Plus Two Accountancy Notes Chapter 2 Accounting for Partnership-Basic Concepts

Kerala Plus Two Accountancy Notes Chapter 2 Accounting for Partnership-Basic Concepts

Summary
Partnership – Definition
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.
Features

• Number of persons – A minimum of two persons. Maximum: 10 – Banking business; others 20.
• Agreement
• Business – profit seeking and lawful
• Sharing of profits
• Agency – principal relationship
• Utmost good faith
• Unlimited liability
• No separate legal existence

Partnership deed
A document containing the terms of partnership as agreed to by the partners.
Contents of deed
Name of firm, name of partners, nature and place of business, date of commencement and duration, capital, division of profit, operation of bank accounts, interest on capital and drawings, ascertainment of goodwill, settlement of accounts, etc.

Provisions of partnership act 1932, applicable to accounting
Rules applicable in the absence of partnership deed

Preparation of Capital Accounts
(i) Fixed Capital:
Original capital invested by any partner remains the same unless additional capital is brought in or part of the capital is withdrawn as per agreement. Each partner will have two accounts –

• partner’s capital account
• partner’s current account. All adjustments like salary, interest on capital, interest on drawings, drawings, share of profit/loss, etc., are shown in current account. Capital account remains fixed.

Proforma of Partners’ Capital Account Partner’s Capital Account

Partner’s Current Account

(ii) Fluctuating Capital:
Only one account, i.e., capital account is maintained. All adjustments like drawings, interest on drawings, interest on capital, salary, share of profit/ loss, etc. are shown in the capital account itself.
Proforma of Partners’ Capital Account

Profit and loss appropriation account
This is a nominal account prepared to show how net profit has been distributed among the partners. This
is an extension of profit and loss account.

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.
To Profit and Loss Appropriation A/c.

(b) If Profit and Loss Account shows a debit balance (net loss)
Profit and Loss Appropriation A/c Dr.
To Profit and Loss A/c.

2. Interest on Capital:
(a) For crediting interest on capital to partner’s
capital account :
Interest on Capital A/c Dr.
To Partner’s Capital/ Current A/cs(individually)

(b) For transferring interest on capital to
Profit and Loss Appropriation Account :
Profit and Loss Appropriation A/c Dr.
To Interest on Capital A/c

3. Interest on Drawings:
(a) For charging interest on drawings to
partners’ capital accounts :
Partners Capital/Current A/c’s (individually) Dr.
To Interest on Drawings A/c

(b) For transferring interest on drawings to
Profit and Loss Appropriation Account :
Interest on Drawings A/c Dr.
To Profit and Loss Appropriation A/c

4. Partner’s Salary:
(a) For crediting partner’s salary to partner’s
capital account :
Salary to Partner A/c Dr.
To Partner’s Capital/CurrentA/c’s (individually)

(b) For transferring partner’s salary to
Profit and Loss Appropriation Account :
Profit and Loss Appropriation A/c Dr.
To Salary to Partner’s A/c

5. Partner’s Commission:
(a) For crediting commission to a partner,
to partner’s capital account :
Commission to Partner A/c Dr.
To Partner’s Capital/ Current A/c’s (individually)

(b) For transferring commission paid to
partners to Profit and Loss Appropriation Account.
Profit and Loss Appropriation A/c Dr.
To Commission to Partners Capital/ CurrentA/c

6. Share of Profit or Loss after appropriations:
If Profit:
Profit and Loss Appropriation A/c Dr.
To Partner’s Capital/Current A/c’s (individually)
If Loss:
Partner’s Capital/CurrentA/c’s (individually) Dr.
To Profit and Loss Appropriation A/c

The Proforma of Profit and Loss Appropriation Account is given as follows
Profit and Loss Appropriation Account:

Interest on capital
Interest on capital payed to partner’s as a compensation for their capital contribution to the firm. It is allowed at an agreed rate on the amount of capital (at the beginning and on additions) with reference to time.

Interest on drawing
Interest to be charged on the withdrawals made by the partners if it has been specifically metioned in the partnership deed. It is calculated with reference to time at an agreed rate on the amount of withdrawal.
Calculation of interest on drawings under different situations
(I) When the amount is withdrawn every month
(a) When the amount is withdrawn at the beginning of each month:
Average period = 6.5 months
Interest on drawings = Total drawings × \(\frac{6.5}{12} \times \frac{\text { Rate }}{100}\)

(b) When the amount is withdrawn at the end of each month
Average period = 5.5 months
Interest on drawings = Total drawings × \(\frac{5.5}{12} \times \frac{\text { Rate }}{100}\)

(c) When the amount is withdrawn in the middle of the month.
Average period = 6 months
Interest and drawings = Total drawings × \(\frac{6}{12} \times \frac{\text { Rate }}{100}\)

(II) When fixed amount is withdrawn quarterly
(a) If the amount is withdrawn at the beginning of each quarter.
interest on drawings= Total drawings × \(\frac{7.5}{12} \times \frac{\text { Rate }}{100}\)

(b) If the amount is withdrawn at the end of each year
Interest on drawings = Total drawing × \(\frac{4.5}{12} \times \frac{\text { Rate }}{100}\)

(III) When varying amounts are withdrawn at different intervals.
Interest on drawings = Sum of Product × \(\frac{Rate}{100} \times \frac{\text {1 }}{12}\)
Sum of Product = Withdrawal amount × Remain-ing months in the year.

Guarantee of profit to a partner
Sometimes, on admission of a new partner, the existing partners may give an assurance to the incoming partner that he shall be given a minimum amount of profit irrespective of the firm’s actual profits. This is called guarantee of profit to a partner.

The guarantee may be given either by all the partners or by one of the partners. If the share of profit of the new partner is more than the guaranteed amount, then he will get his actual share of profit.

Past Adjustments
Sometimes, after closing the books of accounts it is found that certain items are left out by mistake or have been wrongly treated. In such a case necessary adjustments are carried out in partners’ capital accounts through an account called ‘profit and loss adjustment account’.

Preparation of final accounts of a partnership firm
There is not much difference in the final accounts of a sole trading concern and that of a partnership firm. The only difference is the division of profit among the partners for which a profit and loss appropriation account has to be prepared.

Plus Two Accountancy Notes