Partnership is a relation of mutual trust and faith. Partnership accounts should present a true and fair picture of the partnership business.
Definition :-
It is a relationship between persons who have agreed to share the profit of a business. Carried on by all or any of them acting for all (Sec.4 of Indian Partnership Act, 1932) .
Characteristics of partnership
1. There must be at least two persons to form a partnership maximum 10 persons in banking business and 20 persons in case of other business to form a partnership.
2. Partnership is an agreement between two or more persons.
3. Partners must agree to carry on business.
4. The agreement between the partners must be aimed at sharing the profits of the business.
5. Each partner is an agent as well as partner of the firm.
6. Each partner can participate in the conduct of business.
Partnership Deed : It Contains following points :-
1. The name and address of the firm;
2. Names and addresses of the partners.
3. The type and nature of the business the firm proposes to do.
4. Amount of capital [fixed or fluctuating] to be contributed by each partner.
5. The rate of interest is to be allowed on capitals.
6. How much amount withdrawn by partners for personal use.
7. The rate of interest charged on partner’s drawingss.
8. Formula of valuation of goodwill in case of retirement or admission of a partner.
10. Salary to any partner for the work done by him.
11. Accounting period of the firm. Yearly or half-yearly and the date on which accounts are to be closed every year.
12. Safe custody of the books of accounts and other documents of the firm.
13. Whether the firm’s books will be audited or not? If so, the mode of auditors appointment.
14. Date of commencement of the partnership.
15. The period for which the partnership has been established and the mode of dissolution of partnership.
16. Whether decision in the case of garner vs. Murray is to apply in the case of insolvency of a partner.
17. Account in the bank will be opened in firms name or in some partner’s name? Who will have the right to sign the cheques ?
18. Rules to be followed in case of admission of a partner.
19. Rules to be followed while settling the accounts on retirement.
Importance of Partnership Deed
1. It regulates the rights, duties and liabilities of each partner.
2. It helps to avoid any misunderstanding amongst the partners.
3. Any dispute amongst the partners may be settled easily as the partnership deed may be readily referred to .
Rules Applicable in the Absence of Partnership Deed
1. Profits and Losses are to be shared equally irrespective of their capital contribution.
2. No intrest in capitals shall be allowed to the partners.
3. No interest is to be charged on drawingss.
4. Interest at the rate of 6% per annum is to be allowed on a partner’s loan to the firm.
5. No entitlement of salary to any partners.
6. Without the consent of all existing partners, No new partner can be admitted to the firm.
7. Each partner can participate in the conduct of business.
8. Each partner can inspect the books of firm and can take a copy of the same.
The journal entries that are passed for various items Shown in the profit and loss appropriation account are as follows :
1. Entry for Interest on Capital
(1) on allowing interest on capital
interest on capital A/c Dr
To partner’s capital a/c / current a/c.
(interest on capital at -----% p.a.)
(2) on closure of interest on capital A/c
profit & loss appropriation A/c Dr
To interest on capital A/c
2. Entry for Interest on Drawingss
(1) on charging interest on drawingss
Partner’s capitals A/c /current a/c Dr
To interest on drawingss A/c
(Interest on drawingss at-----% p.a.)
(2) on closure of interest on drawingss A/c
Interest on drawingss A/c Dr
To profit & loss appropriation a/c
3. Entry for Salary or Commission Payable to a Partner
(1) on allowing salary or commission to a partner
Partner’s salary / commission A/c Dr
To partner’s capital A/c / current A/c
(2) on closure of salary or commission account
profit & loss appropriation A/c Dr
To partner’s salary / commission a/c.
4. Entry for Transferring a Part of Profit to Reserve:
Profit & loss appropriation A/c Dr
To reserve A/c
5. Entry for transfer of credit balance of profit & loss appropriation A/c (being profit)
Profit & loss appropriation
To partner’s capital or current A/c
6. Entry for Transfer of debit balance of profit & loss appropriation A/c (being loss)
Partner’s capital or current a/c Dr
To profit & loss appropriation A/c
Profit and Loss Appropriation Account
Dr. Cr.
Particulars
|
Rs
|
Particulars
|
Rs
|
To Salary to Partners : X
Y
To Commission to Partners : X
Y
To Interest on Partner’s Capital : X
Y
To Reserve A/c
To Profit transferred to Partner’s Capital or Current A/c : X
Y
|
By Profit & Loss A/c
By Interest on Drawingss : X
Y
By Loss Transferred to Partner’s Capital or current a/c. : X
Y
|
Calculation of Interest on Drawingss :
Amount of Drawingss X Rate of interest X number of months
100 12
Proforma of Capital Accounts When the capitals are fixed
Partner’s Capital A/c.
Particulars
|
A
|
B
|
C
|
Particulars
|
A
|
B
|
C
|
To Cash / Bank a/c (permanent withdrawn of capital)
To balance c/d
(closing balance)
|
By balance b/d
(opening balance )
By case / bank A/c (additional capital)
|
Partner’s Current Account
Particulars
|
A
|
B
|
C
|
Particulars
|
A
|
B
|
C
|
To Balance b/d
[In case of debit opening balance]
To Drawingss
To Interest on Drawingss
To P&L A/c
(Share of loss, in case of loss )
To Balance c/d
|
By Balance B/d
(In case of credit opening balance )
By Interest on Capital
By Salary
By Commission
By P&L Appropriation a/c
(Share of Profit, in case of profit)
|
When the capitals are fluctuating :
Partner’s Capital Account
Particulars
|
A
|
B
|
C
|
Particulars
|
A
|
B
|
C
|
To Drawingss
To Interest on Drawingss
To Profit and Loss A/c (In case of loss, share of loss )
To Balance c/d
|
By Balance B/d
(opening balance)
By Cash / Bank a/c
(Additional capital)
By Interest on Capital
By Salary
By Commission
By P&Lappropriation
(share of profit )
|
Distinction Between Fixed Capital Accounts and Fluctuating Capital Accounts
Fixed Capital Accounts
|
Fluctuating Capitals Accounts
|
|
|
Calculation of Manager’s Commission on Net Profits
(1) on profits before charging such commission
Profit (before commission) X Rate of Commission
100
(2) on profits after charging such commission
Profit (before commission) X Rate of Commission
100 + Rate of Commission
Interest on Partner’s Loan to the Firm
Rate of Interest:
if their no agreement for the rate of interest, then charge interest on loan @ 6% per annum.
Nature of Interest: interest against partner’s loan allowed whether there are profit or not.
Accounting Treatment:
It is treated as a charge against the profits and hence interest on partner’s loan is debited to profit & loss A/c and not to profit & loss appropriation A/c.
Interest on partner’s loan is recorded in “interest accrued account “.
1. Entries for interest on partner’s loan
.
(1) for providing interest on partner’s loan:
Interest on partner’s loan a/c Dr
To interest accrued a/c
(2) for closing the interest on partner’s loan :
P&L a/c Dr
To interest on partner’s loan a/c.
Distinction Between Charge Against Profit and Appropriation out of Profit
S.No.
|
Charge Against Profit
|
Appropriation out of Profit
|
1.
2.
3.
|
It indicates expenses to be deducted from profits while calculating net profit or loss.
It is debited to profit and loss account
It is necessary to make charge against profits even if there is loss.
|
It indicates distribution of net profit to various heads.
It is debited to profit and loss appropriation account.
Appropriations are made only when there is profit.
|
Methods of calculating interest on drawingss:
1. Simple method
Interest on drawingss = Amount of drawingss X Rate of Interest X Months
100 12
2. Product Method:
Interest on drawingss = Total of products X Rate of Interest X 1
100 12
3. Average Method:
Case (1) When Drawings is made in the beginning of every month: If the drawings of equal amount
Average period = Time left after first drawings + Time left after last drawings
2
= 12 Months + 1 Month = 6½ Months
2
Case (2) When Drawings are made at the end of every month:
Average period = Time left after first drawings + Time left after last drawings
2
= 11 Months + 0 Month = 5½ Months
2
Case (3) When Drawings are made in middle or at any time during the month: (middle)
Average period = Time left after first drawings + time left after last drawings
2
= 11.5 Months + 0.5 Month = 6 Months
2
Case (4) When drawings of equal amount are made in the beginning of each quarter:
Average period = Time left after first drawings + Time left after last drawings
2
= 12 Month + 3 month = 7½ Months
2
Case (5) When drawings of equal amount are made at the end of each quarter:
Average period = Time left after first drawings + Time left after last drawings
2
= 9 Months + 0 Month =4½ Months
2
Case (6) When drawings of equal amount are made during the middle of each quarter:
Average period = Time left after first drawings + Time left after last drawings
2
= 10.5 Months + 1.5 Months = 6 Months
2
Case (7) When drawings of equal amount are made only during a period of 6 Months :
(i) In the beginning of each month:
Average period = 6 Months + 1 Month = 3½ Months
2
(ii) At the end of each month :
Average period = 5 Months + 0 Month = 2½ Months
2
(iii) In the middle of each month:
Average period = 5½ Months + ½ Month = 3 Months
2
Case (8) When drawings of equal amount are made during 9 months.
(i) In the beginning of each month
Average period = Time left after first drawings + Time left after last drawings
2
= 9 Months + 1 Month = 5 Months
2
(ii) At the end of each month
Average period = Time left after first drawings + Time left after last drawings
2
= 8 Months + 0 Month = 4 Months
2
(iii) In the middle of each month
Average period = Time left after first drawings + Time left after last drawings
2
= 8.5 Months + 0.5 Month = 4.5 Months
2
Case (9) When the rate of interest is given without the word ‘per annum’ interest will be charged without considering time or date of drawings.
1. Interest on Drawings is charged @ 10% per anum
Amount on Drawings X Rate of Interest X 6
100 12
2. Interest on Drawings is charged @ 10%
Amount on Drawings X Rate of Interest
100
Adjustment in the Closed Accounts:
Accounts have been closed after the financial year, it is discovered that there have been some errors or omission in the old accounts. In such cases instead of altering the old accounts, and the signed balance sheet an adjustment entry for such error or omission is made at the beginning of the next year. Following adjustments are made:
1. When Interest on Capitals or Drawings may have been omitted.
2. When profits and losses have been distributed among the partner in a wrong proportion.
3. When profit sharing ratio has been altered with effect from some past date.
4. When salary or commission payable to a partner has been omitted.
Guarantee of Profit to a Partner :
Sometimes a partner is guaranteed that he shall get a certain minimum amount of profits of the firm. Such a guarantee may be given either (i) any one of the partners or (ii) by all other partners in a particular ratio. When the profits of the firm are not adequate then the ‘excess’ paid to the guaranteed partner should be charged to the partner who has given the guarantee.
Appreciate perusing the article above ,truly clarify everything in points of interest the blog is extremely interesting and viable .thank you
ReplyDeleteHome Tutors in Lucknow | Home Tutors Lucknow