Accounting for Partnership Firms

Fundanmentals

LEARNING OBJECTIVES
After stndying tbis Chapter, you sbonld beable to understand:
"Nature of Partnership Firm
. Definition and Main Features of Partnership
" Partnership Deed Meaning, Importance
" Methods of Preparing Capital Accounts of Partners under Fixed
and Fluctuating Capital Methods
"Division of Profitamong Partners
Profit and Loss Appropriation Account
"Past Adjustments
"Guarantee of Minimum Profit to aPartner

sole trading
Introduction : There are certain limitations of a sole trader. In a business
the risk involved in the and
concern only one man invests capital, undertakes
capital, skill,controlling and
controls the whole affairs of the business. But oneman's
Therefore, some persons may combine and
risk taking capacity are generally limited.
enter into an agreement to form apartnership.
Partnership is arelation of mutual trust and
faith. In order to maintain this trust, it
accurate and
necessary that the partnership accounts be maintained in an honest,
1S
accounts should present a true and
fair picture of the
manner. Partnership
necessary to study the definition of
equitable
business. For this purpose it is
partnership provisions of the
Partnership Act and the relevant
partnership as given in the
partnership accounts.
Partnership Act which affect the

Nature of Partnership Firm : separate business

viewpoint, partnership firm is treated as a
As per Accounting partnershiptirmn is
from its partners. However, asper legal viewpoint, a from its partners.
entity distinct no existence separate
Inother words, it has
hot a separate legal entity. bankruptcy of the
of the partnership tirm, private estates
It means that in case of meet the firm's debts.
partners would be liable
to
of the Indian Partnership Act, 1932, detines
Definition of Partnership: Section 4
partnership as follows :
 ACCOUNTING FOR PARTNERSHIP FIRMS -
1.]
"Partnership is the relation between persons who have agreed to share
of abusiness carried on by all or any of them acting for all."
FUNDAMENTA
Main Features or Characteristics of Partnership
1. Two or more persons : There must be atleast two persons to
partnership and such persons must be competent to contract. As per the Indian
Act, I872 every person except the following are competent to contract : CARtr
(a) Minor

(6) Persons of unsound mind, and

(c) Persons disqualified by any law
Maximum Number of Partners :
Partnership Act does not specify the maximum number of
Government has prescribed maximum number of partners in apartners, but the Cet
fim to be 50 vide ie
10 of theCompanies (Miscellaneous) Rules, 2014.
Minor as a partner :
A minor cannot be admitted as a partner in the fim. However, he is allowed
participate in the profits of the firm.
2. Agreement :- Partnership is the result of an agreement. It must come imte
existence by an agreement and not by the operation of law. On the contrary,a Hind
undivided family comes into existence by the operation of law and not by n
agreement. Such an agreement can be either oral or in writing. The agreement forms
the basis of mutual rights and duties of partners.
3. Existenceof Business and Profit Motive :- Partnership can be formed for the
purpose of carrying on some business with the intention of earning profits and suc
business must be legal. Ajoint ownership of some property by itself cannot be calec
a partnership.
4. Sharing of Profits :- The agreement between the partners must be aimed z
sharing the profits of the business. If some persons join hands to run some charitabie
activity, it willnot be called partnership. Further, if apartner is deprived of his right w
share the profits of the business, he cannot be called a partner. But it is not nevesy
that all partners should share the losses also. It may be agreed between the partners that
one or more of them shallnot be liable for losses.
S. Relationship of Principal and Agent - Each partner is an agent as wel
principal of the firm. An agent, because he can bind the other partners by his acts and
aprincipal, because he himself can be bound by the acts of the oher partners.
6. Business may be earried on by allor any of them acting for all It means
that each partner can participate in the conduct of business and each partner is bound

by the acts of other partners in respect to the business of the fim.

its
1.members.
No Separate Existence - A partnership firm has no separate existence
It means that all agreements entered with the firm will be enforceable
against each partner separately and jointly. However, partnership firm is a separate

business entity from accounting point of view.

ACCOUNTING OR PARTNERSHIP FIRMS - FUNDAMENTALS 1.3

Parthership cannot come into exi0stence in the absence of any one of the above
mentioned essential features.
Rights of a Partner :
1. Every partner has the right to share profits or losses with other partners in the
agreed ratio.
2. Every partner has the right to take part in the conduct of the business.
3. Every partner has the right to be consulted in the matters related to partnership
business.
4. Every partner has the right to inspect and have a copy of the books of
accounts.
5. Every partner has a right to disallow the admission of a new partner.
6. Every partner is the joint owner of the partnership property.
7. If a partner has given loan to the firm, he has a right to receive interest at
agreed rate. If the rate of interest is not agreed, it is paid (@6% p.a.
8. If a partner incurS expenses or makes payment on behalf of the firm, he has a
right tobe indemnified bythe firm.
9. Every partner has a right toretire from the firm after giving a proper notice.
Liabilities of Partners:
1. A partner should not carry on a business in competition with the firm. If he
earns a profit from such business it shall be paid to the firm. However, if he
incurs a loss, it willbe borne by him alone.
2. If a partner earns some profit by using the firm's property or money, such
profit willbe paid to the firm. For example, Aand Bare partners in a fim.
Firm sold goods to Cfor 75,00,000 and Agets a commission of 4% from C.
Commission earned by A shall be paid to the firm.

Partnership Deed
Since partnership is the outcome of an agreement, it is essential that there must be
Some terms and conditions agreed upon by all the partners. Such terms and conditions
may be either oral or written. The law does not make it compulsory to have a written
agreement. However, in order to avoid allmisunderstandings and disputes, it is always
the best course to have a written agreement duly signed and registered under the Act.
Such a written document which contains the terms of agreement is called 'Partnership
Deed'. It is also called 'Articles of Partnership'. The partnership deed should
contain the following points :
(1)The Name and Address of the Firm.
(2) Names and Addresses of the Partners.
(3) The Type and Nature of the Business the Firm Proposes to do.
(4) Amount of Capital to be Contributed by each Partner and whether the
capital accounts will be fixed or fluctuating.
(5) Interest on Capitals : Whether interest is to be allowed on capitals. If so,
the rate of interest.
 ACCOUNTINGFOR PARTNERSHIP FIRMS FUNDAMENTAI
are entitled to
1.4
(6) Drawings: - How much amount the partners withdraw for A

(7) personal
Interest use.
on Drawings Whether interest will be charged on partner's
interest.
drawings. If so, the rate of
(8) Profit Sharing Ratio:-The ratio in which profits or losses are to be divides
among the partners.
(9) Salary Whether any partner will be paid salary for the work done by him
If so, hovw much?
(10) Goodwill - Method of valuation of goodwill in case of admission or
retirement of a partner.
which the final accee
(11) Accounting Period of the Firm :The period after
of the firm are tobe prepared. Whether yearly or half-yearly and the date o
which accounts are to be closed every year.
(12) Method of Recording of Firm'sAccounts and the safe custody of the booke
of accounts and other documents of the firm.
(13) Auditing :-Whether the firm's books willbe audited or not? If so, the mode
of auditor's appointment.
(14) Date of Commencement of partnership.
(15) Duration of Partnership The period for which the partnership has ben
established and the mode of dissolution of partnership.
(16) Use of the Decision of Garner Vs Murray i-Whether decision in the case
of Garner Vs Murray is to apply in the case of insolvency of a partner.
(17) Bank Accounts :-Whether the account in the bank will be opened in fim's
name or in some partner's name? Who will have the right to sign the cheques
(18)Rules to be followed in case of Admission of a Partner.
(19) Rules to be followed while Settling the Accounts on Retirement -
manner in which the amount due on the retirement or death of a partner wl.
becalculated and the manner in which it will be paid.
(20) Settlement of Disputes :-In case of dispute among the partners, how thne
dispute will be solved. Whether arbitrator will be appointed?
Importance of Partnership Deed :
Though, the law does not make it mandatory (compulsory) for every tim to has
a partnership deed, it is desirable tohave it due to the following reasons
() t regulates the rights, duties and liabilities of each partner.
the
because all
(i) It helps to avoid any misunderstanding amongst the partners handin the
terms and conditions of partnership have been laid down before
deed.
partnership
(iii) Any dispute amongst the partners may be settled easily as the
deed may be readily referred to.
signed
Hence, it is alwaysthe best course to have a written partnership deed duly
by all the partners and registered under the Act.
ACCOUNTING FOR PARTNERSHIP FIRMs-
FUNDAMENTALS 1.5

Rules Applicable in the Absence of Partnership

In the absence of a Partnership Deed or Verbal agreement, or ifDeed
Deed is silent on a certain point, the following provisions of the Partnership
be applicable : Partnership Act, 1932 will
(1) Profit-Sharing Ratio - Profits and Losses are to
be shared equally
irrespectiveof their capital contribution.
(2) Interest on Capital :- No interest on Capitals shall be
partners. If there is a provision for the interest on capitals in allowed to the
the partnership
deed, it will be allowed only when there is a profit.
(3) Interest on Drawings :-No interest is to be charged on drawings.
(4) Salary toa Partner :-No partner is entitled to any salary or commission for
taking part in running the firm's business.
(5) Interest on Loan :-Interest at the rate of 6% per annum is to be allowed on
a partner's loan to the firm. Such interest shall be paid even if there are losses
to the firm.
(6) Admission of a New Partner :-Without the consent of all existing partners
no new partner can be admitted to the firm.
(7) Each partner can participate in the conduct of business.
(8) Each partner can inspect the books of firm and can take a copy of the same.

It should be remembered that partners may change any of the above provisions by
coming to a common agreement.

ILLUSTRATION 1.
April 2024 with capitals
Anisha, Bipasha and Mithi entered into partnership on lst to capital, Mithi has
addition
4,00,000, 3,00,000 and 2,00,000 respectively. In
agreement to guide them, they faced
advanced a loan ofU,S0,000. Since they had no
yer:
following issues during and at the end of the
provided @ 9% p.a. but Bipasha and
1. Anisha wanted interest on capital to be
Mithi did not agree. and
wanted that interest on loan be paid to her (@ 10% p.a. but Anisha
2. Mithi
Bipasha wanted to pay @ 5% p.a. capital
Bipasha demanded to share profits in the ratio of their
3. Anisha and agreement with this proposal.
contribution, Mithi is not in p.m. as
working partner, demands a payment of *10,000
4. Bipasha, being which other partners are not in agreement.
remuneration for
use. Bipasha and
withdraws ?1,00,000 from the firm for her personal (@ 6% p.a.
5. Anisha drawings be charged from her
Mithidemand that interest on objects to it.
wants to introduce her son as a partner but Bipasha
6. Mithi
suggest and help them resolve these issues.
Youare required to
 ACCOUNTING FOR PARTNERSHIP FIRMS - FUNDAMENTALs
1.6

In the absence
SOLUTION: of Partnership deed, the provisions of partnership act 1932 will A
1.
apply according to which :
on Capitals.
1. Nointerest is payable
be paid @ 6% p.a.
2. Interest on loan by partner will
3. Profits will be shared equally. 2

4. Nosalary/remuneration is payable to any partner.

charged.
S. Interest on drawings by Anisha willnot be
6. Anew partner cannot be admitted without the consent.of all partners. Hence
Mithi'sson cannot be admitted as a partner.

Recording of Partnership Transactions

Transactions of the partnership firm are recorded according to the principles of
double-entry system, and as in the case of a sole proprietorship concern a partnership
firm will also prepare Trading Account, Profit & Loss Account and Balance Sheet at
the end of every year. The only difference between accounting of a sole trader and
partnership firm is that the profits of the partnership fim are divided among the
partners. Usually, for this purpose, the profits as per Profit and Loss Account is
transferred to a newly-opened account, namely Profit and Loss Appropriation
Account' and entries for interest on capital, interest on drawing, salary to partners and
division of profits among the partners will be passed only in that account. A specimen
of Profit and Loss Appropriation Account showing the distribution of profits is given
below:

PROFIT AND LOSS APPROPRIATION ACCOUNT

Dr. for the year ended
Particulars Particulars
To Salaries of Partners By Profit & Loss Ae
To Commission to Partners
(Net Profit transfèrred from
To Interest on Partner's Capitals : P&LAC)
A
By Interest on Drawings :
B A
To Reserve Alc B
To Profit transferred to :
A'sCapital A/e
(or A's Current A/c)
B's Capital A/e
(or B's Current A/c)

The journal entriesthat are passed for various items shown in the above Profit
and
Loss Appropriation Account are as follows :
 ACCOUNTING FOR PARTNERSHIP FIRMS -
FUNDAMENTALS 1.7
1. Entry for transfer of Net Profit to Profit & Loss
Profit and Loss Ac
Appropriation Account:
Dr.
To Profit and Loss
(Net Profit transferred) Appropriation A/c
2. Entry for Interest on Capital:
() On allowing Interest on Capital :
Interest on Capital Alc Dr.
To Partner's Capital Alc
(Interest on Capital at ...% p.a.)
(ii) On closure of Interest on Capital A/c:
Interest on capital is closed by transferring it to the debit side of Profit &Loss
Appropriation A/c, as this is expenses for the firm. The entry will be:
Profit & Loss Appropriation A/c Dr.
To Interest on Capital A/c
3. Entry for Interest on Drawings ;
(i) On charging Interest on Drawings :
Partner's Capital A/c Dr.
ToInterest on Drawings Alc
(ii) On closure of Interest on Drawings Alc :
Interest on Drawings is closed by transferring it to the credit side of Profit & Loss
Appropriation A/c, as this is income for the firm. The entry will be :
Interest on Drawings A/c Dr.
To Profit & Loss Appropriation A/c
:
4. Entry for Salaryor Commission Payable to a Partner
() On allowing salary or commission to a partner: Dr.
Partner's Salary/Commission Alc
To Partner's Capital Alc
partner account :
(ii) On closure of salary or commission to a
closed by transferring it to the debit
Salary or Commission payable to a partner is
these are expenses for the firm. The
side of Profit and Loss Appropriation Account, as
entry will be :
Dr.
Profit & Loss Appropriation Alc
Salary/Commission A/c
To Partner's
profit to Reserve :
S. Entry for transferring a part of Dr.
Profit & Loss Appropriation Alc
To Reserve Alc

for transfer of Credit balance of Profit && Loss Appropriation A/c

6.Entry
(being profit) : Dr.
Loss Appropriation A/c
I. Profit & CapitalCurrent A/cs
or
To Partner's
 -
ACCOUNTING FOR PARTNERSHIP FIRMS FUNDAMENTAl
Appropriation Account:
Features of Profit and Loss
1. It is prepared just after the Profit and Loss Account. Hence, it is an extension
of Profit and Loss Account.
prepared only by partnership firms.
2 It is
3. It is a Nominal Account.
4. It shows how the net profit for the accounting period is appropriated
(distributed) among the partners.
5. Entries in this account are made giving effect to the Partnership Deed andlor
the Indian PartnershipAct, 1932.

Distinctionbetween Profit & LoSs Account and Profit & Los

Appropriation Account
Basis of Profit & Loss Account Profit &Loss Appropriation
Distinction Account
1. Stage of It is prepared after Trading It is prepared after Profit and Loss
Preparation Account and hence starts with the Account and hence starts with the
gross profit disclosed by Trading net profit disclosed by Profit &
Account. Loss Account.
2. Objective It is prepared to ascertain net It is prepared to show
profit or net loss. appropriation i.e. distribution of
net profit of the year among the
partners.
3. Opening/Closing This account has neither opening This account may have opening
Balance balance nor closing balance. as well as closing balances.
4. Charge or Expenses debited to this account Expenses debited to this account
Appropriation are chargeagainst profits. are appropriation of profits.
5. Partnership This account is not prepared on This account is prepared on the
Agreement the basis of partnership basis of partnership agreement.
agreement, except for interest on
loan from partners.
6.Matching Matching principle (i.e. matching Matching principle is not

Principle of revenue against expenses) is followed while preparing this

followed while preparing this account.
account.
ACCOUNTING FOR PARTNERSHIP FIRMS FUNDAMENTALS 1.9
Distinction between Charge Against Profit and
Appropriationout of Prot
Basis of Charge Against Profit
Distinction Appropriation Out ofProfit
1. Nature
It indicates expenses to be It indicates distribution of net
deducted from profits while profit to various heads.
calculating net profit or loss.
2. Recording It is debited to Profit and Loss It is debited to Profit and Loss
Account. Appropriation Account.
3. Necessary or It is necessary to make charges Appropriations are made only
not
against profits even if there is when there is profit.
loss.
4. Example Interest on partner's loan and Interest on capital, partner's
rent paid to a partner. salary etc.

ILLUSTRATION2.
Aayra and Mayra are partners in a fim sharing profits in the ratio of 2 : 1. The
following trial balance was extractedfrom their books as at 31st March, 2025 :
TRIAL BALANCE
as at 31st March. 2025
Dr. Balances Cr. Balances
Opening Stock 36,000 Sales 10,40,000
Purchases 6,20,000 Returns Outwards 4,000
Returns Inwards 12,000 Sundry Creditors 43,000
1,25,000 Commission 3,000
Sundry Debtors
50,000| Aayra's Capital 3,00,000
Computer 1,50,000
Rent (for ll months) 55,000 Mayra's Capital
Salary to Staff 1,20,000
4,21,000
Land & Building
16,000
Wages 30,000
General Charges
Cash at Bank 25,000
20,000
Aayra's Drawings
10,000
Mayra's Drawings 15,40,000
15,40,000

Trading, Profit and Loss Account

and Profit and
You are required to prepare the and a Balance
the year ended 3Ist March, 2025
Loss Appropriation Account for
account thefollowing adjustments:
Sheet as on that date, taking into
Stock on 31st March, 2025 was valued at 70,000.
()
March 2025 has not been paid.
(ii) Rent for the month of
(iii) Depreciate Computer
by 20%.
salary of ?10,000 per month and partners are entitled
(iv)Mayra is to be allowed a
interest on Capital @ 6%
p.a.
to
 ACCOUNTING POK VARTNERSHIP PIRMS.
1,10 UNDAMP
SOLUTION:
TRADIN0 AND PROT &LONN ACCOUNT OF H. PIPM
or th veW enel /s Murch, 20025
Parteular Partleular
ToOpening Stock 36,000 By Sales 1949,099
To Purchases 6,20,000 Less: Returns Inwards 12000
Roslsess

les: Retums Outwards 4,000

6,16,000 By Closing Stock
16,000
To Wages
To Gross Profit ed 4,30,000
10,98,000 199%554
To Rent 55,000 ByGross Profit b/d 4304
Add : Outstanding By Commission
(55,000 +1) 5,000 60,000
To Salary to Staff 1,20,000
To General Charges 30,000
To Depreciation on Computer 10,000
ToNet Profit transferred to
Profit & Loss
Appropriation A/c 2,13,000
4,33,000 433,000

PROFIT AND LOSS APPROPRIATION ACCOUNT C

Dr. for the year ended 31st March, 2025
Particulars
Particulars
1,20,000 By Profit & Loss A/c
To Mayra's Salary 2,13,000
(Net Profit)
To Interest on Capital A/c :
Aayra 18,000
Mayra 9,000 27,000
ToProfit transferred to
Aayra'sCapital A/c 44,000
Mayra'sCapital Alc 22,000 66,000 2.13,00

2,13,000

BALANCE SHEET OF THE FIRM

as at 3lst March, 2025
Assets
Liabilities 25,000

43,000Cash at Bank 1,25,000

Sundry Creditors
Outstanding Rent 5,000 Sundry Debtors 70,000

3,00,000 Closing Stock

Aayra's Capital 50,000
Less :Drawings 20,000 Computers 10,000
40,000

Less: Depreciation 4 , 2 1 , 0 0 0

2,80,000
Land & Building
Add: Interest on Capital 18,000
Net Profit 44,000 3,42,000
ACCOUNTING FOR PARTNERSHIP FIRMS- FUNDAMENTALS 1.11

Mayra's Capital 1,50,000

Less: Drawings 10,000
1,40,000
Add :Salary 1,20,000
Interest on Capital 9,000
Net Profit 22,000 2,91,000
6,81,000 6,81,000

Interest onCapital:
As already stated, interest on partner's capitals is to be allowed only when it is
expressly agreed to among the partners. If interest on capital is to be allowed as per
agreement, it should be calculated with respect to the time, rate of interest and the
amount of capital.

ILLUSTRATION 3.
Asmi and Kiwi are partners in a firm sharing profits and losses in the ratio of 2:1.
On Ist April, 2024, their capitals were 7,20,000 and 4,80,000respectively. On lst
firm should be in their profit
December, 2024, they decided that the total capital of the
brought in by the
sharing ratio, excess cash to be paid off or shortfall, if any, be
partners, as the case may be.
allowed to the partners @
According to the partnership deed, interest on capital is
allowed for the year ending 31st March,
6% p.a. Calculate interest on capital to be
2025.

SOLUTION:
1st April, 2024 =
Total Capital of Asmiand Kiwi on 77,20,000 +4,80,000 =12,00,000
December, 2024 :
Adjusted Capital on lst
:12,00,000 x =8,00,000
Asmi
x4,00,000
:12,00,000
Kiwi 3

Calculation of Interest on Capital : 2024

:From 1st April 2024 to 30th November
Asmi 6 8
28,800
=7,20,000 x 100 12
to 31st March 2025
From lst December 2024 4
l6,000
= 78,00,000 x 100 12
44,800

30th November 2024

Kiwi :From 1st April2024 to 8
6 19,200
=74,80,000 x100 12
1.12
ACCOUNTING FOR PARTNERSHIP
2024 to 31st March
FIRMS
2025
FUNDAMBNTALS
From 1st December 6 4
=4,00,000 x X
100 12

Accounts discussed in this Chapter:

Special Aspects of Partnership
(1)Capital Accounts of Partner's:
Fixed Capital Accounts, and
Fluctuating Capital Accounts
(2) Interest on Partner's Loan to the Firm
(3) Interest on Loan taken by a Partner from the Firm
(4)Methods of Calculating Interest on Drawings
(5) Interest on Capital
(6) Past Adjustments
(7) Guarantee of Profit to a Partner

Capital Accounts of Partners

In case of partnership there is a separate Capital Account for each partner. The
capital contributed by each partner will be credited to his capital account. The capital
accounts of partners may be maintained in any one of the following twO methods :
(1)Fixed Capital Accounts
(2) Fluctuating Capital Accounts
(1) Fixed Capital Accounts :-Under this system the original capitals invested
by the partners remain constant, unless additional capital is introduced or drawings are
made against capital by an agreement. In other words, capitals of the partners are not
allowed to change during the life-time of business except in extraordinary
circumstances. When fixed capital method is adopted, all entries relating to drawng
against profits, interest allowed on capitals, interest charged on drawings, salary0
partner, share of profit or loss etc., are made in a newly-opened account for each
partner. This account is called Current Account or Drawings
Account.
Thus, the following two accounts will be prepared separately when the capitals a
fixed:

Dr. PROFORMA OF
CAPITAL ACCOUNTS(When the Capitals are fixed) Cr.
Particulars B B C
Particulars
ToCash/Bank A/c
By Balance b/d
(Drawings against
Capital or (Opening Balance)
Permanent With By Cash/Bank A/c
drawal of Capital) (additional
Canital)
 ACCOUNTINGRR PARTNERSHIP FTRME FUNDAMENTALS
To Balance e
(Cosing Balance)

Dr URRENT ACCOUNIS
Particlars Particalars

ToRalane bd By Balance bd
(In case of debit (In case of Credit
opening halance) opening balarce)
To Drawings By Interest on
(Drawings against Capital
profits) By Partner's Salary
To Interest on By Partner's
Commission
Drawings
To P& L Ac By P&LAppro
(Share of loss, in priation A
case of loss) (share of profit, in
To Balance c/d® case of profit)

opposite side also.

" The balances may be on the
Accounts : When the capitals need
not be tixed, the
() Fluctuating Capital reason is that no
accounts go on changing from time to time. The
balances of capital relating to drawings,
are maintained, but all the entries
separate Current Accounts
drawings, salary to partner, share
of protit or loss etc.,
interest on Capital
the absence of information, the
interest on capitals,
accounts itself. In
are recorded in the capital method.
Accounts should be prepared by this
PROFORMA OF
Cr
tluctuating)
CAPIIALL ACCOUNTS
(When the Capitals are
Dr Particulars
Particulars
By Balance bd
ToCash/Bank (Opening Balanxe)
(Drawings against By Cash/Bank Ac
Capital) (add1tional (apital)
To Drawings By lnterest on 'apital
(Drawings against ByPartner's Salary
Profits) By Partsr's
To Interest on Conmission

Drawings By P&L Appro

To P & L A/c priation Ae
(Share of loss, in (share of profi,
case of loss) in case of profi)
To Balance c/d
 FOR PARTNERSHIP FIRMS-
1.14
ACCOUNTING

FUNDAMENTALS
(Cosing Balance)

Capitals are fluctuating

Oument Avounts are not prepared when the
Distinction Between Fixed Capital Accounts and Fluetuating Capital Aceounts:
Basis ef Distinction Fixed Capital Aeeounts Fluctuating Capital Aceount
When the Capitals are fixed, the When the Capitals are
halances in capital accounts the balances in Capitalflhuctuating
1Change in
Capital
usually remain unchanged during go on changing from time Accounts
the life-time of business, except time.
when Capital is introduced or
withdrawn permanently .
Nember of When the Capitals are fixed, cach When the Capitals are fluctuating
Accounts partner has two accounts, namely, each partner has only one account
Capital Account and a Current namely, Capital Account.
Account.

Recording of When the Capitals are fixed, In this case all transactions
Transactions transactions relating to drawings, relating to partners are made
interest on Capital, interest on directly in the Capital Accounts
drawings, salary,share of profit or itself.
loss etc., are not made in Capital
Accounts but are entered in
separate Current Accounts.
4. Can a Capital Fixed Capital Account can never Fluctuating Capital Account can
Account Show show a negative balance. show a negative balance.
anegative
balance?

Distinction Between Capital Account and Current Account :

Basis of Distinction Capital Account Current Account
1Whea prepared It is prepared both in case of It is prepared only in case of
Fluctuating Capital Method as Fixed Capital Method.
well as Fixed Capital Method.
Balance When Capital Account is
prepared on Fixed Capital
Current Account may showv a Cr.
or a Dr. Balance.
Method, it will show only Cr.
Balance. In fluctuating capital
Method, it may show a Cr. or a
Dr. Balance.
3. Nature
When Capital Account is Current Account Changes with
prepared On
Fixed Capital every transaction.
Method, it generally remains
unchanged from year to year. In
fluctuating capital method, it
changes with every transaction.
ACCOUNTING FOR PARTNERSHIP FIRMS - FUNDAMENTALS L15

Interest on Drawings
Interest on drawings should be calculated from the date of the withdrawal of the
amount. In the absence of the date of withdrawal, interest should be charged tor sux
months on the whole of the amount because it willbe assumed that the drawings were
made evenly throughout the year. For example, apartner withdrew 50,000 durine 2
year and interest is to be charged at 8% per annum, interest on drawings will be
calculated as follows:
50,000 ×
100
b2,000
12

ILLUSTRATION4.
(Fluctuating Capitals)
5,00,000
Shiv and Hari entered into partnership on 1st April. 2023. contributingcapital on Ist
additional
and 2,00,000 respectively. Hari also introduced 1,00,000 asratio of 3 : 2. Following
July, 2023. They agreed to share profits and losses in
the
information is provided regarding the partnership :
quarter.
()) Shiv and Hari, each are allowed a salary of 5,000 per
8% p.a. and charged on drawings at
(ii) Interest is to be allowed on Capitals @
10% p.a. and 10,000
during the year were I2,000
Drawings of Shiv and Hari adjustments
respectively. Profit as at 31st March,
2024 before the above mentioned
was 1,96,000.
Prepare : of profits,
Necessary journal entries relating to appropriation
(i)
Appropriation Alc, and
(i) Profit and Loss
(üi)Partner's Capital A/cs.
Hari
Books of Shiv and
SOLUTION: JOURNAL

LE Dr. () Cr. )
Particulars
Date
Dr. 1,96,000
2024
Alc 1,96,000
Profit
March 31| and Loss
Appropriation A/c
To Profit and Loss Appropriation
Profit and Loss
(Transfer of Profit to
Account) 40,000
Dr.
Partner's Salary Alc 20,000
Ac 20,000
To Shiv's Capital
Hari'sCapital A/c
To
(Salary ofpartners) 40,000
Dr.
Appropriation Alc 40,000
Profit and Loss
Salary Alc
To Partner's salaries to Profit
and Loss
partner's
(Transfer of
Appropriation Account)
 ACCOUNTING FOR PARTNERSHIP FIRMS -
1,16

Interest on Capital A/c

Dr.
FUNDAMENTALS
62,000
To Shiv's Capital A/c
To Hari's Capital A/c
40,0
(Interest on partner's Capitals)
Dr. 62,000
Profit and Loss Appropriation A/e
To Interest on Capital A/e 62,00
(Transfer of interest on Capital to Profit and Loss
|AppropriationAccount)
Dr. 600
|Shiv's Capital A/e
Dr. 500
Hari's Capital A/c
To Interest on Drawings A/c 1,100
(Interest on partner's drawings)
Interest on Drawings A/c Dr. 1,100
To Profit and Loss Appropriation Alc 1,100
(Transfer of interest on drawings to Profit and Loss
|AppropriationAccount)
Dr. 95,100
Profit and Loss Appropriation A/c
57,060
To Shiv's Capital A/c
38,040
To Hari's Capital A/c
(Transfer of credit balance of Profit and Loss
Appropriation Account to partner's Capital
Accounts)
APPROPRIATION ACCOUNT
PROFIT AND LOSS
2024 Cr.
Dr. for the year ended 3lst March.
Particulas
Particulars
By Profit & Loss Ac
To Partner's Salary: 1,96,000
Shiv 20,000 being profit
Hari 20,000 40,000 By Interest on Drawings : (note 2)
Shiv 600
To Interest on Capitals : (note 1) 500 1,100
40,000 Hari
Shiv
Hari 22,000 62,000
ToProfit transferred to :
Shiv's Capital A/c 57,060
Hari's Capital A/c 38,040 95,100
1,97,100
1,97,100
Cr.
PARTNERS'CAPITAL ACCOUNTS
Dr.
Particulars Shiv Hari
Date Particulars Shiv Hari Date
2024 2023
5,00,000| 2,00,000
March 31|To Drawings 12,000 10,000 April 1|By Bank
1,00,000
March 31ToInterest on July 1|By Bank
Drawings 600 500 2024
20,000
March 31|To Balance March 31 By Salary 20,000
ACCOUNTING FOR PARTNERSHIP FIRMS FUNDAMENTALS 1.17

c/d
6,04,460 3,69,540 March 31|By Interest on
Capitals 40,000 22,000
March 31| By Profit &
Loss Appro
priation A/c 57,060 38,040
6,17,060 3,80,040 6,17,060 3,80,040
Note (1) :Calculation of Interest on Capitals
Shiv On 5,00,000 at 8% for I year 40,000
Hari On 2,00,000 at 8% for 1year 16,000
On 1,00,000 at 8% for 9 months 6,000
22,000

Interest on Capitals is recorded on the debit side of P&L Appropriation A/c, as it

is an item of expense for the firm. Interest on Capital is also recorded on the credit side
of Capital Accounts, as it increases the Capitals.
Note (2) :In this question, the dates of drawings are not given, therefore, interest on drawings
has been calculated for six months.
10 6
Hence, Interest on Shiv's drawings = 12,000 × =600
100 12
10 6
Interest on Hari'sdrawings = 10,000 × X =500
100 12

Interest on Drawings is recorded on the credit side ofP &LAppropriation A/c, as

it is an item of income for the firm. Interest on Drawings is also recorded on debit side
of Capital Accounts, as it reduces the Capitals.
Manager's Commission on Net Profits Sometimes, the manager is to be
below:
alloweda certain percentage of net profits as his commission. It is calculated as
(I) On profits before charging such commission :- For example, ifallowed the profit
manager is to be a
before charging his comnmission is 22,000 and the
commission
commission of 10% on the profit before charging such commission, the
will be :
10
22,000 X 100 =2,200.
example, if the profit
(II) On profits after charging such commission : For
is to be allowed a
before charging his commission is ?22,000 and the manager the commission will
commission of 10% on the profit after charging such commission,
be :
10
22,000 x =2,000.
110

ILLUSTRATIONS.
(Manager's Commission)
3: 2, with Capitals of S,00.000
Aand B are partners sharing profitsin the ratio of @ 6% p.a. B is to be allowed
and 3,00,000 respectively. Interest on Capital is agreed the profits prior to the
an annual salary of 60,000. During the year 2023-24, amounted to 1,80,000.
calculation of interest on capital but after charging B's salary
Aprovision of 5% of the profit is to be made inrespect of commission to the Manager.
 ACCOUNTING FOR PARTNERSHIP FIRMS )
Ais to be allowed acommission of 1.5% on sales. Sales for the year FUNDAMENTAS
15,00,000.
Prepare Profit and Loss Appropriation account showing the distribution
endingMarch 31, 2024.
and the partners'capital accounts for the year
SOLUTION:
PROFIT AND LOSS ACCOUNT
Dr.
for the year ended 31st March, 2024
Particular Particulars

To Manager's Commission By Balance b/d

(5% of 2,40,000) 12,000 (Profit for the year)
To Net Profit Transferred to Profit (before B's salary)
&
Loss Appropriation Alc 2,28,000 (R1,80,000 + 60,000) 2,40,000
2,40,000 2,40,0

ACCOUNT
PROFIT AND LOSS APPROPRIATION
Cr.
Dr. for the year ended on March 3I, 2024
Particulars
Particulars
60,000 By Profit & Loss Alc 2,28,000
ToSalary Alc (B)
To Interest on Capitals :
30,000
B 18,000 48,000
To Commission (A) 22,500
ToProfits transferred to :
A's Capital Alc 58,500
B's Capital Alc 39,000 97,500
2,28,000
2,28,000

Cr.
PARTNER'S CAPITAL ACCOUNTS
Dr. B
B Date Particulars
Date Particulars
2023
2024 5,00,000|3,00,000
6,11,000|4,17,000 April1 By Balance b/d
March 31|To Balance cld 2024 60,000
March 31|By Salary
March 31|By Interest on 30,000 I8,000
Capital
March 31 By Commi
22,500
ssion
March 31By Profit &
Loss Appr.
Ac (Share 58,500/ 39,000
of profit) 6 , 1 1 , 0 0 0 / 4 . 1 7 . 0 0 0

6,11,000|4,17,000|
ACCOUNTING FOR PARTNERSHIP FIRMS FUNDAMENTALS 1.19

ISCCouncil's Instruetions
In the absence of information, manager's or partner's commission or transfer to general
reserve will be calculated on profit before any adjustment is made according to partnership
deed, i.e., before adjustments in respect of partner's salary, interest on capital etc. In other
words, manager's or partner's commission or transfer to general reserve will be calculated on
corrected Net Profit of the P & LAlcif question is silent.
Note :(1) Manager's Commission is acharge against the profits and not an appropriation
of profit. Hence it is debited to Profit &Loss Account and not Profit and Loss Appropriation
Account.

ILLUSTRATION 6.
(Partner's Commission)
Aand B are partners in a firm sharing profits and losses in the ratio of 3:2 with
capitals of R5,00,000 and 2,50,000 respectively on Ist April, 2023. Each partner is
entitled to 10% p.a. interest on his capital. Ais entitled to acommission of 10%on net
profit before charging any commission, B is entitled to acommission of 8% of net
profit remaining after charging all commissions. Net profit for the year ended 31st
March, 2024 was 3,00,000.
Prepare necessary journal entries.

SOLUTION: Books of A and B

JOURNAL

Particulars LF. Dr. ) Cr. R)

Date
2024
Dr. 3,00,000
March 31 Profit and Loss Alc
3,00,000
To Profit and Loss Appropriation A/c
to Profit and Loss
(The transfer of Profit
|Appropriation Account)
|Interest on Capital A/c Dr. 75,000
50,000
To A's Capital A/c 25,000
To B's Capital A/c
Capitals)
(The interest on partner's
Dr. 75,000
Profit and Loss Appropriation Alc 75,000
ToInterest on Capital A/c
Capital to Profit and
(The transfer of interest on
Loss Appropriation Account)
Dr. 50,000
Commission A/c 30,000
To A's Capital A/c 20,000
To B's Capital A/c
(Commission to partners)
Dr. 50,000
Appropriation Alc
Profit and Loss 50,000
To Commission A/e
commission to Profit and
(The transfer of partner's
Loss Appropriation Account)
 ACCOUNTING POR PARTNERSHIP FIRMS -
ofit andLoee Appropriation A/e
Te 4' Cpital A'c
Dr. FUNDAMENTAL
1,75,000
To B's Capital Ac
(The transfr of credit balance of Profit and Los
Appropriation Account to partner's Capital
Accounts)

Werking Notes PROFIT AND) LOSS APPROPRIATION ACCOUNT

for the year ended 3Ist March 2024
Particulars Particulars
To Interest on Capital Alc: By Profit and Loss A/e
50,000 being profit
25,000 75,000 3,0,0
To Commission (See Note 1 & 2)
A 30,000
20,000 50,000
To Profit transferred to :
A's Capital A/e 1,05,000
B's Capital A/c 70,000 1,75,000
3,00,000
3,00,050
Notes :
(1) Partner's Commission is an appropriation of
Loss Appropriation A/c. profit. Hence, it is debited to Profit an
(2) Calculation of Partner's Commission :
A'sCommission (before charging such 10
commission) = 3,00,000 x 100 = 30,000
B's Commission (after charging such
commission) =
B's Commission will be calculated after
Commission : charging A's Commission and his own
Hence, B's Commission =(3,00,000 -
30,000) x 108 *20,000
ILLUSTRATION 7.
Aand Bare partners sharing profits
ti0,00,000 and 5,00,000 respectively onandIstlosses
April,
in the ratio of 2: Iwith capitals oi
Bis entitled to a salary 2023. Each partner is entitled
8 pa interest on his
capital.
commission of 10% of Net Profit after charging of l0,000 p.m. together
ended 3lst March, 2024 amounted to his commission Net profit for the with
yea
journal entries and prepare Partner's t6,60,000. Show the division of protit, pass
and (i) When capitals are Capital Accounts : () When capitals
fluctuating are fixeu
SOLUTION: PROFIT AND LOSS
Dr. APPROPRLATION
for the year ended 3lst ACCOUNT
Particulars Murch, 2024 Cr.
To Salary Alc (B) Particulars
1,20,000 By Profit and Loss A/c 6.60.000
ACCOUNTING POR PARTNERSHIP FIRMS FUNDAMENTALS 121
To Interest on Capitals A/c:
80,000
40,000 1,20,000
To Commission (B) (See Note 1) 60,000
ToProfits transferred to :
A's Capital/
Current Alc 2,40,000
B'sCapital/
Current Alc 1,20,000 3,60,000
6,60,000 6,60,000

Current Alc will bewritten incase of fixed capitals.

Note : (1) Calculation of Partner's Commission :
10
B'sCommission (after chargingsuch commission) =6,60,000 x 110 = 760,000

(0) When Capitals are fixed :

In the Books of A and B
JOURNAL

Date Particulars LF Dr. ) Cr. ()

2024
March 31 Profit and Loss Alc Dr. 6,60,000
To Profit and Loss Appropriation A/c 6,60,000
(Transfer of net profit to Profit and Loss
Appropriation Account)
March 31|B'sSalary A/c Dr. 1,20,000
To B's Current A/c 1,20,000
(B's salary credited to his Current Account)
Dr. 1,20,000
March 31 Profit and Loss Appropriation Alc 1,20,000
To B's Salary Alc
Loss
(B's Salary transfered to Profit and
AppropriationAccount)
Dr. 1,20,000
March 31| Interest on Capital A/c
To A's Current A/c
80,000
To B's Current Ac
40,000
partners)
(Interest on capital allowed to
Dr. 1,20,000
March 31Profit and Loss Appropriation Alc 1,20,000
ToInterest on Capital Alc
(Interest on capital transferred
to Profit and Loss
Appropriation Account)
Dr. 60,000
March 31Commission to B 60,000
To B'sCurrent A/c
(B'sCommission credited
to his Current A/c)
 ACOOUNTING FOR PARTNERSHIP FRMS--
122
Appeogriaticn Ac Dr
FUNDAMENTALL
60,900
Marct 3iProft ad Loss
To Commissa toB
LoSs
(Bs Commission transferred to Profit &
Appropation Account)
Dr.
March 31 Profit and Loss Appropriation Ac 3,60,000
To A'sCurent Alc 240,155
To BsCurent Alc
(Divisible profit of ?3,60,000 credited to partner's
Curent Accounts in 2:1)

Dr. CAPITAL ACCOUNTS

Date Particulars B Date Particulars
2024 2023
March 31 To Balance April 1 By Balance
cd 10,00,000 5,00,000 b/d 10,00,000 5,00,000
Dr. CURRENT ACCOUNTS C
Date Particulars B Date Particulars
2024 2024
March 31To Balance March 31|By Salary 120,000
cld 3,20,000 3,40,000 March 31 By Interest
on

Capitals 80,000 40,000

March 31 By Commi
ssion 60,000
March 31 By Profit &
Loss
Appropr
iation A/c
(Share of
Profit) 2,40,000 1,20,000
3,20,000 3,40,000 3,20,000 3,40,000

(i)When Capitals are fluctuating :

In the Books of A and B
JOURNAL
Date Particulars LE Dr. () Cr. ()
2024
March 31|Profit and Loss A/e Dr. 6,60,000
6,60,000
To Profit and Loss Appropriation A/c
(Transfer of net profit toProfit and Loss
Appropriation A/e)
B's Salary Ale Dr. 1,20,000
To B'sCapital A/c 1,20,000

(B's salary credited to B's Capital Account)

 ACCOUNTING FOR PARTNERSHIP FIRMS -
FUNDAMENTALS 123
Profit and Loss Apropriation A/e
I20,000
To B'sSalary A/c I.20,000
(B's salary transfered to Profit and Loss
|Appropriation A/c)
Interest on Capital Ae D. 1,20,006
ToA's Capital Alc 80,000
To B'sCapital A/c 40,000
(Interest on Capital allowed to partners)
Profit and Loss Appropriation Alc Dr. 1.20,000
To Interest on Capital Alc 1.20,000
(Interest on capital transferred to Profit and Loss
Appropriation A/c)
Commission to B Dr. 60,000
To B's Capital A/c 60,000
(B's Commission credited to his Capital A/c)
Profit and Loss Appropriation A/c Dr. 60,000
To Commission to B 60,000
(B's Commission transferred to Profit & Loss
Appropriation A/c)
Profit and Loss Appropriation A/e Dr. 3,60,000
To A's Capital A/c 2,40,000
To B's Capital A/c 1,20,000
(Divisible profit of R3,60,000 credited to partner's
Capital Accounts in 2: 1)
CAPITAL ACCOUNTS Cr.
D:
Particulars B Date Particulars
Date
2023
2024
March 31 To Balance April I By Balance
13,20,000 8,40,000 b/d 10,00,000 5,00,000
cld
2024
March 31 By Salary 1,20,000
March 31 By Interest
on
80,000 40,000
Capitals
March 31 By Commi
ssion o0,000
March 31 By Profit
and Loss
Appro
priation
As
(Share of
Profi) 2,40,000 120,000
13,20,000 8.40,000
13,20,000 8,40,000
commission of
manager is written in Profit and Loss Ae whereas
Note : Commission of
Partner iswritten in Profit and Loss Appropriation A/c.
 ACCOUNTINGFOR. PARTNERSHIP FIRMS
1.24

ILLUSTRATION 8.
FUNDAMENT ALS
Ram and Gopal were partners in afirm sharing profits in the ratio of 3
April, 2024 their fixed capitals were 1,00,000 and 1,50,000 :2. On
June, 2024 they decided that their total capital (fixed) should respectively.
ls.
be 3,00,000. On30h
further decided that the capital (fixed) should be in their profit It was
Accordingly they introduced or withdrewthe necessary capital. The sharing raio,.
provided the following: partnership deed
() Interest on capital @ 12% p.a.
(i)Interest on drawings @18?% p.a.
(üi) Monthly salary to Ram @ 2,000 per month and to Gopal at the rot
3,000 per month.
The drawings of Ramand Gopal during the year were as follows:
Date Ram Gopal
2024
Oct. 1 10,000 12,000
Dec. 31 15,000 12,000
The profit earned by the firm for the year ended 31st March, 2025 was
10% of this profit was to be kept as a reserve. 2,00,000.
You are required to prepare :
(i) Profit and Loss Appropriation Account,
(ii) Capital Accounts of Ram and Gopal, and
(ii)Current Accounts of Ram and Gopal.
SOLUTION: PROFIT AND LOSS APPROPRIATION ACCOUNT
Dr. for the year ended 31st March, 2025 Cr.

To Reserve 20,000 By Profit & Loss A/c

ToInterest on Capitals A/c : being profit 2,00,000
Ram's Current A/c 19,200 By Interest on Drawings:
Gopal's Current A/c 15,300 34,500 Ram's Current Alc 1,575
To Salary Gopal's Current A/c 1,620 3,195
Ram's Current A/c 24,000
Gopal's Current A/c 36,000 60,000
To Profit Transferred to :
Ram's Current A/c 53,217
Gopal's Current A/c 35,478 88,695
2,03,195 2,03,195

Dr. PARTNER'S CAPITAL ACCOUNTS Cr.

Particulars Ram Gopal Particulars Ram Gopal

To Bank Alc
30,000| By Balance b/d 1,00,000|1.50,000

To Balance c/d
1,80,000| 1,20,000|By Bank Alc 80,000
1,80,000 |1,50,000 1,80,000 1,50,000
 ACCOUNTING FOR PARTNERSHIP FIRMS
Dr. FUNDAMENTALS 125
PARTNER'S CURRENT ACCOUNTS Cr.
Particulars
Ram Gopal Particulars Ram Gopal
To Drawings 25,000
To Interest on Drawings 24,000 By Interest on Capital 19,200 15,300
1,575 1,620 By Salary
To Balance cd
69,842 24,000 36,000
61,158 By Profit & Loss
Appropriation A/c 53,217 35,478
96,417 86.778 96,417 86,778
Working Notes :
() Calculation of New Capitals :
Ram's Capital 3/5 of 3,00,000
Gopal's Capital 2/5 of 3,00,000 ==1l,80,000
1,20,000
(ii) Capital to be introduced by Ram
Capital to be withdrawn by Gopal =1,80,000 1.00,000 = 780,000
= E1,50,000 -120,000 =30,000
(iii) Calculation of Interest on
Capital :
Interest for 3months ie. from Ist April
2024 to 30th June 2024: Ram
Ram on 1,00,000 @ 12% p.a. Gopal
Gopal on 1,50,000 (@ 12% p.a. 3,000
Interest for 9 months i.e. from 1st July 2024 to 4,500
31st March 2025 :
Ram on 1,80,000 @ 12% p.a.
Gopal on 1,20,000 @ 12% p.a. 16,200
10,800
19,200 15,300
(iv) Calculation of Interest on Drawings
Interest for 6 months i.e. from lst Oct. 2024 to 31st
March 2025: Ram
Ram on Z10,000 @ 18% p.a. Gopal
900
Gopal on 12,000 @ 18% p.a.
Interest for 3 months i.e. from 1st Jan. 2025 to 31st March 2025 : 1,080
Ram on15,000@ 18% p.a. 675
Gopal on 12,000 @ 18% p.a. 540
1,575 1,620

(2) Interest on Loan by Partner to the Firm :

Rate of Interest : If a partner has given loan to the firm,
Interest on such loan at an agreed rate of interest. However, if he is entitled to receive
to the rate of interest. he is entitled to receive interest there is no agreement as
on loan (@ 6% per annum.
Nature of Interest: Interest on Loan by Partner is a charge against
hence, such interest is allowed whether there are profits or not. the profits and
Accounting Treatment: It is treated as a charge against the profits and hence
interest on Loan by Partner is debited to Profit & Loss Ale and not to Profit &
Loss Appropriation A/c.
ISC Council's Instructions
Interest on Loan by Partner is not credited to the partner's Capital
It iscredited to his Loan Account. or Current Accounts.