12 Accountancy Keynotes Ch01 Fundamentals of Partnership
Transcript of 12 Accountancy Keynotes Ch01 Fundamentals of Partnership
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CBSE Quick Revision Notes and Chapter Summary
Class-12 Accountancy
Chapter 1 - Basics of artnership
!ntroduction
A business can be organised in the form of a sole proprietorship, a partnership firm or a
company. In Sole Proprietorship total capital is invested by only one person and only he is
responsible for functioning and all the profits and losses. The main disadvantage of single
ownership is that his all personal properties are always at risk and may be used for the
payment of the business liabilities. That's why the need of partnership takes place. Inpartnership loss is shared by all the partners while in single proprietorship only one
person is suffering for all losses. The main advantage of partnership is that there are two or
more persons to take the responsibility of business. All profits and losses are distributed
among the partners. Partnership comes into eistence out of agreement. The agreement
may be written or oral among the partners. It is better to have a written agreement among
the partners to avoid the conflicts or disputes. !henever there is dispute for the
distribution of the profits among the partners, in such case Indian partnership act "#$% is
applicable.
"eanin# and $efinition of artnership
A partnership is formed by an agreement. Partnership agreement may be written or oral.
The agreement should be to share the profits of the business. The firm&s business may be
carried on by all the partners or any one of them acting for all. As per the law, it is not
necessary to have a written agreement but to avoid the trouble in managing the affairs of
the partnership firm, it is always advisable to have a written partnership deed which
should be signed by all the partners.
Definition According to Section- 4 of the Indian Partnership Act, 1932 :
"Partnership is the relationship beteen persons ho ha!e agreed to the share
the profits of a bsiness carried on b# al or an# one of the$ acting for all"
%eatures&Characteristics of artnership
". '(o or "ore ersons ) A partnership business can be commenced with two or more
partners. According to the Indian ompanies Act, "#(), maimum number of persons
in case of a banking business is "* +Ten and %* +Twenty in case of other business.
Boo! "ecommended: #$%M&E B''( ') &CC'#N&NC* +By r. -inod (umar, -ishas Pulications0
1arning: his is copyrighted content of r. -inod (umar. Not to e reproduced in any form, anywhere else.
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%. A#reement Bet(een the artners - A partnership is formed by an agreement.
Partnership agreement can be written or oral. There is no fied or compulsory law for
the formation of written partnership agreement but in the absence of a written
agreement partners may face difficulty in managing the affairs of the partnership firm.
Therefore, to avoid the conflictsdisputes among the partners, it is also advisable to
have a written partnership agreement.
$. *a(ful Business - The agreement should be carrying on some legal business. /nlawful
activities are not considered as partnership business.
Example 1 - %inod and &!ra' prchased a piece of land 'ointl# and sold after so$eti$e at a
profit( )he profit earned fro$ sale of land as shared b# %inod and &!ra' *+all#( It ill not
be treated as partnership bsiness(
Example 2 : Da!id and ohn are partners doing s$ggling and share the a$ont earned
e+all#( It is not a partnership bsiness(
0. Sharin# of rofits - It is necessary to share the profitslosses of a partnership business
among the partners. A group of people doing some charitable activities, will not be termed
as partnership. The ratio of sharing profitslosses should be determined by the agreement
and in case if there is not partnership deed, in such a situation profitslosses should be
shared e1ually.
(. Business Carried on +y all or any of them actin# for all- It is not necessary for all the
partners to participate in day2to2day activities of the business. A partnership business can
be carried on by all the partners or any one of them acting for all on behalf of other
partners. In Acutal, partnership is based on the concept of 3utual Agency realtionship. A
partner is both an agent and a principal because he binds other partners by his acts and in
the same manner he is also bound by the acts of the other partners.
"eanin# and Contents of artnership $eed
A Partnership is formed by an agreement. This agreement may be written or oral. In actual,
Partnership deed is a written agreement signed by all the partners. It is a document whichcontains all terms and conditions of partnership agreed by the partners. As we know that
partnership is the result of agreement among the partners. The agreement may be written
or oral. In absence of a written agreement, there may be dispute or conflicts among other
partners regarding profits. Therefore, an agreement should be written and signed by all the
partners. Partners can make changes in the clauses of partnership deed time to time with
the consent of all partners.
Contents of partnership deed
The partnership deed usually contains the following particulars-
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". 4ame of the 5irm 6 address of 5irm 6 its main 7usiness
%. 4ames and addresses of all partners
$. 8ate of commencement of partnership
0. apital contributed by each partners
(. 9atios in which profits and losses are to be shared by the partners
). Salaries, commission, allowances payable to the partners
:. 9ights, duties and liabilities of the partners
;. 8uration of partnership, if any
#. 3ode of auditors appointment
"*. Accounting period of the firm
"". 9ules regarding the operation of bank account
"%.
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$. Interest on e is entitled for the full
amount of interest on such loan.
0. Interest on 8rawings In the absence of partnership deed, no interest will be
charged on the drawings made by the partners.
(. Salary9emuneration to
Partners
In the absence of partnership deed, no
salaryremuneration will be paid to any partner
whether his particpation in the business is more than
other partners.
"ights of partners
Right to take part in management
Right to inspect the books of accounts
Right to share profits
Right to be consulted about matters affecting the partnership business
Right to retire
uties of partners
He should be faithful to other partners
He should share the losses of the firm
To attend his duties diligently
He should not compete with the firm
reparation of rofit , *oss Appropriation Account
In case of a partnership firm, all charge are shown in profit and loss account and all appropriations
are shown in Profit and
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Profit and
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+7eing profit distributed among partners
roforma of rofit and *oss Appropriation Account
articulars Amount articulars Amount
To Interest on Capital
X xxxx
Y xxxx
Z xxxx
To Partners Salary
X xxxx
Y xxxx
Z xxxx
To Partners Commission
X xxxx
Y xxxx
Z xxxx
To Transfer to Reserve
To Profit Transferred to
X’s Capital/Current A/c xxxx
Y’s Capital/Current A/c xxxx
Z’s Capital/Current A/c xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
y Profit ! "oss A/c #profit$
y interest on %ra&in's (
X xxxx
Y xxxx
Z xxxx
xxxx
xxxx
xxxx xxxx
reparation of artners Capital
AccountsPartner's apital Accounts - It is an account
which represents the partner's interst in
the business.
In case of partnership business, a separate
capital account is maintained for each
partner. The capital accounts of partners may
be maintained by following any of the
following two methods-
+" %ied Capital Accounts ) /nder this method capitals of the partners remain fied. apital
accounts of the partners will show always redit balances. /nder This method mainly two
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accounts are prepared i.e. Partners apital Account and Partners urrent Account. There
are only two situations when fied capitals of the partners may change -
#ituation 1: When Additional !apital is introduced %$ the partners #ituation 2: When #ome part of capital is withdrawn permanentl$ %$ the partners
Bnly two items are shown in the credit side i.e. opening balance or capital introduced by
the partners and additional capital +if any introduced by the partners.
In the debit side withdrawn of capital +permanently and closing balance is shown.
artners Capital Account
articulars A B articulars A 7
'o Cash&+ank
.(ithdra(n of
capital/
'o +alance c&d
By Balance +&d
artners Current Account
articulars A B articulars A B
To ashbank
+withdrawn ofcapital
To balance cd
7y 7alance bd
7y Interest on apital7y Salary9emuneration
7y ommission7onus
7y 7alance cd +if any
Note -
". 8ebit balance of urrent Account is shown in Assets side of 7alance Sheet.
%. redit balance of urrent Account is shown in
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$e+it Side !tems
+a !ithdrawl of capital +if any
+b
8rawings made during the year +if any
+c Interest on drawings +if any
+d Share of loss +if any
+e losing balance
artners Capital Account
articulars A B articulars A B
To ashbank
+withdrawn of
capitalTo 8rawings
To Int. on 8rawings
To P< Ac +if loss
To balance cd
7y 7alance bd
7y ash7ank +additional cap.
7y Interest on apital7y Salary9emuneration
7y ommission7onus
7y 7alance cd +if any
INTEREST ON CAPITAL
Interest on partners& capital will be allowed only when it has been specifically mentionedin the partnership deed. Interest on apital can be treated as either an Appropriation
of profit or a charge against profits.
Charge &ppropriation
C)ar'e is compulsory in nature*
+)et)er t)ere is profit or loss, all
c)ar'e items &ill -e met*
.xample of C)ar'e(ffice Rent
Salary to .mployees
0ana'er’s Commission etc*
Appropriation is not compulsory in nature*
Appropriation is t)at amount of profit &)ic)
is paid to t)e partners in t)e form of interest
on capital, salary, commission/-onus etc*
T)e concept of appropriation is applica-le
only &)en t)ere is some profit*
In case of loss no appropriations*
.xample of Appropriation( Interest on capital,
salary or remuneration to partners, -onus or
commission to partners etc*
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A. Interest on Capital : An Appropriation of Profits:
When there is loss Interest on Capital is not allowed because it
is an appropriation and will be paid onlywhen there is some profit
In Case of Sufficient Profits Interest on Capital is allowed in full. All
partners are entitled for the interest on
capital at the agreed rate or rate of
interest on capital already mentioned in
the partnership deed.
In case of Insufficient Profits Interest on Capital is allowed only to the
extent of profits in the ratio of interest oncapital of each partner. In this case
partners do not get full amount of
interest.
B. Interest on Capital: As a Charge against Profits:
Interest on Capital is always allowed in full irrespective of amount of profits or
losses
Journal Entries
a. In case of sufficient profits
Profit and Loss Appropriation A/c Dr.
To Interest on Capital A/c
(Being interest on capital transferred to P & L Appropriation A/c)
b. In case of Insufficient Profits or Losses
Profit and Loss / Profit and Loss Adjustment A/c Dr.
To Interest on Capital A/c
(Being interest on capital transferred to P&LAdjustment A/c)
Note :
Interest on Capital is always calculated on the opening capital. If Opening Capital
is not given in the question, it should be ascertained as follows :
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Calculation of 0penin# Capital
apital at the end +closing capital
A88 - 8rawings made during the year
A88 - Share of
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"ethods for Calculation of interest on dra(in#s
1 hen a fied amount is (ithdra(n +y the partners after re#ular intervals and rate of
interest is #iven in the 3uestion (ith the (ord per annum
Step 2. Calculate aerage period :
aerage period 3 ime after first drawing 4 time after last drawing
5
Step 5. Calculate interest on drawings :
interest on drawings 3 otal drawings 6 "ate/277 6 &erage period
2 hen rate of interest is #iven (ithout the (ord per annum
In such a case, Interest on Drawings is calculated with a flat rate irrespective of date ofdrawings.
4 hen $ifferent amounts are (ithdra(n at different time intervals
!e have the following two methods to calculate the amount of Interest on 8rawing -
". Simple !nterest "ethod
In this method, interest on drawing is calculated for each amount of drawing
indivdually of the basis of periods for which
% roduct "ethod
In this method, the amounts of drawings are multiplied by the period for which itremained withdrawn during the period, Interest for " month is calculated on the sum of
these products.
5 6alf 7early $ra(in#s
6alf yearly $ra(in#s for year (hen)
+a 8rawings are made in the begnning of each period +half2year Interest on drawing C
Amount 9ate"** #"%
+b 8rawings are made in the middle of each period +half year Interes on drawing C
Amount 9ate"** )"%
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+c 8rawings are made at the end of each period +half year
Interest on drawing C Amount 9ate"** $"%
%or monthly dra(in#s for 8 months
+a 8rawings are made in beginning of each month
Interst C Amount 9ate"** $.("%
+b !hen drawings are made in the middle of each month
Interest C Amount 9ate"** $"%
1hen date of withdrawal is not specified
Sometimes date of &it)dra&al is not 'iven in t)e 1uestion2 amount &it)dra&n -y t)e partners as
dra&in's is 'iven only* In suc) a case it is assumed t)at t)e amount is &it)dra&n at avera'e -asis or
&it)dra&n evenly t)rou')out t)e year and interest &ill -e c)ar'ed for t)e avera'e period &)ic) &ill
-e assumed to -e 3 mont)s* It is assumed t)at amount is &it)dra&n in t)e middle of every mont)* T)e
follo&in' formula &ill -e used*
Interest on %ra&in's 4 Total %ra&in's x Rate/566 x 3/57
%mportant Points
5* If amount is &it)dra&n in t)e -e'innin' of eac) mont), interest is calculated for 3 8
mont)s*7* If amount is &it)dra&n in t)e middle of eac) mont), interest is calculated for 3 mont)s*
9* If amount is &it)dra&n at t)e end of eac) mont), interest is calculated for : 8 mont)s*
;* If amount is &it)dra&n in t)e -e'innin' of eac) 1uarter, interest is calculated for < 8
mont)s*
:* If amount is &it)dra&n at t)e middle of eac) 1uarter, interest is calculated for 3
mont)s*
3* If amount is &it)dra&n at t)e end of eac) 1uarter, interest is calculated for ; 8
mont)s*
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Concept of ast Ad9ustment
Past AdDustments are concerned with the previous entries which were left out or
ommitted or wrongly entered in the accounts. If, after preparation of 5inal
Accounts of firm, it is found that some errors or omission in accounts hasoccurred than such errors or omissions are rectified in the net year by
passing an adDustment entry.
A statement is prepared to ascertain the net effect of such errors or omissions
on partner's capitalcurrent accounts in the following manner.
&dustment ale
Particulars & B
Step 2. 1hat &mount partners should get
+%nterest 4 Salary 4 Commission 4 Profits etc.0
Step 5. $ess : &mount already receied +wrong Profit0
66666
66666
66666
66666
66666
66666
Now compare Step 2 and Step 5 and decide Partner is gainer or sacrificing.
&fter this ma!e the following entry :
8ainer partner9s &/c r.
o Sacrificing Partner9s &/c
:;ARAN'EE 0% R0%!'S '0 A AR'NER
Euarantee is an assurance given to the partner of the firm that at least a fied
amount shall be given to himher irrespective of hisher actual share in profits of
the firm. If actual share in profits is less than the guaranteed amount in that case
the deficit amount shall be borne either by the firm or by any partner as the
case may be.
ote : .arantee to a partner is gi!en for $ini$$ share in profits( If the actal
share in profits is $ore than the $ini$$ garanteed a$ont then the actal
profits ill be alloed to the partner
Case ) 1 hen #uarantee is #iven +y %!R" .ie< +y all the artners of the firm/
". Euaranteed amount to a partner is written in Profit and
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remaining ratio.
Case 2) hen #uarantee is #iven +y a partner or partners to another partner
".
alculate the share in profits for the partner to whom guarantee is given
%. If share in profits is more than the guaranteed amount, distribute the profits as
per the profit and loss sharing ratio in usual manner.
$. If share in profits is less than the guaranteed amount, find the difference
between the share in profits and the guaranteed amount and the difference is
known as 8eficiency. 8eficiency is distributed among the partner or partners
who guaranteed in a certain ratio and subtracted from his or their respective
shares.