“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.”
Relation between persons
Who have agreed (written/oral)
To share the profits (losses)…business with a motive to earn profits
Of a business…legal business (theft/cheating, scam)
Carried on by all or
Any of them acting for all
B. Nature of Partnership
C. Nature of Partnership
To share profits in an agreed ratio
To take part in the conduct of the business
Right to be consulted
Right to inspect the books of accounts
Right to retire from the firm
To disallow admission of new partners (Imp).
Example 40 partners, want to admit new partner, one partner says No
D. Contents of Partnership Deed
Partnership agreement is the mutual understanding on which Partners decide to do a legal business to earn profits.
It may be oral or written.
The written, signed and registered version of the agreement is also called partnership deed
Deed is optional/non mandatory/non compulsory but recommended
Profit will be distributed/apportioned as per the agreement
Agreement once made needs to be honoured in all the conditions
The Partnership Deed may contains basically two types of matters:
Management related matters
Money related matters
E. Provisions relevant for Accounting
F. Interest on Loan given by Partner
Is a charge against profit (accrued even if no Profits)
Interest rate is as provided in the Partnership deed
If no partnership deed or not provided in partnership deed – @6% p.a.
Interest = Amount of Loan X Rate of Interest X Time
Interest is credited to Partner Loan Account (and not to Partner Capital/Current A/C)
Journal Entry
G. Rent Payable to Partner
Is a charge against profit (accrued even if no Profits)
Charge since rent is paid for using property for business purpose
Rent is credited to Rent Payable Account (and not to Partner Capital/Current A/C) Capital/Current A/C)
Journal Entry
H. Remuneration to Partner – Salary/Commission
Payable only if provided in the partnership deed
If loss – it is not payable, If sufficient profits – Fully allowed
If insufficient profits – Profits are distributed in the ratio of Salary/Commission to be allowed
Salary/Commission is credited to Partner’s Capital/Current Account
Journal Entry
Topic - 2 | INTEREST ON CAPITAL AND DRAWINGS:
Video Lectures [2]
Study Material & Notes
Study Material & Notes for the Chapter 1
Partnership – Fundamentals
II. INTEREST ON CAPITAL AND DRAWINGS
A. Interest on Capital
Interest is computed on time proportion basis, number of days capital deployed in Firm
Interest is computed only on Opening Capital, Additional Capital & drawings against capital
Interest is not computed on Profit/Loss
Interest on Capital= Amount of capital X Rate of Interest X Time
If only Closing Capital is given, interest cannot be computed on Closing capital
We need to find out Opening Capital and capital additions/deletions
If Opening Capital is not given prepare Capital A/C or use formula
Opening Capital=Closing Capital + Loss + Drawings- Profit – Additional Capital
Prepare Ledger Account as per the below format
Partner Capital Account
For the year ended …………………….
Journal Entry
B. Interest on Drawings
Product Method (unequal amount withdrawn at different dates)
Simple Method – Interest is computed for each drawing separately using simple interest formula:
Product Method – Interest is computed for each drawing separately using simple interest formula:
Product = Each Drawing x No. of Months till Financial year end
Average Period Method (Uniform drawings & uniform time internal)
Two prerequisites / condition of using this method
Uniform/Similar time intervals…monthly, quarterly, half-yearly etc.
Uniform/Similar amounts on each interval say 1000, 5000, 10000 etc.
Important to Note:
If date of withdrawal is not given, the interest on total drawings for the year is calculated for six months on the average basis
When rate of interest is given without the word ‘per annum’ interest is charged without considering the time factor.
Journal Entry
Topic - 3 | PROFIT & LOSS APPROPRITATION ACCOUNT AND FIXED & FLUCTUATING CAPITAL :
Video Lectures [2]
Study Material & Notes
Study Material & Notes for the Chapter 1
Partnership – Fundamentals
III. PROFIT & LOSS APPROPRITATION ACCOUNT
Profit & Loss Account
Profit & Loss Appropriation Account
Appropriation > Available Profits
Profit is distributed in the ratio of appropriations to be made, determined as follows:
Determine the amount payable as appropriation to each partner as per the Partnership deed (e.g. Salary, commission, interest on capital)
Total the amount of appropriations for each partner separately
The ratio of total appropriations amongst partners becomes the ratio for distribution of available profits among the partners
Study Material & Notes for the Chapter 1
Partnership – Fundamentals
IV. FIXED AND FLUCTUATING CAPITAL
Capital Accounts
A. Fixed Capital
Partners’ Capital Accounts
Partners’ Current Accounts
B. Fluctuating Capital
Partners’ Capital Accounts
A. Fixed Capital Ledgers
Partners’ Capital Accounts
Partners’ Current Accounts
B. Fluctuating Capital Ledgers
Partners’ Capital Accounts
C. Difference between Fixed & Fluctuating Capital Methods
In the absence of any information, always prepare fluctuating A/C
Topic - 4 | PAST ADJUSTMENT:
Video Lectures [2]
Study Material & Notes
Study Material & Notes for the Chapter 1
Partnership – Fundamentals
V. PAST ADJUSTMENT
Method-1 When net impact is routed through partners accounts
Process Steps
Prepare an analytical table in the following format
Benefits to partners are mentioned on credit side of respective Partner column and on the debit side of firm and vice versa
Total of columns designated to firm will give Firm’s net profit/loss
Distribute the profit/loss in profit sharing ratio
Sum partners columns and compute difference of total debit and total credit
If net difference is debit, that partner’s capital account will be debited and vice versa
Journal Entry
Method-2 Adjustment entry for each adjustment
Topic - 5 | GUARANTEE OF PROFITS:
Video Lectures [1]
Study Material & Notes
Study Material & Notes for the Chapter 1
Partnership – Fundamentals
VI. GUARANTEE OF PROFITS
A. Definitions
B. Type of Guarantees
C. Order of applying Guarantees
In case in a question two or more Guarantees are to be applied then this order is to be followed
By Partner To Firm
By Firm to Partner
By Partner to Another Partner(s)
When beneficiary’s actual share of profit is more than the guaranteed amount, then his share of profit is given to him, not guaranteed amount of profit.
