Partnership –IPartnership –I(Fundamentals)(Fundamentals)

Meaning of Partnership and its Meaning of Partnership and its featuresfeatures

Partnership Deed and its contentsPartnership Deed and its contents Rules applicable in the absence of Rules applicable in the absence of

Partnership deed…Partnership deed… Profit is to divided equally.Profit is to divided equally. No interest on capital, drawingsNo interest on capital, drawings No salary, or commission.No salary, or commission. Interest on loan of a partner @ 6 %Interest on loan of a partner @ 6 %

Profit and Loss Profit and Loss appropriation Accountappropriation Account

This account is prepared to This account is prepared to show distribution of profit show distribution of profit as per the terms of as per the terms of partnership deed.partnership deed.

It is prepared based on the It is prepared based on the basis of following items:- basis of following items:- Credit sideCredit side Net profit b/dNet profit b/d Interest on Drawings Interest on Drawings Debit SideDebit Side Interest on Capital Interest on Capital Salary to partner Salary to partner Commission to partnerCommission to partner

The remaining profit is to be divided in The remaining profit is to be divided in the profit ratio…the profit ratio…

Profit and Loss Profit and Loss Appropriation AccountAppropriation Account

To Interest on CapitalTo Interest on Capital AA …. …. BB …. …. To Salary to partnerTo Salary to partner To Commission to Partner To Commission to Partner

(name)(name) To General Reserve/ Reserve To General Reserve/ Reserve

Fund Fund (transfer of profit to any fund (transfer of profit to any fund

or reserve)or reserve)To To Profit transferred to Profit transferred to

capitals/current accountscapitals/current accounts

A ---B ---

By Net Profit b/d …..By Net Profit b/d ….. *Less Interest on loan *Less Interest on loan

of of Partner Partner …… ……

By Interest on drawings By Interest on drawings AA ….…. B B ….….

Notes:

1. Treatment of Interest on loan

Interest on loan of a partner is a business expense, and should be subtracted from Net Profit

2. If Profit given in the question is after salary, it may be added to N.P. before solving the question, so that Salary is shown as an appropriation on the debit side.

3.Commission of Manager is also a business expense.

Therefore it should be subtracted from the Net Profit.

a) Commission on Net Profit before charging such commission :-

N.P. × Rate/100

b) Commission on Net Profit after Charging such commission:-

N.P. × Rate/100 +Rate

CAPITAL ACCOUNTSCAPITAL ACCOUNTS

The capital accounts of the partners The capital accounts of the partners can be maintained in any of the can be maintained in any of the following two ways:-following two ways:-

1) 1) Fixed Capital AccountsFixed Capital Accounts

2) Fluctuating Capitals2) Fluctuating Capitals

Fluctuating Capital Fluctuating Capital AccountAccount

To Cash To Cash (capital (capital Withdrawn) …Withdrawn) …

To DrawingsTo Drawings … …

To Interest on To Interest on Drawings ..Drawings ..

To balance c/dTo balance c/d ?__?__

By balance b/dBy balance b/d By cash By cash (additional (additional

capital) …capital) …

By interest on capital By interest on capital … …

By Salary/commission By Salary/commission … …

By P & L App. A/c By P & L App. A/c

( profit)( profit) …_…_

Fixed CapitalsFixed Capitals

No change is made in the capitals No change is made in the capitals except with except with

-additional capital or-additional capital or

- capital withdrawn- capital withdrawn Current accountsCurrent accounts are prepared for to are prepared for to

reflect adjustments for interest on reflect adjustments for interest on capital, drawings, interest on capital, drawings, interest on drawings, salary or commission and drawings, salary or commission and profit share.profit share.

Capital accountsCapital accounts

To Cash ( capital To Cash ( capital withdrawn if any) withdrawn if any) ....

T balance T balance c/d ?c/d ?

By balance b/d By balance b/d (Opening (Opening balance) balance) ... ...

By Cash (additional By Cash (additional capital if any) capital if any) ... ...

CURRENT ACCOUNTSCURRENT ACCOUNTS

To balance b/dTo balance b/d

( Dr. balance )( Dr. balance ) … …

To drawings To drawings … …

To Interest on Drawings To Interest on Drawings ... ...

To Balance c/dTo Balance c/d??

By balance b/d …By balance b/d …

( Cr. Balance)( Cr. Balance)

By Interest on Capital By Interest on Capital ……

By Salary By Salary ……

By Commission …By Commission …

By Profit & Loss By Profit & Loss Appropriation A/cAppropriation A/c

(profit ) …(profit ) …

By Balance c/dBy Balance c/d ??

Calculation of interest on Calculation of interest on DrawingsDrawings

Case 1: Case 1: When total amount of drawings are given When total amount of drawings are given (i.e. the date of drawings is not given), (i.e. the date of drawings is not given), e.g. Drawings of A= Rs.7000 and of B= Rs. 6000, e.g. Drawings of A= Rs.7000 and of B= Rs. 6000, interest on drawings being 5% p.a.interest on drawings being 5% p.a.

In such a case, interest should be calculated on In such a case, interest should be calculated on an average for 6 months.an average for 6 months.i.e. interest on drawingsi.e. interest on drawings of A = 7,000 × of A = 7,000 × 55 × × 66 = Rs. = Rs. 175175

100 12 100 12 of B = 6,000 × of B = 6,000 × 5 5 × × 6 6 = Rs. 150 = Rs. 150

100 12 100 12

Case 2. Case 2. Suppose in the above Suppose in the above illustration rate is given i.e. interest illustration rate is given i.e. interest on drawings (Av.) is 5% (not 5% p.a.), on drawings (Av.) is 5% (not 5% p.a.), then interest should be calculated for then interest should be calculated for full yearfull year

Interest on drawings of A = Interest on drawings of A = 7,000 x 7,000 x 55 = Rs. 350 = Rs. 350 100100

Interest on drawings of B = Interest on drawings of B = 6,000 x 6,000 x 5 5 = Rs. 300 = Rs. 300 100100

Case 3 . Case 3 . When dates of drawings are given , When dates of drawings are given , we can calculate interest with help of a) Table we can calculate interest with help of a) Table method ( i.e. according to time) or b) by using method ( i.e. according to time) or b) by using product method.product method.

Example: Drawings of A during the year Example: Drawings of A during the year were as under : calculate interest on drawings were as under : calculate interest on drawings @6% p.a.@6% p.a.

31st March Rs.2,00031st March Rs.2,000 30th June Rs. 1,00030th June Rs. 1,000 31st August Rs. 50031st August Rs. 500

Calculate Interest on Drawing for the year Calculate Interest on Drawing for the year ending 31ending 31stst Dec. Dec.

a) Calculation according a) Calculation according to time to time

Interest on Drawings:Interest on Drawings: On 2,000 × On 2,000 × 6 6 × × 9 9 = =

9090 100 12100 12

On 1,000 × On 1,000 × 6 6 × × 66 = 30 = 30 100 12100 12

On 500 x On 500 x 6 6 x x 4 4 = 10 = 10 100 12 _____100 12 _____

Total Total Rs130Rs130

b) In case we use b) In case we use product product methodmethod

DateDate AmountAmount Period Period

(months)(months)ProductProduct

31st 31st MarchMarch

2,000 2,000 99 18,00018,000

30th June30th June 1,0001,000 66 6,0006,000

31st 31st AugustAugust

500500 44 2,0002,000

26,00026,000

Interest = Interest = Product × Rate Product × Rate × _ × _1__1__

100 12100 12

26,00026,000 × × 6 6 × _ × _1__1__

100 12100 12

= Rs. 130= Rs. 130

In case partners withdraw In case partners withdraw equal equal amount each monthamount each month and and

throughout the yearthroughout the year --- If a partner withdraws --- If a partner withdraws at the beginning of at the beginning of

each month,each month, interest should be charged on an interest should be charged on an average for 6 ½ months i.e. average for 6 ½ months i.e. 6.5 months. 6.5 months. { Being Average of (12 + 1) ÷ 2 } { Being Average of (12 + 1) ÷ 2 }

Example:- Example:- Calculate interest on Drawing at the rate of 8%p.a Calculate interest on Drawing at the rate of 8%p.a

ifif A withdraws Rs.2,000 at the beginning of each monthA withdraws Rs.2,000 at the beginning of each month

Interest = Interest = 24,000 × 24,000 × 8 × 8 × 6.5 6.5 = = = = Rs.1,040Rs.1,040

100 12 100 12

--- If a partner withdraws --- If a partner withdraws at the end of at the end of each month,each month, interest should be charged interest should be charged on an average for 5 ½ months i.e. on an average for 5 ½ months i.e. 5.5 5.5 months.months.

Example:- Example:- Calculate interest on Drawing at the rate of Calculate interest on Drawing at the rate of 8%p.a if8%p.a if A withdraws Rs.1,500 at the end of each A withdraws Rs.1,500 at the end of each

monthmonth

Interest = Interest = 18,000 × 18,000 × 8 × 8 × 5.5 5.5

100 12 100 12

= Rs.660 = Rs.660

--- If a partner withdraws --- If a partner withdraws at the middle at the middle of each monthof each month, interest should be , interest should be charged on an average for charged on an average for 6 months.6 months.

Example:- Example:- Calculate interest on Drawing at the Calculate interest on Drawing at the rate of 8%p.a ifrate of 8%p.a if A withdraws Rs.2,500 at the A withdraws Rs.2,500 at the

middle of each monthmiddle of each month

Interest = Interest = 30,000 × 30,000 × 8 × 8 × 6__ 6__

100 12 100 12

= Rs.1,200 = Rs.1,200

Practice these :-Practice these :-

If a partner withdraws twice a year, If a partner withdraws twice a year, one on 30one on 30thth June and the other on 31 June and the other on 31stst Dec.Dec.

If a partner withdraws some amount If a partner withdraws some amount at the end of each quarter.at the end of each quarter.

If he withdraws at the beginning of If he withdraws at the beginning of each quarter.each quarter.

If accounts are to be made for six If accounts are to be made for six months.months.