Partnership Accounts – Fundamentals of Partnership
Partnership
“Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.”
-Section 4 of the Indian Partnership Act, 1932
Essential Features of Partnership
1. Association of two or more members: Partnership is the association of minimum 2 members and maximum 20 (10 in case of Banking).
2. Agreement:There is an agreement between the members which are the set of rules and regulations on which the partnership proceeds. This agreement is also known as Partnership Deed.
3. Carrying of Business: All partners may carry the business or one of them can act for all for carrying of the business.
4. Lawful Business: The business on which the partnership is formed must be legal.
5. Profit Sharing: The agreement between the partners also determines the profit/loss share ratio of the partnership.
Partnership Deed
Partnership can be formed on the basis of the oral agreement but it is advised to have a written document which have all the rules and regulation on which the partnership has to proceeds.
The written document which has all the rules and regulation is known as the Partnership Deed.
Contents of Partnership Deed
1. Name and address of the firm
2. Name and address of all partners
3. Profit and loss sharing ratio
4. Contribution to capital by each partner
5. Rights, types of roles and duties of partners
6. Duration of partnership
7. Rate of interest on capital, drawings and loans
8. Salaries, commission, if payable to partners.
9. Settlement of disputes amongst partners
10. Rights and Duties of partners
11. Rules regarding admission, retirement, death and dissolution of the firm, etc.
Provision when Partnership Deed is Absent
S. No. | Adjustment | Provision |
1 | Share of Profit/ loss | Equal distribution in equal ratio. |
2 | Interest on Capital | No interest on capital is allowed. |
3 | Interest on Drawings | No interest on drawing. |
4 | Interest on loan | 6% p.a. is paid (in case of loss also). |
5 | Salary / Commission | No Salary, No Commission is allowed. |
Profit and Loss Appropriation Account
Profit and Appropriation Account is an extension of Profit and Loss Account which starts after calculating the Net Profit.
1. It is a Nominal Account.
2. It discloses how the profit distributed among Partners (as salary, commission, interest etc.).
3. This account follow the rules of Partnership Deed.
Performa of Profit and Loss Appropriation Account
Profit and Loss Appropriation Account
Dr. For the year ended….. Cr.
Particulars | Amount | Particulars | Amount |
To Interest on Capitals: X Y To Partner’s Salary: X Y To Partner’s Commission: X Y Reserve To Profit transferred to (Balancing Figure) X’s Capital/Current A/c Y’s Capital/Current A/c | By Net Profit A/c (-) interest on partners loan (-) outstanding expenses (+) Accrued Income (Net Profit for appropriation after adjusting the items of charge against profit e.g. interest on partners loan, manager’s commission, etc.) By Interest on Drawings: X Y | ||
Appropriation and Charge
Appropriation: Appropriation are the balances which is distributed in case of Profit only. And if the profit is less than the required amount then the adjusting entry is passed to distribute amounts. These balances are shown in Profit and Loss Appropriation Account.
Charge: Charge amount are those amount which is must distributed in case of loss or less profit also. These balances are not shown in Profit and Loss Appropriation Account.
Balances | Appropriation / Charge |
Interest on capital | Appropriation |
Salary, Commission | Appropriation |
Transfer to General Reserve | Appropriation |
Interest on loan | Charge |
Rent paid to Partner | Charge |
1. Partners Capital Account:
There are two types of Capital Account.
Two Accounts are created:
1. Partners Capital A/c
2. Partners Current A/c
When Capital is not Fixed (fluctuating capital)
One Account is created:
1. Partners Capital A/c
a) Partners Capital Account when capital is fixed:
Partners Capital Account
Dr. For the year ended….. Cr.
Particulars | X | Y | Particulars | X | Y |
To Cash/Bank (Withdrawal of capital) To Balance c/d (Closing Balance) | By Balance b/d (Opening Balance) By Cash/Bank (Additional capital | ||||
Partners Current Account
Dr. For the year ended….. Cr.
Particulars | X | Y | Particulars | X | Y |
To Balance b/d (In case of debit balance) To Drawings To Interest on Drawings Profit and Loss (Loss- if any) To Balance c/d (If credit is more than debit) | By Balance b/d (In case of credit balance) By Interest on Capital By Partners Salary By Commission By Profit and Loss Appropriation (Profit) By Balance c/d (If debit is more than credit) | ||||
b) Partners Capital Account when capital is not fixed (Fluctuating):
Partners Capital Account
Dr. For the year ended….. Cr.
Particulars | X | Y | Particulars | X | Y |
To Drawings To Interest on Drawings Profit and Loss (Loss- if any) To Balance c/d (If credit is more than debit) To Balance c/d (Closing Balance) | By Balance b/d (Opening Balance) By Cash/Bank (Additional capital) By Interest on Capital By Partners Salary By Commission By Profit and Loss Appropriation (Profit) By Balance c/d (If debit is more than credit) | ||||
2. Interest on Partners Drawings:
Interest on Drawings will be charged at the rate prescribed partnership or orally decided (agreed) by the partners at the time of formation of partnership.
Months used when the total drawings and rate is given | |
When the rate is given as 10% p.a. | Month used 6/12 |
When the rate is given as 10% | Month used 12/12 |
Treatment of Interest on Drawings (Journal)
Date | Transactions | L.F. | Debit | Credit |
1 2 | Partners’ Capital A/c Dr. OR Partners’ Current A/c (If capital is fixed) Dr. To Interest on Drawings A/c (Interest charged on partners’ drawings) Interest on Drawings A/c Dr. To Profit and Loss Appropriation A/c (Interest on drawings transferred to Profit and Loss Appropriation A/c) | |||
Calculation of Interest on Drawings
a. When equal amount is withdrawn ant equal intervals. b. When unequal amount is withdrawn at unequal intervals. | |||
Case I. When Equal Amount of Drawings are Withdrawn at Regular Intervals
In this case, partners withdraw equal amount from their partnership business at regular
intervals say, monthly, quarterly or half-yearly. In all these situations, interest is computed
on the basis of the average period. The ascertainment of average period is explained below.
When equal amount is withdrawn on monthly basis | ||
At the 'beginning' of each month | Average Period = (total period in months + 1)/2 = 13/2 = 6.5 months | Interest = annual drawings x rate/100 x 6.5/12 |
At the 'middle' of each month | Average Period = =(total period in months )/2 = 12/2 = 6 months | Interest = annual drawings x rate/100 x 6/12 |
At the 'end' of each month | Average Period = =(total period in months - 1)/2 = 11/2 = 5.5 months | Interest = annual drawings x rate/100 x 5.5/12 |
When equal amount is withdrawn on Quarterly basis (3 months in 1 Quarter) | ||
At the 'beginning' of each quarter | Average Period =(total period in months + 3)/2 = 15/2 = 7.5 months | Interest = annual drawings x rate/100 x 7.5/12 |
At the 'middle' of each quarter | Average Period = =(total period in months)/2 = 12/2 = 6 months | Interest = annual drawings x rate/100 x 6/12 |
At the 'end' of each quater | Average Period = =(total period in months - 3)/2 = 9/2 = 4.5 months | Interest = annual drawings x rate/100 x 4.5/12 |
Case II. When Unequal Amount of Drawings are Withdrawn at Different Intervals
Sometimes partners of a partnership firm withdraw different amounts of drawings from
the business at different time intervals. Therefore, interest on drawings cannot be
computed using the average period. In this case, interest on drawings is calculated using
Simple Method or Product Method.
Interest on Drawings = Sum of Drawings x rate/100 x months used/12
Pattern to calculate the Sum of Drawings (Product Method)
Date | Drawings | No. of Months (till the end of year) | Product |
(+) | |||
Sum of Product | <> |
3. Interest on Partners Capital
Journal
Date | Transactions | L.F. | Debit | Credit |
1 2 | Partners’ Capital A/c Dr. OR Partners’ Current A/c (If capital is fixed) Dr. To Interest on Capital A/c (Interest on partners’ capital) Interest on capital A/c Dr. To Profit and Loss Appropriation A/c (Interest on capital transferred to Profit and Loss Appropriation A/c) | |||
Interest on Capital = Capital x rate/100 x months used/12
4. Interest on Partners Loan:
When Partnership Deed is Absent | 6% |
When Partnership Deed is there | At agreed Value |
5. Guarantee to a Partner
Guarantee of Profit to a Partner
6. Partnership of past adjustments (Omission)
Step | Particulars | A’s Capital A/c | B’s Capital A/c | Firm | |||
Dr. | Cr. | Dr. | Cr. | Dr. | Cr. | ||
Step 1 | Do Reverse adjustment with all the transaction which are been treated wrongly in past | ||||||
Step 2 | Now do all the correct dealings with right adjustments | ||||||
Step 3 | Balance firm total and calculate the divisible profit/loss | ||||||
Step 4 | Balance individually all the partners capital a/c and adjust it with Dr./Cr. | ||||||
Journal
Date | Transactions | L.F. | Debit | Credit |
Partners Capital A/c Dr. To Partner’s Capital A/c (Being Adjusted Entry Passed) | ||||
For Queries:
Abhishek Poddar - 9716746576,
Sunil Yadav - 9312736111
0 comments:
Post a Comment