\nPartnership – Definition<\/span>
\nThe relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.
\nFeatures<\/span><\/p>\n
- \n
- Number of persons – A minimum of two persons. Maximum: 10 – Banking business; others 20.<\/li>\n
- Agreement<\/li>\n
- Business – profit seeking and lawful<\/li>\n
- Sharing of profits<\/li>\n
- Agency – principal relationship<\/li>\n
- Utmost good faith<\/li>\n
- Unlimited liability<\/li>\n
- No separate legal existence<\/li>\n<\/ul>\n
Partnership deed<\/span>
\nA document containing the terms of partnership as agreed to by the partners.
\nContents of deed
\nName 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.<\/p>\nProvisions of partnership act 1932, applicable to accounting<\/span>
\nRules applicable in the absence of partnership deed<\/p>\n\n\n
\n Profit sharing<\/td>\n equal<\/td>\n<\/tr>\n \n Interest on capital<\/td>\n no<\/td>\n<\/tr>\n \n Interest on loan<\/td>\n 6%<\/td>\n<\/tr>\n \n Interest on drawings<\/td>\n no<\/td>\n<\/tr>\n \n Remuneration to partners<\/td>\n no<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n Preparation of Capital Accounts<\/span>
\n(i) Fixed Capital:
\nOriginal capital invested by any partner remains the same unless additional capital is brought in or part of the capital is withdrawn as per agreement.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 –<\/p>\n- \n
- partner\u2019s capital account<\/li>\n
- partner\u2019s 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.<\/li>\n<\/ul>\n
Proforma of Partners\u2019 Capital Account Partner\u2019s Capital Account
\n![\"Plus](\"https:\/\/www.aplustopper.com\/wp-content\/uploads\/2019\/06\/Plus-Two-Accountancy-Notes-Chapter-2-Accounting-for-Partnership-Basic-Concepts-1.jpg\")
<\/p>\nPartner\u2019s Current Account
\n![\"Plus](\"https:\/\/www.aplustopper.com\/wp-content\/uploads\/2019\/06\/Plus-Two-Accountancy-Notes-Chapter-2-Accounting-for-Partnership-Basic-Concepts-2.jpg\")
<\/p>\n(ii) Fluctuating Capital:
\nOnly 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.
\nProforma of Partners\u2019 Capital Account
\n![\"Plus](\"https:\/\/www.aplustopper.com\/wp-content\/uploads\/2019\/06\/Plus-Two-Accountancy-Notes-Chapter-2-Accounting-for-Partnership-Basic-Concepts-3.jpg\")
<\/p>\nProfit and loss appropriation account<\/span>
\nThis is a nominal account prepared to show how net profit has been distributed among the partners. This
\nis an extension of profit and loss account.<\/p>\nJournal Entries:
\n1. Transfer of the balance of Profit and Loss Account to
\nProfit and Loss Appropriation Account:
\n(a) If Profit and Loss Account shows a
\ncredit balance (net profit) :
\nProfit and Loss A\/c Dr.
\nTo Profit and Loss Appropriation A\/c.<\/p>\n(b) If Profit and Loss Account shows a debit balance (net loss)
\nProfit and Loss Appropriation A\/c Dr.
\nTo Profit and Loss A\/c.<\/p>\n2. Interest on Capital:
\n(a) For crediting interest on capital to partner\u2019s
\ncapital account :
\nInterest on Capital A\/c Dr.
\nTo Partner\u2019s Capital\/ Current A\/cs(individually)<\/p>\n(b) For transferring interest on capital to
\nProfit and Loss Appropriation Account :
\nProfit and Loss Appropriation A\/c Dr.
\nTo Interest on Capital A\/c<\/p>\n3. Interest on Drawings:
\n(a) For charging interest on drawings to
\npartners\u2019 capital accounts :
\nPartners Capital\/Current A\/c\u2019s (individually) Dr.
\nTo Interest on Drawings A\/c<\/p>\n(b) For transferring interest on drawings to
\nProfit and Loss Appropriation Account :
\nInterest on Drawings A\/c Dr.
\nTo Profit and Loss Appropriation A\/c<\/p>\n4. Partner\u2019s Salary:
\n(a) For crediting partner\u2019s salary to partner\u2019s
\ncapital account :
\nSalary to Partner A\/c Dr.
\nTo Partner\u2019s Capital\/CurrentA\/c\u2019s (individually)<\/p>\n(b) For transferring partner\u2019s salary to
\nProfit and Loss Appropriation Account :
\nProfit and Loss Appropriation A\/c Dr.
\nTo Salary to Partner\u2019s A\/c<\/p>\n5. Partner\u2019s Commission:
\n(a) For crediting commission to a partner,
\nto partner\u2019s capital account :
\nCommission to Partner A\/c Dr.
\nTo Partner\u2019s Capital\/ Current A\/c\u2019s (individually)<\/p>\n(b) For transferring commission paid to
\npartners to Profit and Loss Appropriation Account.
\nProfit and Loss Appropriation A\/c Dr.
\nTo Commission to Partners Capital\/ CurrentA\/c<\/p>\n6. Share of Profit or Loss after appropriations:
\nIf Profit:
\nProfit and Loss Appropriation A\/c Dr.
\nTo Partner\u2019s Capital\/Current A\/c\u2019s (individually)
\nIf Loss:
\nPartner\u2019s Capital\/CurrentA\/c\u2019s (individually) Dr.
\nTo Profit and Loss Appropriation A\/c<\/p>\nThe Proforma of Profit and Loss Appropriation Account is given as follows<\/span>
\nProfit and Loss Appropriation Account:
\n![\"Plus](\"https:\/\/www.aplustopper.com\/wp-content\/uploads\/2019\/06\/Plus-Two-Accountancy-Notes-Chapter-2-Accounting-for-Partnership-Basic-Concepts-4.jpg\")
<\/p>\nInterest on capital<\/span>
\nInterest on capital payed to partner\u2019s 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.<\/p>\nInterest on drawing<\/span>
\nInterest 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.
\nCalculation of interest on drawings under different situations<\/span>
\n(I) When the amount is withdrawn every month<\/span>
\n(a) When the amount is withdrawn at the beginning of each month:
\nAverage period = 6.5 months
\nInterest on drawings = Total drawings \u00d7 \\(\\frac{6.5}{12} \\times \\frac{\\text { Rate }}{100}\\)<\/p>\n(b) When the amount is withdrawn at the end of each month
\nAverage period = 5.5 months
\nInterest on drawings = Total drawings \u00d7 \\(\\frac{5.5}{12} \\times \\frac{\\text { Rate }}{100}\\)<\/p>\n(c) When the amount is withdrawn in the middle of the month.
\nAverage period = 6 months
\nInterest and drawings = Total drawings \u00d7 \\(\\frac{6}{12} \\times \\frac{\\text { Rate }}{100}\\)<\/p>\n(II) When fixed amount is withdrawn quarterly<\/span>
\n(a) If the amount is withdrawn at the beginning of each quarter.
\ninterest on drawings= Total drawings \u00d7 \\(\\frac{7.5}{12} \\times \\frac{\\text { Rate }}{100}\\)<\/p>\n(b) If the amount is withdrawn at the end of each year
\nInterest on drawings = Total drawing \u00d7 \\(\\frac{4.5}{12} \\times \\frac{\\text { Rate }}{100}\\)<\/p>\n