Part 1 Partnership Basic

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Part :1
Accounting for Partnership
Partnership contains three sections:
Accounting for Partnership
[A] Fundamental / Basic of partnership.

[B] Reconstitution of partnership firm i.e. Dissolution of partnership.
[C] Dissolution of partnership firm i.e. death of firm / liquidation of firm.
Fundamental / Basic of partnership

As per syllabus , the following topics are to be covered:
A] Definition of partnership
B] Definition of partners and firm.
C] Nature of partnership
D] Features / Characteristics of partnership
E] Partnership deed
F] Provision of The Indian Partnership Act 1932 in absence of partnership deed.
G] Partners’ capital account under fluctuating and fixed concepts.
H] Profit and loss Appropriation A/c.
I] Division of profit/loss in different conditions. Eg loss , not enough profit, in different ratios
J] Minimum guaranteed profit to a partner
K] Past adjustments.
L] Goodwill a separate chapter.
This chapter contains the following topics in details.

a) Preparation of partners’ capital account.
b) Preparation of profit & loss appropriation account.
c) Different journal entries related to profit distribution and transfer.
d) Calculation of interest on drawing.
i) For irregular drawing
 Simple method
 Product method
ii) For regular drawing
 For monthly drawing.
 For quarterly drawing.
 For half-yearly drawing.
e) Calculation of interest on capital
 When there are opening capital, additional capital and permanent drawing,
 When opening capital is not given but other information are given like closing capital,
additional capital, permanent & temporary drawing, interest on drawing,
salary/commission and profit transferred.
f) Minimum profit guaranteed to a partner by firm or partners.
 If there is profit.
 If there is loss.
g) Revenue guaranteed by a partner to the firm.
h) Past adjustments entries related to appropriation.
i) If profit is given.
 And PSR was not changed for distributed profit, or,
 And PSR was changed for distribution of profit.
ii) If profit is not given.
 And PSR was not changed for distributed profit, or,
 And PSR was changed for distribution of profit.
Note:- in conclusion, we can include profit in solution ,if given, to discard the confusion.
i) Interest on partners’ loan: - it is provided @ 6% p.a. if nothing is said in the question.
j) Remuneration to partners. It is not provided until it is given in partnership deed.
 Commission before charging such commission is eg.15 % .
= Estimated net profit x
 Commission after charging such commission is eg. 15%.
= Estimated net profit x
k) Preparation of opening balance sheet after all adjustments refer to comprehensive question.
Nature of partnership
A] Partners and partnership firm are not separate from liabilities viewpoint. That’s why, it has
nature of unlimited liabilities.
B] Partners and partnership firm are separate from business entity concept and accounting
viewpoint.
The essential features or characteristics of partnership are:

1. Two or More Persons:
2. Agreement:
3. Business:
4. Mutual Agency
5. Sharing profit
6. Liability of Partnership
Some important points:

 Partners:- Persons who have entered into partnership with one another are individually
called 'partners'
 Partnership:- According to Section 4 of the Indian Partnership Act 1932 defines partnership
as the
“Partnership is the relationship between persons who have agreed to share the profits of a
business carried one by all or any of them acting for all”.
 Partnership firm:- The partners are collectively known as partnership firm.
 Partnership firm:- Persons who have entered into partnership with one another are
individually called 'partners' and collectively called :firm'. The name under which the
business is carried is called the firm's name'. A partnership firm has no separate legal entity,
apart from the partners constituting it
 Partnership deed- The agreement among partners can be either oral or written. But
wherever it is in writing, the document which contains terms of the agreement is called
'Partnership Deed'. Thus, the written document of the terms and conditions of agreement
among partners for smooth operation business and solving the will be disputes is called
partnership deed.
The clauses of partnership deed can be altered with the consent of all the partners. The deed
should be properly drafted and prepared as per the provisions of the 'Stamp Act' and preferably
registered with the Registrar of Firms.
Important Contents of the Partnership Deed

The Partnership Deed usually contains the following details:
• Names and Addresses of the firm and its main business;
. objectives of the business.
• Names and Addresses of all partners;
• Amount of capital to be contributed by each partner;
• Profit and loss sharing ratio;
• Rate of interest on capital, loan, drawings, etc;
• Salaries, commission, etc, if payable to any partner;
• The rights, duties and liabilities of each partner;
• Method of settlement of disputes among the partners;
• Rules to be followed in case of admission, retirement, death of a partner; and
• Any other matter relating to the conduct of business.
Normally, the partnership deed covers all matters affecting relationship of partners amongst
themselves.
However; if there is no expressed agreement on certain matters, the

provisions of the Indian Partnership Act, 1932 shall apply.
The significant Provisions of in Indian Partnership Act 1932
Relevant for Accounting for partnership in absence of partnership deed.
The important provisions affecting partnership accounts are as follows:
Conditions Provisions
(a) Profit Sharing Ratio The profits and losses of the firm are to be shared equally.
(b) Interest on Capital No interest on capital allowed.

(c) Interest on Drawings: No interest on drawings is to be charged.
(d) Interest on Advances or loan interest on partners’ loan is allowed @ 6% p.a.
from partners:
(e) Remuneration eg. Salary, No partner is entitled to get salary or other remuneration.
commission etc:
Apart from the above, the Indian Partnership Act specifies that subject to contract between the
partners:
(i) If a partner derives any profit or him/herself from any transaction of the firm or from the use of
the property or business connection of the firm or the firm name, he/ she shall account for the
profit and pay it to the firm.
(it) If a partner carries on any business of the same nature as and competing with that of the firm,
he/she shall account for and pay to the firm, all profit made by him/her in that business.
2.4 Maintenance of Capital Accounts of Partners

There are two methods by which the capital accounts of partners can be maintained.
These are:
(i) fluctuating capital method, and
(ii) Fixed capital method.
Fluctuating capital Fixed capital
Single or say, Only partners’ capital are Two partners’ accounts are prepared.
prepared. a) Partners’ capital a/c
b) Partners’ current a/c.
Fluctuating Capital Method:
Partners’ capital accounts (Fluctuating concept)

Particulars A B Particulars A B
To cash a/c or Bank a/c (for By balance b/d ( opening bal.)
permanent drawing) By cash a/c or Bank a/c ( additional capital)
To Drawing ( Temporary) By interest on capital a/c
To interest on Drawing A/c By Remuneration e.g. salary, commission
To P/L Appropriation a/c (loss) By P/L Appropriation a/c (profit)
Fixed Capital Method:

Under this approach two accounts are prepared i.e.
(i) Partners’ capital a/c : it records only opening capital, additional capital and permanent
drawing i.e. drawing out of capital. It always shows Cr. Bal.
(ii) Partners’ current a/c: it records all transactions related to partners except the events
recorded in fixed partners’ capital a/c. it may Dr. or Cr. Bal.
Dr. Partners’ Capital Account (fixed capital) Cr.

Particulars A B particulars A B
To cash or bank a/c (permanent By balance b/d (opening bal.)
capital) By cash or bank a/c( additional cap.
brought)
To balance c/d
Dr. Partner's Current Account Cr.

Particulars A B Particulars A B
To balance b/c( if Dr. bal.) By Balance b/ d (in case of credit balance)
To drawing a/c (temporary) By interest on capital a/c
To interest on Drawing A/c By Remuneration e.g. salary, commission
To P/L Appropriation a/c (loss) By P/L Appropriation a/c (profit)
Questions for practice:

Assignment 1. on 1/4/2020 , A and B are partners in a firm who contributed Rs. 5,00,000
and Rs.6,00,000 respectively sharing profit/loss in the ration of 3:7. The other information are
as follows:
Particulars A Rs. B Rs.
Additional capital 1,00,000 2,00,000
Permanent drawing 50,000 60,000
Temporary Drawing 40,000 30,000
Interest on capital (IOC) 45,000 55,000
Interest on Drawing (IOD) 7,000 6,000
Salary 5,000 per month (p.m.) 3,000 per quarter.
Commission 10,000 -
Profit transferred 1,50,000 3,50,000
Required:
a) Partners’ capital under fluctuating concept.
b) Partners’ capital under fixed concept.
Assignment 2.
on 1/4/2020 , A and B are partners in a firm who contributed Rs. 10,00,000 and Rs.20,00,000
respectively sharing profit/loss in the ration of 7:3. The other information are as follows:
Permanent drawing 1,50,000 1,60,000
Temporary Drawing 1,00,000 1,60,000
Salary per month [p.m.] 10,000 15,000
Commission 10,000 -
Profit transferred 2,10,000 4,90,000
Required:
a) Partners’ capital under fluctuating concept.
b) Partners’ capital under fixed concept.
2.5.1 Profit and Loss Appropriation Account

Profit and Loss Appropriation Account is merely an extension of the Profit and Loss Account
of the firm. It shows how the profits are appropriated or distributed among the partners as
partner's salary, partner's commission, interest on capital, interest on drawings, etc.
The journal entries for preparation of Profit and Loss Appropriation Account and making
various adjustments through it are given as follows:
Journal Entries
1. Transfer of the balance of Profit and Loss Account to Profit and Loss Appropriation Account:
(a) If Profit and Loss Account shows a credit balance (net profit):
Profit and Loss A/c Dr. xxxx
To Profit and Loss Appropriation A/ c xxxx
(b) If Profit and Loss Account shows a debit balance (net loss)
Profit and Loss Appropriation A/c Dr. xxxx
To Profit and Loss A/ c xxxx
2. Interest on Capital:
(a) For crediting interest on capital to partners· capital account:
Interest on Capital A/c Dr. xxxx
To Partner's Capital/Current A/s (individually) xxxx
(b) For transferring interest on capital to Profit and Loss Appropriation Account:
Profit and Loss Appropriation A/c Dr. xxx
To Interest on Capital A/ c xxxx
Or alternative journal entries for (a) and (b)
Profit and loss appropriation a/c Dr. xxxx
Partners’ capital a/c or current a/c xxxx
(Being interest on capital allowed and transferred to p/l app. a/c)
3. Interest on Drawings:
(a) For charging interest on drawings to partners' capital accounts:
Partners Capital/Current A/c's (individually) Dr. xxxx
To Interest on Drawings A/ c xxxx
(b) For transferring interest on drawings to Profit and Loss Appropriation Account:
Interest on Drawings A/c Dr. xxxx
To Profit and Loss Appropriation A/c xxxx
Alternative journal entries for a and b

Partners’ capital a/c or current a/c Dr. xxxx
To P/L appropriation a/c xxxx
4. Partner's Salary:
(a) For crediting partner's salary to partner's capital account:

Salary to Partner A/c Dr. xxx
To Partner's Capital/Current A/c's (individually) xxx
(b) For transferring partner's salary to Profit and Loss Appropriation Account:
To Salary to Partner's A/ c xxx
P/L appropriation a/c Dr.
To Partners’ capital a/c or current a/c(individually)
5. Partner's Commission:
(a) For crediting commission to a partner. to partner's capital account:
Commission to Partner A/c Dr. xxx
To Partner's Capital/Current A/c's (individually) xxx
(b) For transferring commission paid to partners to Profit and Loss Appropriation Account.
To Commission to Partners Capital/ Current A/ c (individually) xxx
P/L appropriation a/c Dr.
To Partners’ capital a/c or current a/c(individually
6. For transferring any reserve eg. General reserve, workmen compensation reserve, investment
fluctuation reserve etc.
Profit and loss appropriation a/c Dr.
To General reserve a/c
To workmen compensation reserve a/c
To investment fluctuation reserve a/c
7. Share of Profit or Loss after appropriations:
if Profit:
Profit and Loss Appropriation A/c Dr.
To Partner's Capital/Current A/c (individually)
if Loss:
Partner's Capital/Current A/c's (individually) Dr.
To Profit and Loss Appropriation A/c
Note: while preparing P/L app. a/c, we should also consider that partners’ capital are fixed or
fluctuating. If partners’ capital a/c are fluctuating, partners’ capital a/c are used as shown in p/l
app. a/c. and if partners’ capital are fixed, partners’ current a/c are used.
Note: if question doesn’t express either partners’ capital are fluctuating or fixed, we should always
follow fluctuating capital.
Format of P/L Appropriation a/c

Profit and loss appropriation Account
Particulars Particulars
To P/L a/c (loss) By P/L a/c (profit)
To interest on capital a/c By interest on drawing a/c.
A’s capital a/c : xxxx A’s capital a/c : xxxx
B’s capital a/c : xxxx B’s capital a/c : xxxx
To Remuneration eg. Salary, commission By loss transferred to:
A’s capital a/c : xxxx A’s capital a/c : xxxx
B’s capital a/c : xxxx B’s capital a/c : xxxx
To General Reserve a/c
To workmen compensation reserve/ Fund a/c
(W.C.R. or W.C.F.)
To investment fluctuation reserve or fund a/c
(I.F.R. / I.F.F.)
To any reserve a/c
To profit transferred to :
A’s capital a/c : xxxx
B’s capital a/c : xxxx
Assignment 3.
Salary 6,000 per month 5,000 per
(p.m.) quarter.
Commission 10,000 15,000
They also decided to transfer Rs.50,000 to general reserve, Rs. 40,000 to workmen compensation
reserve (WCR) and Rs.60,000 to investment fluctuation reserve. The profit for the year before all
adjustments was Rs. 15,00,000.
Required:
(a) Journal entries.
(b) Profit and loss appropriation a/c.
(c) Partners’ capital under fluctuating concept.
Assignment 4.
respectively sharing profit/loss in the ration of 3:7. The other information as per partnership
deed are as follows:
The firm usually transfer some profit to transfer Rs.50,000 to general reserve, Rs. 40,000 to
workmen compensation reserve (WCR) and Rs.60,000 to investment fluctuation reserve if there
happens profit. The loss for the year before all adjustments was Rs. 1,50,000.
Required:
a) Profit and loss appropriation a/c.
b) Partners’ capital under fluctuating concept.
c) Partners’ capital under fixed concept.
Note.:- No appropriation is done as there is loss in the question.
Assignment 5.
They also decided to transfer Rs.50,000 to general reserve, Rs. 40,000 to workmen compensation
reserve (WCR) and Rs.60,000 to investment fluctuation reserve. The profit for the year before all
adjustments was Rs. 15,00,000. Conditions to be applied for profit distribution as : first
Rs.2,00,000 in profit sharing ratio, secondly Rs.2,70,000 equally and balance in capital ratio.
Required:
a) Profit and loss appropriation a/c.
b) partners’ capital under fluctuating concept.
From NCERT.
Fixed and Fluctuating Capitals
Assignment 6. Triphati and Chauhan are partners in a firm sharing profits and losses in the
ratio of 3:2. Their capitals were Rs.60,000 and Rs.40,000 as on January 01,2005. During the year
they earned a profit of Rs. 30,000. According to the partnership deed both the partners are entitled
to Rs. 1,000 per month as Salary and 5% interest on their capital. They are also to be charged an
interest of 5% on their drawings, irrespective of the period, which is Rs. 12,000 for Tripathi, Rs.
8,000 for Chauhan. Prepare Partner's Accounts when, capitals are fixed.
(Ans:Tripathi's Current account Balance Rs. 20,400,Chauhan's Current account Balance Rs.17,600)
Assignment 7. Anubha and Kqjal are partners of a firm sharing profits and losses in the ratio of
2:1. Their capital, were Rs.90,000 and Rs.60,000. The profit during the year were Rs. 45,000.
According to partnership deed, both partners are allowed salary, Rs. 700 per month to Anubha and
Rs. 500 per month to Kqjal. Interest allowed on capital @ 5%p.a. The drawings at the end of the
period were Rs. 8,500 for Anubha and Rs. 6,500 for Kqjal. Interest is to be charged @ 5% p.a. on
drawings. Prepare partners capital accounts, assuming that the capital account are fluctuating.
(Ans: Anubha's Capital Account Balance Rs.1 ,23,975, Kqjal's Capital Account Balance Rs. 77,175)
Distribution of Profit
Assignment 8.
Harshad and Dhiman are in partnership since April 01,2006. No Partnership agreement was made.
They contributed Rs. 4,00,000 and 1,00,000 respectively as capital. In addition, Harshad advanced an
amount of Rs. 1,00,000 to the firm, on October 01, 2006. Due to long illness, Harshad could not
participate in business activities from August 1, to September 30, 2006. The profits for the year ended
March 31, 2006 amounted to Rs.1,80,000. Dispute has arisen between Harshad and Dhiman.
Harshad Claims:
(i) he should be given interest @ 10% per annum on capital and loan;
(ii) Profit should be distributed in proportion of capital;
Dhiman Claims:
(i) Profits should be distributed equally;
(ii) He should be allowed Rs. 2,000 p.m. as remuneration for the period he managed the business, in the
absence of Harshad;
(iii) Interest on Capital and loan should be allowed@ 6% p.a.
You are required to settle the dispute between Harshad and Dhiman. Also prepare Profit and
Loss Appropriation Account.
(Ans : Harshad's share in profit Rs. 88,500, Dhiman's share in profit Rs. 88,500)
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Youtube : spk sanjay kushwaha sir :9845786742 ; 9814236035 1

[A] Fundamental / Basic of partnership.

Fundamental / Basic of partnership

This chapter contains the following topics in details.

The essential features or characteristics of partnership are:

Some important points:

 Partnership firm:- The partners are collectively known as partnership firm.

Important Contents of the Partnership Deed

However; if there is no expressed agreement on certain matters, the

(b) Interest on Capital No interest on capital allowed.

2.4 Maintenance of Capital Accounts of Partners

Fluctuating Capital Method:

Partners’ capital accounts (Fluctuating concept)

Fixed Capital Method:

Dr. Partners’ Capital Account (fixed capital) Cr.

Dr. Partner's Current Account Cr.

Questions for practice:

2.5.1 Profit and Loss Appropriation Account

Alternative journal entries for a and b

(a) For crediting partner's salary to partner's capital account:

Format of P/L Appropriation a/c

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