Basic Concept

-Sole proprietorship Business-

Forms of Business:

-Partnership

-Joint Hindu Family Business

-Cooperative Society

-Company

NEADS OF PARTNERSHIP BUSINESS

- More access to capital

-More managerial skills

-Right decision

-Sharing of risk etc.

According to section 4 of partnership act 1932, “Partnership is a relationship between two or more person who have agreed to share the profit of a business and carried on by all or any one of them acting for all.

-Minimum two members are required, and maximum number of member in case of banking business could be 10 and 20 in case of other business.

-There must be an agreement between the partners to share the profit of the business.

-Carried on by all or any one of them acting for all.

-Unlimited liability of the members.

-There must be a legal business.

-Governed by Indian partnership act 1932.

A document which contains necessary terms and conditions of Partnership agreement and signed by all members called Partnership deed.

-Name and address of Firm and all partners.

-Nature and place of business

-Amount of capital invested by each partner.

-Profit and loss ratio.

-Rate of interest on partner’s capital and partners drawings if any.

-Partner’s salary and commission if any etc.

*Profit and loss will be divided equally among the partners.

*No interest is allowed on partner’s capital.

*No partner will be entitled for salary or commission.

*No interest will be charged partners drawings.

*6% interest will be allowed on the loan advanced by the partners.

* All decisions will be taken with mutual consent.

*At lest ......Two....... partners are required to form a partnership firm.

*The liability of partners are ....Unlimited..............

*In the absence of agreement, profits of a firm are shared .....Equally ...among partners .

*Interest on lone is paid even in...No agreement

*Interest on capital is not paid when there is .no agreement..

*Current accounts are opened when capitals are Fixed

• In the absence of agreement partners are not entitled to receive salary

• In the absence of an agreement profit are shared equally among partners :

* Interest on capital is payable to partners out of : profit

Very Short Questions

Give answer in true or falls :

A and B are partners, but there is no any partnership agreement. What should be done in the following cases: -

1-A invested capital Rs.2, 00,000 and B Rs.5, 00,000. What interest on capital will be given to A and B.

2-A invested capital Rs.20, 00,000 and B Rs.10, 00,000 and profit earned by the firm during the year Rs.50000. A demanded distribution of profit in the ratio of capital.

3-B spent twice the time than A, and demanded salary of Rs. 2000 per month.

4-A wants to appointed his brother as accountant in business but B object to it.

*B provided Rs. 5,00,000 to the firm as loan, so he demanded interest @ 10% on loan.

5-A provided his services to the firm as sales agent and he achieve the sales target during the year Rs.25, 00,000 and demanded commission @ 5%.

1-What do you mean by partnership?

2-State any four features of partnership.

3-What do you mean by partnership deed?

4-State the contents of partnership deed.

5-State any five rules, which are applicable in the absence of partnership deed.

A account in which all transactions related to a partner are recorded, is called partners capital account, in case of Partnership separate account is prepared for each partner but these can also be shown in a tabular form.

Partners capital account

Particulars A B C Particulars A B C

To Goodwill By balance b/f

To Profit & Loss Loss By Genral Reserve

By Revaluation( Loss ) By Profit & Loss

By Revaluation( Profit )

To Balance c/f By Cap. A/C.By Cap. A/C.By JLP A/C.By Int.On Cap.

Partners capital accountFormat

Methods of maintaining partners capital account

There are two methods of maintaining partners capital accounts:

*Fluctuating capital method.

*Fixed capital method.

Under the fluctuating partners capital account, only one , partners capital account for each partner is maintained and all adjustments affecting partners capital account like interest on capital, interest on drawings, partners salary, commission etc. are recorded in it.

Fluctuating capital method *

Date Particulars J.F. Amount Date Particulars J.F. Amount

DrawingsInterest on drawingsShare of lossWithdrawals of capitalClosing balance

Opening balanceAdditional Capital investmentSalaryInterest on capitalShare in profit etc.

Total Total

Format (partners capital account)

Under the fixed capital method, the capitals of the partners shall remain same (Fixed) unless some additional capital is introduced or some amount of capital is withdrawn by the partners.

Other adjustments like interest on capital, interest on drawings, partners salary, commission etc. are recorded in a separate partners current account.

Fixed capital Method

Date Particulars J.F. Amount Date Particulars J.F. Amount

Withdrawals of capitalClosing balance

Opening balanceAdditional Capital investment

Total Total

Format partners capital account

Date Particulars J.F. Amount Date Particulars J.F. Amount

Opening balanceDrawingsInterest on drawingsShare of lossClosing balance

Opening balanceSalaryInterest on capitalShare in profit etc.Closing balance

Total Total

Format partners current account

S.No.

Basis of difference

Fixed capital account Fluctuating capital account

1-

2-

3-

4.

Change in capitalNo. Of accounts

Adjustments of different items

Balance

Usually remain same

Two accounts, Partners capital account and partner’s current account are prepared.

All adjustments are recorded in partner’s current account.

Fixed capital account always showed credit balance.

Change after each transaction

Only one account Partners capital account is prepared.

All adjustments are recorded in partner’s capital account.

Fluctuating capital account may have debit or credit balance

1-State any two items of debit side and two items of credit side when partner’s capital accounts are fixed.

2-Give any four differences between fluctuating partners capital account and fixed partners capital account.

3-List any two circumstances under which the fixed capital of partners may change.

4-If the partner’s capital is fixed, where will you record the following items?Salary payable to partners, (ii) Drawings made by partners (iii) Fresh capital introduced by a partner (iv) Share of profit earned by a partners (v) Interest on partners capital (vi) Interest on drawings made by partners (vii) Capital withdrawn by partner.

REVIEW QUESTIONS

P/L appropriation account is nothing but an extension of P/L. account , which is prepared to calculate distributable profit by adjusting certain items in profit shown by P/L account.

Date Particulars J.F.

Amount Date Particulars J.F. Amount

Net loss as per P/L A/C.Salary and commissionInterest on capitalTransfer to Reserve Partners capital A/C(Share of profit if Any)

Net profit as per P/L A/CInterest on drawingsPartners capital A/C(Share of loss if any)

Total Total

*A, B and C are partners with a fixed capitals of Rs.300000, 240000 and 200000 respectively. The balance of current account on 1st January 2005 were A Rs.20000(Cr.) ,B Rs.25000(Cr.) and C Rs.15000 (Dr.).B advanced Rs.50000 on October 1st 2005 as a loan to the firm. The partnership deed provide the following:1-Interest on the capital @ 5%.2-Interest on drawings @ 10%, each partner drew Rs.50000 on July 1st 2005.3-P/L to be shared in the ratio of 2:2:1 up to Rs.30000 and above Rs.30000 equally.4-Net profit of the firm before above adjustments was Rs.150000.5- Rs.30000 is to be transferred to a general Reserve.Prepare P/L appropriation account, capital accounts and partners Current Accounts.

PRACTICE QUESTION:

INTEREST ON CAPITAL:

Interest on partner’s capital is to be allowed only when there is an agreement among the partners only out of the profit and it will be calculated with respect to the time, Rate of interest and amount of capital.

INTEREST ON DRAWINGS:

Partners have right to withdrew some goods or money for their personal use and firm may charge interest on that drawings at an agreed rate, interest on drawings may calculate on the following methods:

*Product method : (If different amounts are withdrawn at different dates).

*Average month method : (If same amount is withdrawn at same date):

* CALCULATION OF INTEREST ON CAPITAL AND INTEREST ON DRAWINGS *

1-X and Y are partner in a firm. Their capitals on April 1, 2006 were Rs.3, 00,000 and Rs.5, 00,000 respectively. On July 1 2006 that their capitals should be Rs.10, 00,000 each. Interest on capitals is allowed @ 5%p.a. compute interest on capital for both the partners for the year ending 31st march 2007.

Calculation of interest on Partners Capitals:

Interest on X,s Capital:I- Interest for three months: = (3,00,000*5/100)*3/12 = 3750I- Interest for Nine months:(1st July 06 To 31st March 07) = (10,00,000*5/100)*9/12 =37500Total interest for X = 41250

Interest on Y,s Capital:I- Interest for three months: = (5,00,000*5/100)*3/12 = 6250I- Interest for Nine months:(1st July 06 To 31st March 07) = (10,00,000*5/100)*9/12 =37500Total interest for Y = 43750

EXAMPLE:

1-A and B are partners in a firm sharing P/L. in the ratio of 2:1. Their capitals on 1st January 2006 were Rs.2, 00,000 and 1, 50,000 respectively. On July 1st 2006 they introduce further capitals of Rs.1, 00,000 and Rs.50, 000 respectively. On October 1st 2006 A withdrew Rs.50, 000. Interest is allowed @ 8% p.a. Compute interest on capital for both the partners for the year ending 31st December 2007.

2-X and Y are partner in a firm and sharing P/L in the ration of 3:1. Their capitals on March 31, 2007 were Rs.4, 00,000 and Rs.2, 30,000 respectively. During the year X’s Drawings were Rs.20, 000 and the Drawings of Y were Rs.10000, which had been duly debited to partners capital accounts. Profit before charging Interest on capita for the year was Rs.1, 60,000; the same Had also been credited in their P/L ratio. Y had brought additional capital of Rs.1, 00,000 on July 1st 2006. Interest on capitals is allowed @ 5%p.a. compute interest on capital for both the partners for the year ending 31st march 2007.

PRACTICE QUESTIONS:

3-A and B are partners in a firm sharing P/L in the ratio of 2:1. Their capitals on

1st January 2006 were Rs.2, 00,000 and 50,000 respectively. Rate of Interest is

@ 5% p.a. During the year Business earned a Profit of Rs.10, 000(before interest).

Determine the interest on capital for both the partners for the year ending 31st

December 2007:

1-If partnership deed is silent about the treatment of interest on capital, and

2-If interest is treated as charge as per partnership deed.

12 + 1Average month= = 6.5 months 2

If fixed amount is withdrawn in the beginning of the month, 12 months ( a year ) then:

Average months will be calculate as follows:

12 - 1Average month= = 5.5 months 2

If fixed amount is withdrawn at the end of the month, 12 months ( a year ) then:

Average months will be calculate as follows:

12Average month= = 6 months 2

If fixed amount is withdrawn at the mid of the month, and 12 months ( a year ) then:

Average months will be calculate as follows:

* If there is no information regarding date of drawings then interest will be calculated average for six months

If amount is withdrawn at each quarter:

1-If withdrawn at the beginning of the each quarter then:

12+3 Average month = = 7.5months 22-If withdrawn at the end of the each quarter then:

12-3 Average month = =4.5months 2

Guarantee of profit to a partner:

Sometimes, a partner is admitted to the firm on the some Guarantee In respect of his minimum profit from the business.

Such a guarantee may be given to an existing Partner or new partner and deficiency arising if any will be met by the partners in their agreed ratio but if there is no any agreement then it will be met in the profit sharing ratio.