Partnership Fundamentals Notes2

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 …………………….
Table 2.2.A1,1
Journal Entry
Table 2.2.A2
B. Interest on Drawings
  • Simple Method – Interest is computed for each drawing separately using simple interest formula:

Formula 2_1.3

  •  Product Method – Interest is computed for each drawing separately using simple interest formula:

Formula 2_2.2.2

             Product = Each Drawing x No. of Months till Financial year end

  • 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.

Formula 2_3.1 Formula 2_4.1

Important to Note:
Journal Entry
Table 2.2.B1

Attention Students!!!


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