|
To Profit
Transferred to Capital A/c A- 6240 B- 4160 |
10400 |
By Profit
& Loss A/c |
10400 |
|||
|
|
10400 |
|
10400 |
|||
(B) Profit
earned during the year is Rs. 9000.
Profit & Loss Account
|
Particular |
Amt. |
Particular |
Amount |
|
To
Interest on Capital A/c A- 6000 B- 3600 |
9600 |
By Balbld |
9000 |
|
|
|
By loss
transferred to capital A/c A- 360 B- 240 |
600 |
|
|
9600 |
|
9600 |
(C) Loss
earned during the year is 10400.
Profit & Loss Account
|
Particular |
Amount |
Particular |
Amount |
|||
|
To Balbld |
10400 |
By loss
transferred to Capital A/c A- 12000 B- 8000 |
20000 |
|||
|
To IOC A- 6000 B- 3600 |
9600 |
|
|
|||
|
|
20000 |
|
20000 |
|||
Past
adjustment
Particular |
Amount |
Particular |
Amount |
|
To
amount to be credited |
|
By
amount already credited
|
|
GUARANTEE
A.
Guarantee by the firm.
B. Personal
guarantee by the partner or partners
C.
Minimum earning guarantee by a partner
to a firm & minimum profit guarantee by the firm to a partner.
D.
Guarantee by the firm to one of the
partner and personal guarantee by one partner to another partner.
E. Manager
admitted as a partner & guarantee is given by the firm.
F.
Manager admitted as a partner and
guarantee of profit given by one
G.
Manager treated as a partner from some
last year.
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