Chapter 2: Accounting for Partnership Firms – Fundamentals-notes

Provisions affecting Accounting treatment in the absence of Partnership deed:

Sl. Matters Provisions of the Indian Partnership Act, 1932.

No
1 Sharing profits/losses Share equally
2 Interest on partner capital Not paid
3 Interest on partners drawings Not Charged
4 Remuneration/commission to partners Not paid
5 Interest on advance/loan by a partner 6% per annum
6 Admission of a partner New partner cannot be admitted unless all the
partners agree to it.

Charge against profit : Salaries, Rent, Interest on loan…etc

Appropriation of Profit : Interest on partners capital , Partners salaries, partners commission,
transfer to reserves etc.

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JOUNRAL ENTRIES IN THE BOOKS OF ………………………………….

1.Transfer of profit from profit and loss account to Profit & loss appropriation account *
2020 Profit & loss a/c Dr
st
March31 To P & L appropriation a/c

2.Transfer of loss from profit and loss account to Profit & loss appropriation account*
P & L appropriation a/c Dr
Profit & loss a/c

Note: If the net result of profit and loss a/c is NET LOSS, the NET LOSS either it can be transferred to
Partners capital/ current accounts if we don’t have interest on drawings or it can be transferred to profit
and loss appropriation account if we have interest on drawings.
3. For partners salaries /Commission
Partners’ salaries / commission a/c Dr
To Partner’s Capital/current a/c

4. For transfer of partners salaries/ commission to P & L Appropriation a/c

P & L appropriation a/c Dr
To Partners salaries / commission a/c

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5. For allowing interest on partners capitals.
Interest on partners’ capitals a/c Dr
To Partners’ Capital /current a/c (Individually)

6. For transfer of the interest on partners capitals to P & L Appropriation a/c.

P & L appropriation a/c Dr
To Interest on partners’ capitals a/c

7. For charging interest on drawings.

Partners’ Capital /current a/c (Individually) Dr
To Interest on drawings a/c

8. For transfer of interest on drawings to P & L Appropriation a/c .

Interest on drawings a/c Dr
To P & L appropriation a/c

9. For transfer to reserve out of profit.

P & L appropriation a/c Dr
To Reserve a/c

10. For transfer of credit balance of profit and loss appropriation a/c to partners capitals / current a/c.
P & L appropriation a/c Dr
To Partners’ Capital /current a/c (Individually)
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11. For transfer of debit balance of profit and loss appropriation a/c to partners capitals / current a/c.
Partners’ capital / current a/c Dr
To P & L appropriation a/c

12. For introducing the capital or additional capital by the partners.

Cash a/c Dr
To Partners capitals a/c (Individually)

13. For withdrawals of money out of capital by the Partners

Partners’ Capital a/c (Individually) Dr
To Cash a/c

14. For withdrawals of money out of anticipated profits or salary/commission by Partners.

Drawings a/c Dr
To Cash a/c

15. For transfer of withdrawals of money out of anticipated profits/salary/commission by the partners to
Partners Capital/Current a/c at the year end
Partners capitals/current a/c (Individually)
To Drawings a/c

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 DR PROFIT AND LOSS APPROPRIATION ACCOUNT CR
Particulars Amount Particulars Amount
Rs. Rs.
To Profit & Loss a/c (Loss)* …………. By Profit & Loss a/c (Profit)* ………….
To Partners salaries a/c By Interest on Drawings a/c
A - ……….. A - ………..
B - ……….. …………… B - ……….. ……………
To Partners commission a/c By Partners capital/Current a/c (Loss) **
A - ……….. A - ………..
B - ……….. ………….. B - ………..
To Interest on Partners capital a/c
A - ………..
B - ……….. …………..
To Reserves …………..
To Partners capital/Current a/c
(Profit)**
A - ………..
B - ……….. ……………
……………. ……………..
* Either of the two exists ** Either of the two exists

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PARTNERS CAPITAL ACCOUNTS - UNDER FLUCTUATING CAPITAL METHOD

DR PARTNERS CAPITAL ACCOUNTS CR

Particulars A B C Particulars A B C

By Balance b/d * …… …… …… By Balance b/d * …… …… ……

To Interest on Drawings a/c …… ……. …… By Partners salary a/c …… …… ……

To P & L Appropriation (loss) …… ……. …… By Partners commission a/c …… …… ……

To Cash a/c (Drawings Out of capital) …… …… …… By Interest on Partners’ capital …… ……. ……

To Drawings (Out of Profit) By P & L Appropriation (Profit) …… ……. ……

By Cash a/c (Capital/Add.cap) …… ……. ……

…… ……. …… …… ……. ……

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PARTNERS CAPITAL ACCOUNTS - UNDER FIXED CAPITAL METHOD

DR PARTNERS CAPITAL ACCOUNTS CR

Particulars A B C Particulars A B C
To Cash a/c (Drawings ……… ……… ……… By Balance b/d ……… ……… ………
out of capital)
To Balance c/d ……… ……… ……… By Cash a/c (Additional ……… ……… ………
capital)
……… ……… ……… ……… ……… ………

DR PARTNERS CURRENT ACCOUNTS CR

Particulars A B C Particulars A B C
To Balance b/d * …… …… …… By Balance b/d * …… …… ……
To Interest on Drawings a/c …… …… …… By Partners salary a/c …… …… ……
To P & L Appropriation (loss) …… ……. …… By Partners commission a/c …… …… ……
To Drawings (Out of Profit) …… …… …… By Interest on Partners’ capital …… ……. ……
By P & L Appropriation (Profit) …… ……. ……
To Balance c/d ** …… …… …… By Balance c/d ** …… …… ……

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PARTNERS CAPITAL ACCOUNTS – Methods of maintaining Partners’ capital accounts
- FIXED CAPITAL ACCOUNT
- FLUCTUATING CAPITAL ACCOUNTS

FIXED CAPITAL ACCOUNTS METHOD

1. Partners’ Capital accounts – Capital introduced & Capital withdrawn only be recorded.
2. Partners’ current accounts- all transactions will be recorded except the above two. Like
Interest on partners’ capital, remuneration, commission, interest on drawings, share of
profit or loss etc.

FLUCTUATING CAPITAL ACCOUNTS METHOD

1. Partners’ capital accounts – All kinds of transactions will be recorded
If the Question is silent – which method should be followed? - FLUCTUATING CAPITAL ACCOUNTS.

2. REMUNERATION TO PARTNERS (SALARY OR COMMISSION) TO PARTNERS

- The salary or commission is allowed if the partnership agreement provides for it.
Otherwise, the salary or commission is not allowed.

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 If commission is payable as percentage of net profit :
- A) % of net profit or distributable profit before charging such commission
Commission = Net Profit X % of commission/100

- B) % of net profit or distributable profit after charging such commission

Commission = Net Profit X % of commission/100 + % of commission
Note:
1.If the question is silent regarding the above methods, we need to apply the first method
i.e. % of net profit or distributable profit before charging such commission.
2. In general if its not mentioned in the partnership deed regarding whether it is an item of
charge against profit or appropriation, the REMUNERATION TO PARTNERS (SALARY OR
COMMISSION) TO PARTNERS is an item of appropriation , not charge against profit.

3. INTEREST ON PARTNERS’ CAPITALS

Interest on partners’ capital is provided based on the capital used (time period used) in
partnership firm.
Additional capital – Interest is provided for the additional capital used in firm.
Withdrawal of capital – Interest is provided for the capital used/remained in firm
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Reasons or justification for allowing interest on capital are :
i) When capitals of partners are different but profit share is equal
ii) When capitals of partners are not same but profit share is also not equal
iii) Capital increases the earning capacity of the firm

Case Provision
1.Partnership deed is IOC is not allowed
silent
2. Partnership deed is IOC – is an appropriation item
provides for Interest on a) Loss – No Interest on capital (IOC)
capital (IOC) b) Profit (60,000) before IOC (30,000) is equal or
more than the IOC – IOC is allowed at agreed rate
c) Profit (20,000) before IOC (1,00,000) is less than
the IOC – IOC is allowed only to the extent of
profit in the ratio of IOC of each partner.
Eg.A – 40,000 ; B – 60,000 = 2 : 3 = 8,000:12,000
3. IOC is treated as charge IOC is allowed whether the firm has the profit or loss.

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Home Work - Write the format of Calculation of opening capital under fixed
capital and fluctuating capital methods , Page No…………….

4.Interest on partners’ drawings (Page No.2.40)

Drawings against capital – Interest is not charged on such drawings
Drawings against profit - Interest is charged on such drawings

Drawings broadly divided into two types: (Page no.2.42)

(i) Irregular drawings – Drawing same /different amount at irregular
intervals.
(ii) Regular drawings – Drawings of same amount at regular intervals

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Few examples for regular and irregular drawings
MONTHLY Regular Regular Irregular (same Irregular
(Same amount & (Same amount & amount but different (Different amount
same time same time time) and different
interval) interval time) time)
Apr 1st 4 10,000 40,000 50,000
May 5 10,000 50,000
June 6 10,000 (5+ 0)= 2.5/12
July 7 10,000 40,000
August 8 10,000 50,000
Sept 9 10,000 40,000
Oct 10 10,000 40,000
Nov 11 10,000 50,000
Dec 12 10,000 80,000
Jan 1 10,000 40,000
Feb 2 10,000 50,000
March 3 10,000 70,000
Total 1,20,000 1,60,000 2,00,000 2,40,000
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Average period in case of regular drawings:
Details Beginning Middle End
Month 6.5/12 6/12 5.5/12
Quarter 7.5/12 6/12 4.5/12
Six Months 3.5/12 3/12 2.5/12
If withdrawal time is not mentioned? Average Period 6 months = 6/12
If word(s) like p.a. or per Calculate the interest for the full
annum/annually/per year/yearly is/are year by ignoring the time factor.
not mentioned along with rate of Example: Interest on drawings is
interest on drawings in the question? 10%.

There are two methods of calculating interest on drawings (Page No.2.42):

I. Product method : a) Simple method b) Product method – (Applicable
when irregular drawings are there)
II. Average period method (Applicable when regular drawings are there)

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I.Product Method
(a)Simple method -
Interest on drawings (IOD) =
Drawings amount * Rate of interest p.a./100* Time period used
50,000*10/100*12/12 = 5,000
50,000*10/100*8/12=

(b) Product method -

Interest on drawings (IOD) =
Total of Product * Rate of interest p.a./100* 1/12 or 1/365

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Solution to Q.No.43 (PAGE NO.2.85) old book,
Calculation of interest on drawings OF KANIKA
Date Amount No of months up to Interest Product
st
31 March 2020 (Simple Method) (Product Method)
1st April 10,000 12 600 1,20,000
1st June 9,000 10 450 90,000
1st Nov 14,000 5 350 70,000
1st Dec 5,000 4 100 20,000
1,500 3,00,000

Simple Method Product Method

10,000 * 6/100 * 12/12 = 600 IOD= 3,00,000 * 6/100 * 1/12 =
9,000 * 6/100 * 10/12 = 450 1,500
14,000 * 6/100 * 5/12 = 350
5,000 * 6/100 * 4/12 = 100
Total Interest = 1,500

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New Book Q.No. (Pg.no. )
Calculation of interest on drawings OF Divya
Date Amount No of months Product Interest
up to 31st (Product (Simple Method)
March 2021 Method)
31st May 20,000 10 2,00,000 20,000 * 6/100 * 10/12 = 1,000
1st Nov 17,500 5 87,500 17,500*6/100*5/12= 437.5
st
1 Feb 12,500 2 25,000 12,500*6/100*2/12= 125
TP =
3,12,500

Simple Method Product Method

20,000 * 6/100 * 10/12 = 1,000 IOD= 3,12,500 * 6/100 * 1/12 =
17,500*6/100*5/12= 437.5 1,562.5 or 1,563.
12,500*6/100*2/12= 125
Total Interest = 1,562.5 or 1,563.

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II.Average Period Method (Applicable when regular drawings are there i.e. –
Amount of drawing is uniform & Time interval between two drawings is also
uniform) (Page no. )

Interest on drawings (IOD) =

Total drawings * Rate of interest /100 * Average Period/12
Average period =
(Months left after first drawing + Months left after last drawing)/2

Average period =
(Months left after first drawing + Months left after last drawing)/2 = (12+1)/2 = 6.5months

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Average period in case of regular drawings:
Details Beginning (1st) Middle (15th ) End (30th )
Month 6.5/12 6/12 5.5/12
Quarter 7.5/12 6/12 4.5/12
Six Months 3.5/12 3/12 2.5/12
If withdrawal time is not mentioned? Average Period 6 months. = 6/12
Eg: Drawings of Krishna during the year
Rs.2,00,000.
If word(s) like p.a. or per Calculate the interest for the full
annum/annually/per year/yearly is/are year by ignoring the time factor.
not mentioned along with rate of Ex: 2,00,000*10/100 = 20,000
interest on drawings in the question?
Example: Interest on drawings is 10%.

Home Work
From Page ……. to Page No………– Write all the situations with the average period.

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Interest on loan by the firm to Partner (Page No.2.9)
For charging interest on loan to partner
Partner’s capital a/c or current a/cs Dr
To Interest on loan to partner a/c

For transfer of interest

Interest on loan to partner a/c Dr
To Profit & loss a/c

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