Table of Contents
Important questions of fundamentals of partnership-4
Important questions of fundamentals of partnership-4
1. Interest on Capital
2. Interest on drawing
3. Profit and Loss Appropriation Account
4. Profit and Loss Appropriation Account and Partners Capital Account
5. Past Adjustment
6. Guarantee of Profit
Important questions of fundamentals of partnership-4
Profit and Loss Appropriation Account and Partners Capital Account:
Profit and loss Appropriation Account:
Partners Capital Account:
In a partnership firm, Partners contribute their share of capital in business are recorded in their respective capital accounts. Normally, each partner’s capital account is prepared separately.
A partner’s capital account is an account in which all the transactions between the partners and the firm are to be recorded.
Suppose there are two partners Mohit and Rachit, there will be Mohit’s capital account and Rachit’s capital account.
There are two methods by which the capital accounts of partners can be maintained. These are-
1.Fixed Capital Account method
2.Fluctuating Capital Account method
Important questions of fundamentals of partnership-4
1. Fixed Capital Account method-
Under the fixed capital account method two accounts are prepared for each Partner –
1. Partner’s Capital Account
2. Partner’s Current Account
1.Partner’s Capital Account – In fixed capital account method, in the partner’s capital accounts only these are recorded ,Capital invested by each partner’s and additional capital introduced by any partner’s , capital permanently withdrawn by any partner’s . This makes the balance in the capital account is fixed year after year. That’s the reason why this method is called fixed capital account method.
Partner’s capital Account is credited with
- Capital Introduced by partners 2. additional Capital Introduced by partners
Partner’s capital Account is debited with
- Drawings against capital (capital permanently withdrawn by any partner’s )
2. Partner’s Current Account – All items like share of profit or share of loss, interest on capital, Partner’s Salary, Partner’s commission, Partner’s Bonus, Partner’s drawings (against profit), interest on drawings, etc. are recorded in a separate account, is called Partner’s Current Account. Transactions relating to capital are not recorded in this account.(Capital Introduced by partners, additional Capital Introduced by partners, Drawings against capital)
Partner’s Current Account is credited with
- Interest on capital
- Partner’s Salary
- Partner’s commission
- Partner’s Bonus
- share of general reserve
- Share of profit
Partner’s Current Account is debited with
- Drawings (Against Profit)
- Interest on drawings
- Share of loss
- In fixed Capital method the partners’ capital accounts will always show a credit balance.
- The partners’ current account may show a debit or a credit balance
- partners’ capital accounts shall always appear on the liabilities side in the balance sheet.
- The partners’ current account’s balance shall be shown on the liabilities side, if they have credit balance and on the assets side, if they have debit balance.
Partners Capital Account Format
(Under Fixed Capital Account Method)
The format of partners’ capital accounts and partners’ current account prepared under the fixed capital method is given below:
Important questions of fundamentals of partnership-4
2.Fluctuating Capital Account method-
Under the fluctuating capital method, only one account, i.e. capital account is maintained for each partner.
All the adjustments such as share of profit and loss, interest on capital, drawings, interest on drawings, salary or commission to partners, etc. are recorded directly in the capital accounts of the partners. This makes the balance in the capital account to fluctuate from time to time. That’s the reason why this method is called fluctuating capital method.
Partner’s Capital Account is credited with
- Capital Introduced by partners
- Additional Capital Introduced by partners
- Interest on capital
- Partner’s Salary
- Partner’s commission
- Partner’s Bonus
- Share of general reserve
- Share of profit
Partner’s Capital Account is debited with
- Drawings (Against Capital)
- Drawings (Against Profit)
- Interest on drawings
- Share of loss
Note: In the absence of any instruction , the capital account should be prepared by this method.
Partners Capital Account Format
(Under Fluctuating Capital Account Method)
The proforma of partners capital accounts prepared under the fluctuating capital method is given below:
Important questions of fundamentals of partnership-4
Example 1.
Ram and Shyam started a partnership business on 1st April, 2019. Their capital contributions were ₹2,50,000 and ₹1,50,000 respectively. The partnership deed provided:
- Interest allowed on capitals @10% p.a.
- Ram, get a salary of ₹4,000 p.m. and Shyam ₹2,000 p.m.
- Profits are to be shared in the ratio of 3:2.
- Their Drawings are ₹ 30,000 and ₹20,000 respectively.
- Interest charged on Drawings amounted to ₹1,200 for Ram and ₹ 800 for Shyam.
The profits for the year ended 31st March, 2020 before making above appropriations were ₹ 2,00,000. The books are closed on March 31, every year.
Prepare Profit and Loss Appropriation Account and partners capital Account.
(i) If The capitals are fixed, and
(ii) If The capitals are fluctuating.
Solution:
(i) If The capitals are fixed:
(ii) If The capitals are fluctuating:
Important questions of fundamentals of partnership-4
Example 2.
Ram and Shyam are partners in a firm on 1st April, 2019. Their capital were ₹4,60,000 and ₹3,50,000 respectively. The partnership deed provided:
- Interest allowed on capitals @10% p.a.
- Ram, gets a salary of ₹3,000 p.m. and Shyam gets ₹2,000 p.m.
- Profits are to be shared in the ratio of 4:1.
- Their Drawings are ₹ 60,000 and ₹40,000 respectively.
- Interest charged on Drawings @ 6% p.a.
The profits for the year ended 31st March 2020 before making the above appropriations were ₹ 2,67,000. The books are closed on March 31, every year.
Prepare Profit and Loss Appropriation Account and partners capital Account.
(i) If The capitals are fixed.
(ii) If The capitals are fluctuating.
Example 3.
Jay and Vijay started a partnership business on 1st April, 2019 without any partnership Deed. Their capital contributions were ₹3,40,000 and ₹2,60,000 respectively.
On 1st October 2019 , Vijay advanced ₹3,00,000 as loan to the firm without any agreement as to interest.
Their Drawings are ₹ 50,000 and ₹40,000 respectively.
The profit and Loss account for the year ended 31st March, 2020 showed a profit ₹ 2,09,000. The books are closed on March 31, every year. Partners could not agree upon the amount of Interest on loan to be charged and the basis of division of profits.
Prepare Profit and Loss Account, Profit and Loss Appropriation Account, partners capital Account, and Loan account of Vijay.
Example 4.
Ram and Shyam are partners in a firm on 1st April 2019. Their capital were ₹ 4,00,000 and ₹ 3,00,000 respectively. The partnership deed provided:
- Interest allowed on capitals @ 5% p.a.
- Ram, get a salary of ₹ 3,000 p.m.
- Profits are to be shared in the ratio of 4:1.
The profits for the year ended 31st March, 2020 before charging Interest on capital but after charging Ram’s salary were ₹ 1,64,000. There is a provision of 10 % commission on profit to the manager. The books are closed on March 31, every year.
Prepare Profit and Loss Account, Profit and Loss Appropriation Account, and partners capital Account.
Example 5.
Jay and Vijay are partners in a firm on 1st April, 2019. Their capitals were ₹3,00,000 and ₹2,00,000 respectively. The partnership deed provided:
- Interest allowed on capitals @ 6% p.a.
- Vijay, get a salary of ₹2,500 p.m.
- Profits are to be shared in the ratio of 3:2.
The profits for the year ended 31st March, 2020 before charging Interest on capital but after charging Vijay’s salary were ₹1,70,000. There is a provision of 10 % commission on profit to the manager. The books are closed on March 31, every year.
Prepare Profit and Loss Account, Profit and Loss Appropriation Account, and partners capital Account.
Example 6.
A, and C are partners with fixed capitals of ₹2,00,000, ₹ 1,50,000 and ₹1,00,000 respectively. The balance of current accounts on 1st April, 2019 were A ₹10,000 (Cr.); B ₹ 4,000 (Cr.) and C ₹ 3,000 (Dr.). A gave a loan to the firm of₹ 50,000 on 1st october, 2019. The Partnership deed provided for the following:-
(i) Interest on Capital at 6%.
(ii) Interest on drawings at 6%. Each partner drew ₹ 20,000 on 1st october, 2019.
(iii) ₹40,000 is to be transferred in a Reserve Account.
(iv) Profit sharing ratio is 5:3: 2 up to ₹80,000 and above₹ 80,000 equally. For the year ended 31st march 2020, Net Profit of the firm before above adjustments was ₹2,28,360.
From the above information prepare Profit and Loss Appropriation Account, Capital and Current Accounts of the partners.
Important questions of fundamentals of partnership-3
Profit and loss Appropriation Account
Format of Profit and loss Appropriation Account
Hidden Goodwill at the time of Admission of A New Partner
Important questions of fundamentals of partnership
Important questions of fundamentals of partnership-2
Goodwill questions for practice Class 12 ISC & CBSE