Class 12

Accountancy
Chapter -1

Accounting for
Partnership Basic
Concepts
 Partnership

Definition

The relation between persons who have agreed to

share the profits of a business carried on by all or
any of them acting for all
 Features
of
Partnership
 Features of Partnership
1. Two or more persons

Minimum : 02 Maximum : 50

According to Section 464 of Companies Act 2013

maximum number of partners can be 100, subject to the
number prescribed by the government
At present it is limited to 50 by Govt. of India.
 Features of Partnership
2. Agreement Between the Partners

It can be either written or oral

regarding the sharing of profit,
capital investment etc.
 Features of Partnership
3. Business

The agreement should be for carrying on a

business whereas joint ownership of some property
does not constitute partnership
 Features of Partnership
4. Sharing of Profit

Profit or Loss must be shared among the partners

either equally or on the agreed ratio
 Features of Partnership
5. Business is carried on by all or any of
them acting for all

The business can be conducted either by all the

partners or any of them can act as agents for the
other partners
 Features of Partnership
6. Unlimited Liability

The liability of each partner is unlimited and they

are jointly and severally liable for the debts of the
firm
 Features of Partnership
7. No Separate legal existence
It cannot own property or enter into contract in
its own name

Retirement, admission, death, insolvency etc. lead

to change in the constitution of the firm
 Features of Partnership
8. Utmost good faith
All the partners should disclose all material facts
and present true account to one another

No one should make a secret profit out of the business

 Features of Partnership
9. Restriction on Transfer of Interest

A partner is not entitled to transfer his interest in the

partnership to an outsider without the consent of
other partners
Partnership Deed

Articles of Partnership
 Partnership Deed
Partnership is established by an agreement which may
be oral or in writing

It is always better to have the agreement in writing to

avoid any dispute

The document, containing the agreement in writing

among the partners is called Partnership Deed
 Contents of Partnership Deed
1. Name of the firm
ABC ASSOCIATES
 Contents of Partnership Deed
2. Names and addresses of all partners
 Contents of Partnership Deed
3. Nature and place of
business
 Contents of Partnership Deed
4. Date of Commencement of partnership
 Contents of Partnership Deed
5. Duration of partnership, if any
 Contents of Partnership Deed
6. Capital contribution by the partners
 Contents of Partnership Deed

7. The amount that can be withdrawn by

each partner

Rs. 20,000
 Contents of Partnership Deed
8. Rules regarding operation of bank
accounts
 Contents of Partnership Deed
9. Division of profits or
losses
 Contents of Partnership Deed
10. Interest on capital or drawings, if
any
 Contents of Partnership Deed
11. Interest on partner’s loan to the firm
 Contents of Partnership Deed

12. Salaries, commission, etc. if payable

to any partner
 Contents of Partnership Deed

13. Detailsof division of work amongthe

partners
Purchase Manager Production Manager Sales Manager
 Contents of Partnership Deed
14. Ascertainment of goodwill

On admission, retirement and death of a

partner
 Contents of Partnership Deed
15. Settlement of accounts

In the event of retirement or death of partners

 Contents of Partnership Deed
16. Settlement of accounts

On dissolution of the firm

 Contents of Partnership Deed

17. Provisions relating to the

maintenance and audit of accounts
 Contents of Partnership Deed

18. Provisions for arbitration in the

event of disputes
 Contents of Partnership Deed
19. Provisions regarding borrowings of the
firm
 Contents of Partnership Deed
20. Rights, duties and liabilities of
partners

Rights Duties Liabilities

 Rules applicable in
the absence of
Partnership Deed or if
the Deed is silent on
any matterAjith Kanthi Wayanad
www.hssplustwo.blogspot.com
 In the absence of Deed

1. Profit Sharing

The profit or loss shared equally among the

partners irrespective of their capital
 In the absence of Deed

2. Interest on Capital

No interest is payable to the partners

If the deed provides for interest on capital, it
should be paid only out of profit and if there is
loss, no interest can be allowed
 In the absence of Deed

3. Interest on loan to the firm

Partners are entitled to get interest at 6% p.a.

on loans advanced by the partners
It should be paid even if there is loss
 In the absence of Deed

4. Interest on Drawings

No interest will be charged on

drawings made by the
 In the absence of Deed

5. Remuneration to Partners

No one is entitled to get salary or

commission
 PARTNERS’
CAPITAL ACCOUNTS
PARTNERS’ CAPITAL ACCOUNTS
Transactions relating to partners should
be recorded in their capital accounts

Normally each partner’s capital account

is prepared separately
PARTNERS’ CAPITAL ACCOUNTS

Methods of Preparing
Partners' Capital
Account
Fluctuating Fixed
Capital Method Capital Method
 PARTNERS’CAPITAL ACCOUNTS

1. Fluctuating Capital Methods

Only one account is maintained (Partner’s capital
account)

All the items affecting partner’s capital account is

recorded such as interest on capital, interest on drawings,
drawings, salary, commission, share of profit or loss etc.

Balance in the capital accounts keeps on fluctuating

year after year
PARTNERS’CAPITAL ACCOUNTS
Proforma of Capital Account

Fluctuating Capital Method

 PARTNERS’CAPITAL ACCOUNTS

2. Fixed Capital Method

Two accounts are maintained for each
partner (Capital account and Current account)

The balance in capital account will not be

changed unless some additional capital is
introduced or some amount of capital is
withdrawn by an agreement among the partners
 PARTNERS’CAPITAL ACCOUNTS

2. Fixed Capital Method

Interest on capital, drawings, interest on
drawings, salary, commission, share of profit or
loss etc. are recorded in partner’s current
account and hence the balance of current
account is always changing
PARTNERS’CAPITAL ACCOUNTS

Proforma of Capital Account

Fixed Capital Method

PARTNERS’CAPITAL ACCOUNTS
Proforma of Current Account

Fixed Capital Method

Differences between
Fixed Capital &
Fluctuating Capital
Methods
PARTNERS’CAPITAL ACCOUNTS

Fixed Vs. Fluctuating Capital Methods

Fixed Capital Fluctuating Capital

Two Accounts are Only one Account is

maintained maintained
 PARTNERS’CAPITAL ACCOUNTS

Fixed Vs. Fluctuating Capital Methods

Fixed Capital Fluctuating Capital

Usually no change in Capital is fluctuating year

Capital after year
 PARTNERS’CAPITAL ACCOUNTS

Fixed Vs. Fluctuating Capital Methods

Fixed Capital Fluctuating Capital

All adjustments in All adjustments in Capital

Current Account Account
 PARTNERS’CAPITAL ACCOUNTS

Fixed Vs. Fluctuating Capital Methods

Fixed Capital Fluctuating Capital

Current a/c and Capital a/

c appears in Balance Only the Capital a/c
Sheet appears in Balance Sheet
 PARTNERS’CAPITAL ACCOUNTS

Fixed Vs. Fluctuating Capital Methods

Fixed Capital Fluctuating Capital

It should be specifically Not necessary to mention

mentioned in the deed in the deed
 Fixed Vs. Fluctuating Capital Methods
Fixed Capital Fluctuating Capital

Two Accounts Only one Account

No Change in Capital Change in Capital

All adjustments in Current A/c All adjustments in Capital A/c

Current A/c & Capital A/c in Only Capital A/c in

Balance Sheet Balance Sheet
Specified in Deed Not necessary
Drawings Account
 Drawings Account

Drawings
Withdrawal by a partner in the form of money
or money’s worth from the firm is called
drawings
 Drawings Account
Drawings account is a personal account
When cash or goods are withdrawn by a partner,
drawings account is debited and cash or
purchase account is credited
 Drawings Account

At the end of the period, drawings account is closed

by transfer to capital account or current account
of the partner concerned

Capital A/
Drawings A/c c Or
Current A/c
 Drawings Account

If some amount is withdrawn out of capital, it

is recorded in capital account and not in
drawings account
Accounting Treatments on
Drawings
 Drawings Account

Journal Entries
1. When cash or goods withdrawn by a
partner
Drawings Cash / Purchase

Partner’s Drawings A/c Dr

To Cash / Purchase A/c
 Drawings Account

Journal Entries
2. To close drawings account by transfer to
capital account
Capital / Current A/cDrawings A/c

Partner’s Capital / Current A/c Dr To

Partner’s Drawings A/c
 Drawings Account

Journal Entries

3. When some amount is withdrawn by

a partner out capital
Capital A/c Cash A/c

Partner’s capital A/cDr To

Cash A/c
 Distribution of
Profit / Loss
among partners
through
Profit & Loss Appropriation A/c
Profit & Loss Appropriation A/c
The net profit reflected by the profit and loss
account of the partnership firm needs certain
adjustments for items like interest on capital,
interest on drawings, salary, commission to the
partners etc.
Interest of Capital Interest of Drawings

Salary Commission
Profit & Loss Appropriation A/c

All these items are incorporated in the Profit

and Loss Appropriation Account

P & L Appn A/c

But not in Profit and Loss Account as they are not

directly related to the operation of business but on
the basis of agreement among the partners
Profit & Loss Appropriation A/c

This is an extension of profit and loss account and

is prepared to show how the net profit has been
distributed among the partners

Profit & Loss A/c P&L Appn. A/c

Profit & Loss Appropriation A/c
This account should begin with the net profit or
net loss brought forward from the profit and
loss account
(profit on the credit side and if loss on the debit side)

Net Loss Net Profit

 Profit & Loss Appropriation A/c
Items to be debited
Dr Cr
Profit and Loss Appropriation A/c
Particulars Amount Particulars Amount
Net Loss (if any) Interest XX
on Capital Salary XX
Commission XX XX

(expense to the firm i.e., incomes to the partner)

 Profit & Loss Appropriation A/c
Items to be credited
Dr Cr
Profit and Loss Appropriation A/c
Particulars Amount Particulars Amount
Net Profit (P/L A/c) Interest XX XX
on Drawings

(Incomes to the firm i.e., expense to the partner)

 Profit & Loss Appropriation A/c
Dr
Sharing of Profit Cr
Profit and Loss Appropriation A/c
Particulars Amount Particulars Amount
Interest on Capital XX Net Profit (P/L A/c) XX
Salary Commission XX Interest on Drawings XX
Partners' Capital A/c: Mr. XX
A xx
Mr. B xx
XX
Profit & Loss Appropriation A/c
Format of P&L Appropriation A/c
 Interest on Capital
If the Partnership Deed allows to pay the interest
on capital, it should be calculated on the
opening balance in the capital account

Capital A/c
Balance b/d xxx
 Interest on Capital
If some additional capital is introduced during the
year, the interest on this additional amount
should be calculated based on the time for which
the amount remains in the business

Capital A/c

Balance b/d xxx Cash (Addl.

Cap) xxx
 Interest on Capital

No interest is calculated on the Current A/

c balances
Current A/c

Balance b/d xxx

 Interest on Capital
To find out the opening capital
 Interest on Capital
In case there are withdrawals out of capital as per
agreement, during the year
1. Calculate the interest on the opening capital up to
the date of withdrawal out of capital.
2. Then calculate interest for the remaining period
on the amount left after the withdrawal out of
capital.
Interest on Drawings
 Interest on Drawings

Interest on drawings is to be charged from

partners if it is specified in the deed

The interest is calculated by

considering the time period
 Methods of Calculating Interest on Drawings

1. Amount of withdrawal, Rate of interest and

the date of withdrawal are given:

Amount X Rate of Interest X Time Period

Eg: 10000 x 10% x 4/12* = 500

* Time period is 4 months

 Methods of Calculating Interest on Drawings

2. Date of withdrawal not given but the amount and

rate of interest given:

Amount X Rate of Interest X Time Period

assumed as 6 months on an average

e.g., 10000 x 10% x 6/12 = 500

 Methods of Calculating Interest on Drawings

3. Different amounts withdrawn at different Intervals:

In case the dates of drawings and the amounts

of drawings are clearly stated, the interest may
be calculated with the help of Product Method
 Methods of Calculating Interest on Drawings

Product Method – Steps:

i. Calculate the time period between the date
of withdrawal and the date of closing the
accounts

e.g., 10 months, 8 months, 7 months etc.

 Methods of Calculating Interest on Drawings

Product Method – Steps:

ii. Multiply the period so calculated by the
respective amount of drawings, this is called the
Product
2. 10000 x 8 months 80,000
e.g., 1. 10000 x 10 months = 100,000
= 70,000
3. 10000 x 7 months
 Methods of Calculating Interest on Drawings

Product Method – Steps:

iii. Add up the various products

e.g., 1. 10000 x 10 months = 100,000

2. 10000 x 8 months = 80,000
3. 10000 x 7 months = 70,000
250,000
 Methods of Calculating Interest on
Drawings

Product Method – Steps:

iv. Calculate the interest for one month on the
sum of products at the rate of percentage

i.e., 250,000 x 1/12 x 10% = Rs.2083

 Methods of Calculating Interest on
Drawings Product Method – Example:

Accounting Period April to March

 Methods of Calculating Interest on Drawings

4. Fixed amount withdrawn every month:

If a fixed amount is withdrawn at regular intervals,
such as:
a. First day of every month
b. Last day of every month
c. Middle of every month etc.
The interest on drawings can be calculated on
the basis of average period
 Methods of Calculating Interest on Drawings

a. If the amount is withdrawn on the first day of every

month:
Average Period = Total period in months + 1
2
= 12 + 1 = 6.5 months
2
:. Interest on Drawings = Total Amount x Average Period x 1/12 x
Rate of Interest / 100
 Interest on Drawings
Also we can interpret the average period as follows:
(Months left after 1st withdrawal + Months left after last withdrawal) / 2
1. 1st day of every month; months left after 1st withdrawal is 12 months and
months left after the last withdrawal is 1 month. (= (12+1)/2= 6.5 months)
2. Middle of every month; (11.5 + 0.5)/2 = 6 months
3. Last day of every month; (11+0)/2 = 5.5 months
4. 1st day of every quarter; (12+3)/2 = 7.5 months
5. Middle of every quarter; (10.5+1.5)/2 = 6 months
6. Last day of every quarter; (9+0)/2 = 4.5 months
7. 1st day of every 6 months; (12+6)/2 = 9 months
8. Middle of every 6 months; (9+3)/2 = 6 months
9. Last day of every 6 months; (6+0)/2 = 3 months
 Methods of Calculating Interest on Drawings

b. If the amount is withdrawn on the last day of every

month:
Average Period = Total period in months - 1
2
= 12 - 1 = 5.5 months
2
:. Interest on Drawings = Total Amount x Average Period x 1/12
x Rate of Interest / 100
e.g., 12000 x 5.5 x 1/12 x 10/100 = 550
 Methods of Calculating Interest on Drawings

c. If the amount is withdrawn on the middle of every

month:
Average Period = Total period in months
2
= 12 /2 = 6 months

:. Interest on Drawings = Total Amount x Average Period x 1/12

x Rate of Interest / 100
 Methods of Calculating Interest on Drawings

5. If the amount is withdrawn at each quarter:

a. If the amount is withdrawn in the beginning of
each quarter (3 months), the average period is 7.5
months

i.e., (12+3)/2 = 15/2 = 7.5 months

3 indicates number of months in a quarter.

 Methods of Calculating Interest on Drawings

5. If the amount is withdrawn at each quarter:

b. If the amount is withdrawn at the end of each

quarter Average period is 4.5 months.

i.e., (12-3)/2 = 9/2 = 4.5 months.

 Methods of Calculating Interest on Drawings

5. If the amount is withdrawn at each quarter:

c. If the amount is withdrawn at the middle of each

quarter

Average period is 6 months.

i.e., 12 / 2 = 6 months.
 Interest on Drawings
Various Cases

Cases Average
Period
1. Date of Drawings not given 6 months

2. First Day of Every Month 6.5 months

3. Last Day of Every Month 5.5 months

4. Middle of Every Month 6 months

 Interest on Drawings
Various Cases

Cases Average
Period
5. Beginning of each quarter 7.5 months
6. Middle of each quarter 6 months
7. End of each quarter 4.5 months

8. Different dates are given Product

Method
 Guarantee of
Profit to a Partner
 Guarantee of Profit to a Partner
Guarantee of profit may be given to an
existing partner or a new partner at the time
of admission

This guaranteed profit is to be paid only if his/her profit

as per the ratio is less than the guaranteed amount
 Guarantee of Profit to a Partner
E.g., Abin and Sibin are partners, they admit Lal,
profit sharing ratio is 3:2:1 with a guaranteed
amount of Rs.5000 to Mr.Lal.

Current year’s profit is Rs.24000/-

:. Lal’s share of profit = 24000 x 1/6 = 4000
This is Rs.1000 less than the guaranteed amount
 Guarantee of Profit to a Partner
This deficiency amount of Rs.1000 should be given to
Lal by Abin and Sibin in their profit sharing ratio, ie;
:. Sacrifice
3:2 by Abin = 1000 x 3/5 = 600
Sacrifice by Sibin = 1000 x 2/5 = 400

In this case, Abin’s share of profit:

= 24000 x 3/6 – 600 = 12000 – 600 = 11400
Sibin’s shae of profit:
= 24000 x 2/6 – 400 = 8000 – 400 = 7600
 Guarantee of Profit to a Partner
Sometimes any one of the old partners may give
guarantee to the incoming partner

E.g., Mr.Abin gives guarantee, then he should pay the entire

amount of deficiency. In this case his share of profit will be :

24000 x 3/6 – 1000 = 12000 – 1000 = 11000/-

 Past Adjustments
Sometimes, after closing the books of accounts it
is found that certain items are left out by mistake or
have been wrongly treated.
P&LAdjustmentA/c
In such a case necessary adjustments are carried
out either in partners’ capital accounts or through
“Profit and Loss Adjustments Account”.
 Final Accounts
The Trading and Profit and Loss
Account and Balance Sheet are
prepared in the same manner as in the
case of a sole trading concern
P&L A/c B/S
 Final Accounts
The net profit or net loss should be
transferred to Profit and Loss
Appropriation Account
Net Profit P&L Appn. A/c
 Final Accounts
All adjustments like interest on capital,
interest on drawings, interest on
partner’s loan, partner’s salary, share of
profit or loss, etc. are entered in the
profit and loss appropriation account
 Final Accounts
All adjustments in
P/L Appropriation A/c will help to
distinguish between the results of
operations of business and the
distribution of profit among the partners