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Fundamental: Accounting For Partnership
Fundamental: Accounting For Partnership
Fundamental
TOPICS COVER .
1. Profit and loss Appropriation Account
2. Calculation of Interest on Capital
3. Interest on Drawings
4. Past Adjustments
According to Section – 4 of Indian Partnership Act, 1932
“Partnership is the relations between two or more persons who have agreed to share profits of a business carried
on by all or any of them acting for all.”
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 written or oral. The law does not make
it compulsory to have a written agreement.
▪ However, in order to avoid all misunderstanding and dispute, it is always the best course to have a written
agreement duly signed and registered under the Act.
▪ The partnership deed is a written agreement among the partners which contains the terms of agreement.
It is also called ‘Articles of Partnership’
▪ It generally contains the details about all the aspects affecting the relationship between the partners including
the objective of the business, contribution of capital by each partner, ratio in which the profit and the losses will
be shared by the partners and entitlements of partners to interest on capital, interest on loan etc .
Difference between Profit and Loss Account and Profit and Loss Appropriation Account .
No. Basis Profit and Loss A/C Profit and Loss Appropriation A/c
Prepared to ascertain net profit or Prepared to distribute net profit to the
1 Objectives
loss during the year partners.
2 Preparation Prepared after Trading Account Prepared after Profit and Loss Account.
Income and Expenses charged Shows items of appropriations such as
3 Items
against profit is shown. interest on capital, drawings, salary etc.
4 Usage It is prepared by all business concern It is prepared by partnership firms only.
Transfer of Loss of Profit and Loss A/c . Transfer to profit & Loss appropriation A/c .
Profit & Loss Appropriation A/c _______ Dr. Profit & Loss Appropriation A/c ___________ Dr.
To Profit & Loss A/c To Interest on Capital A/c
(Being loss transfer to Profit & Loss Appropriation A/c) (Being Interest transfer to Profit & loss Appropriation A/c)
3. For Partners’ Salary/Bonus/Commission etc. . 4. For Interest on Drawings .
Partners’ Salary/Bonus/Commission __________ Dr. Partners’ capital/Current A/c (individually) _______ Dr.
To Partners’ capital/Current A/c (individually) To Interest on Drawings
(Being partners’ Salary etc. transfer to capital A/c) (Being interest on drawings charged on capital)
CAPITAL ACCOUNT
Fluctuating Capital Capital A/c
Capital A/c
Capital A/c
Fixed Capital
Current A/c
Alternatively, it can be calculated with respect to the amount remained invested for the relevant periods .
A. As an appropriation of profit .
Interest on capital is not allowed because it is an appropriation and will be paid only when there is
Where there is loss
some profit.
Interest on capital is allowed in full. All partners are entitled for interest on capital at an agreed
In case of sufficient profit
rate or rate of interest on capital already mentioned in the partnership deed.
In case of insufficient Interest on capital is allowed only to the extent to the profit in the ratio of capital of each partner. In
profit this case partners do not get full amount of interest.
B. As a charge against Profit. – interest on capital allowed in full irrespective of amount of profit or loss
Interest on capital is always calculated on the opening capital. If opening capital is not given, it should be
ascertained as follows –
Particulars Amount
Capital at the end xxxx
Add : Drawings xxxx
Interest on Drawings xxxx
Losses during the year xxxx xxxx
3. INTEREST ON DRAWINGS______________________________________________________________
✓ Interest on drawings is to be charged from the partners, if the same has been specifically provided in the
partnership deed.
✓ Interest on drawings is to be calculated with reference to the time period for which the money was withdrawn.
✓ In the absence of any particular date of withdrawal, it is assumed that withdrawal is made evenly throughout
the year. Hence, interest is charged for the average of the period of the year i.e. for six months.
Interest on drawing can be calculated using either Product Method or Direct Method
Direct method is used only if all the following three conditions are satisfied –
1. Amount should be same throughout the period
2. Date of drawings should be same throughout the period
3. Drawings should be made throughout the period regularly without any gap.
a) If amount is withdrawn during the month (implicitly assumed to be in the middle of the moth), interest is
calculated for six months ;
Interest on Drawing = Total Drawing × Rate % × 6/12
b) If withdrawal is made in the beginning of the month, interest is calculated for 6 ½ months (six and half
months), or is can be calculated as Average period = (Total period in months + 1)÷2
Interest on Drawing = Total Drawing × Rate % × 6.5/12
c) If withdrawal is made at the end of the month, interest is calculated for 5 ½ months (five and half months),
or is can be calculated as Average period = (Total period in months – 1) ÷2
Interest on Drawing = Total Drawing × Rate % × 5.5/12
a) If withdrawal is made in the beginning of each quarter, interest is calculated for 7 ½ months (seven and
half months), or is can be calculated as Average period = (Total period in months + 3)÷2
Interest on Drawing = Total Drawing × Rate % × 7.5/12
b) If withdrawal is made in the end of each quarter, interest is calculated for 4 ½ months (four and half
months), or is can be calculated as Average period = (Total period in months – 3)÷2
Interest on Drawing = Total Drawing × Rate % × 4.5/12
Partners would be entitled to get commission only when partnership deed provides for it. Commission payable
to a partner may be calculated in either of two ways –
1. Commission on net profit before charging such commission
𝑹𝒂𝒕𝒆 𝒐𝒇 𝑪𝒐𝒎𝒎𝒊𝒔𝒔𝒊𝒐𝒏
Commission = 𝑵𝒆𝒕 𝒑𝒓𝒐𝒇𝒊𝒕 𝒃𝒆𝒇𝒐𝒓𝒆 𝒔𝒖𝒄𝒉 𝒄𝒐𝒎𝒎𝒊𝒔𝒔𝒊𝒐𝒏 × 𝟏𝟎𝟎
4. PAST ADJUSTMENTS___________________________________________________________________
✓ Sometime a few adjustments or errors in the recordings of transection or the preparation of summary
statements are found after the final accounts have been prepared and the profits distributed among the
partners.
✓ The omission may be in respect of interest on capital, interest on drawings, interest on partners’ loan, partners’
salary, partners’ commission or outstanding expenses. There may also be some changes in the provision of
partnership deed or system of accounting having impact with retrospective effect.
✓ The adjustments can also be made directly in the partners’ Capital Account without preparing a Profit and
Loss Appropriation Account. In such a situation, we shall prepare a statement to find out the net effect of
omission and commission and then to debit the capital account of the partner who had been credited in excess
and credit the capital account of the partner who had been debited in excess.
Pass necessary adjustment or rectifying entry .
Liabilities A/c _____________ Dr. Old Partners’ Capital A/c ___________ Dr.
To Revaluation A/c To Revaluation A/c
END