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
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