(1) Fundamentals of Partnership Firm

Print Instructions

(i) Press Print button from the tool bar (ii) Select ‘Print : Odd Pages Only’ from the Print dialog box (iii) Press OK / Print and you will get half of your document printed

Step-2

ACADEMY (i) Put the printed paper back of into theACCOUNTS source paper tray Step-3 : Leave Instruction Page and Center Stapple all the other pages... All Done.

Step-1

CA. Naresh Aggarwal’s

Accounts Costing Maths Stats • English • E conomics • Taxfrom • FM (ii) Press• Print button the•tool bar •again West Patel Nagar, New Delhi. Ph:8010444896. Website: www.academyofaccounts.org (iii) Select ‘Print : Even Pages Only’ from the Print dialog box + Check ‘Reverse Pages’ from printer dialog box (iv) Press OK / Print

CA. Naresh Aggarwal’s

ACADEMY of ACCOUNTS Accounts • Costing • Tax • FM • Maths • Stats • English • E conomics West Patel Nagar, New Delhi. Ph:8010444896. Website: www.academyofaccounts.org

Blank Page

Blank Page

CA. Naresh Aggarwal’s

ACADEMY of ACCOUNTS Accounts • Costing • Tax • FM • Maths • Stats • English • E conomics West Patel Nagar, New Delhi. Ph:8010444896. Website: www.academyofaccounts.org

Class XII

Fundamentals of Partnership

CA. Naresh Aggarwal’s

ACADEMY of ACCOUNTS Accounts • Costing • Tax • FM • Maths • Stats • English • E conomics West Patel Nagar, New Delhi. Ph:8010444896. Website: www.academyofaccounts.org

41

Practice in Accountancy

Assignment - 1

Q-10: If the Partners capital Accounts are fixed, where will you record the following: CA.toNaresh (a) Salary payable a partner. Aggarwal’s (b) Drawings made by a partner. (c) Fresh capital introduced by a partner. Accounts • Costing • Tax • FMby•aMaths • Stats • English • E conomics (d) Share of profit earned partner.

ACADEMY of ACCOUNTS

West Patel Nagar, New Delhi. Ph:8010444896. Website: www.academyofaccounts.org

Q-11: List any two circumstances under which the fixed capital of partners may change. Q-12: Give two items appearing on the credit side of partners’ capital accounts when capitals are fixed. Q-13: List the items that may appear on the debit side of a partner’s fixed capital account. Q-14: List any two items appearing on the debit side of a partner’s current account. Q-15: List any two items appearing on the credit side of a partner’s current account. Q-16: List any three items appearing on the credit side of a partner’s capital account, when capitals are fluctuating. Q-17: List any three items appearing on the debit side of a partner’s capital account, when capitals are fluctuating.

* Very Important Questions

••••••••••••••••••••••

Price: 30/-

40

Fundamentals of Partnership

The profits for the year ended 31.03.2012 amounted to Rs.44,000 after charging C’s salary. Prepare the Appropriation Account showing the division of the profits of the year. [Share of Profit: A- Rs.21,500, B- Rs.16,000, C- Rs.12,500] Q-75: X, Y and Z are partners in a firm. X and Y sharing profits in the ratio of 5 : 3 and Z receiving a salary of Rs.12,000 p.a. plus a commission of 5% on the profits after charging such salary and commission or 1/5th of the profits of the firm, whichever is larger. Any excess of the later over the former is, under the partnership agreement, to be borne personally by X. The profits for the year ended 31.03.2012 amounted to Rs.84,000 after charging Z’s salary. Prepare the Appropriation Account showing the division of the profits of the year. [Share of Profit: X- Rs.46,800, Y- Rs.30,000, Z- Rs.19,200]

CA. Naresh Aggarwal’s

Contents

ACADEMY of ACCOUNTS  Preparation of Profit and Loss Appropriation Account      

Preparation of Profit Loss Appropriation A/c and Partners A/cs Accounts E conomics • Costing • &Tax • FM • Maths • Stats • English • Capital Calculation of Interest on Drawings West Patel Nagar, New Delhi. Ph:8010444896. Website: www.academyofaccounts.org Calculation of Interest on Capital and Capital Ratios Adjustment Entry Guarantee in Partnership Theoretical Questions

What is Partnership ? Partnership is the relation between persons who have agreed to share profits of a business carried on by all or any of them acting for All. Essentials of Partnership : 1. Minimum Two and Maximum 50 Members 2. Carrying on a Business (i.e. vocation with profit motive) 3. Sharing of Profits 4. Agreement 5. Legal Objects

Theoretical Questions Q-1*: What is meant by partnership ? or Define Partnership. Q-2*: What is meant by partnership deed ? Q-3*: List any four contents of a partnership deed. Q-4*: Distinguish between fixed capital and fluctuating capital. Q-5*: State the main provisions of the Partnership Act related to accounting, if there is no Partnership deed. Q-6*: Name any six items which are shown in Profit & Loss Appropriation Account. Q-7: Why is Profit & Loss Appropriation Account prepared by partnership firm ? Q-8: State any three items that may be included in the partnership agreement from accounting point of view. Q-9: List any four essential elements of Partnership.

What is Partnership Agreement / Deed ? Partnership agreement is the mutual understanding on which some people decide to do a legal business to earn profits. It may be oral or written. The written and registered version of the agreement is also called partnership deed. The Partnership Agreement / Deed may contains basically two type of matters: 1. Management Related Matters: e.g. Name of the business, nature of the business, responsibilities and duties of partners, way of settlement of disputes etc. 2. Money Related Matters: e.g. Capitals of Partners, Profit sharing Ratios, Interest on Capital and Drawings, Interest on Loans, Remunerations to partners, Method of valuation of Goodwill and Method of maintaining Books of Accounts etc. For accounting purpose, only money related matters are considered. If an agreement is made then that is always followed. What happens if there is no agreement ? If there is no agreement at all then following provisions of Law will apply. 1. Profit sharing ratio of all partners will be equal (irrespective of any factor) 2. Interest on loan will be 6% p.a. (whether loan is given to firm or taken from firm) 3. Interest on capitals is not allowed. 4. Interest on drawings is not charged. 5. Any remuneration (e.g.. salary or commission) is not allowed to any partner. If, there is an agreement which is silent on a specific matter then for only that particular matter above rules will apply.

2

Fundamentals of Partnership

Illustration-1: A and B form a partnership without any partnership agreement. After the end of first year of partnership, A draw the following Profit and Loss Appropriation Account: Dr. Profit and Loss Appropriation Account Cr. Particulars To Salary to : A 4,800 B 3,000 To Interest on Capital @ 6% A 2,400 B 1,200 To Commission to A To Profit transferred to : A 6,000 B 4,000

Amount Particulars By Profit & Loss A/c (Net Profit) 7,800 By Interest on Drawings : A 250 B 150 3,600 3,000

Amount 24,000

400

10,000 24,400

24,400

You are required to point out any contravention of the law, found in above account and draw it in proper manner. Ans: As there is no any partnership deed, the above mentioned Profit and Loss Appropriation Account contains the following errors: 1. There should not be any salary to any partner. 2. There should not be any interest on capital. 3. Commission should not be allowed to partner 4. No interest on drawings should be charged. 5. Profit sharing ratio should be equal. If all the above mentioned errors are eliminated, then correct account will appear as given bellow: Dr. Profit and Loss Appropriation Account Cr. Particulars To Profit transferred to: A: 12,000 B: 12,000

Amount Particulars By Profit & Loss A/c (Net Profit)

Amount 24,000

24,000 24,000

24,000

Illustration-2: Hema and Jaya started business on 1st January 2012 with capitals of Rs.20,000 and Rs.15,000 respectively. Due to further need of money Jaya gave a loan of Rs.10,000 to the firm on 1st July 2012. At the end of year 2012 they earned a net profit of Rs.4,000. You are required to draw their Profit and Loss Appropriation Account to show allocation of the profit.

Practice in Accountancy

39

CA. Naresh Aggarwal’s

ACADEMY of ACCOUNTS Accounts • Costing • Tax • FM • Maths • Stats • English • E conomics West Patel Nagar, New Delhi. Ph:8010444896. Website: www.academyofaccounts.org

Q-71: A, B and C are partners sharing profits in the ratio of 3 : 2 : 1. The terms of partnership is as follows : (i) C’s share of profit will not be less than Rs.12,000 in any year. (ii) A’s contribution in firm’s profit will not be less than Rs.30,000 in any year. During the year, firm earns a total profit of Rs.60,000 (including A’s contribution Rs.27,000. You are required to show firm’s Profit & Loss Appropriation Account. [A’s Deficiency: Rs.3,000; Profit: A- Rs.30,600; B- Rs.20,400; C- Rs.12,000] Q-72: A, B and C are partners sharing profit and losses in the ratio of 3 : 2 : 1. C is guaranteed by the firm that his share of profit including his salary of Rs.2,000; will not be less than Rs.10,000 in any year. It is further decided that any loss arising from this guarantee will be borne by A and B in equal proportions. Another guarantee is given by B to the firm that he will earn at least Rs.7,000 for the firm’s profits. The profit (after charging C’s salary and including B’s contribution Rs.4,000) amounted to Rs.33,000. You are required to allocate the profit though proper accounts. [A- Rs.17,000; B- Rs.11,000; C- Rs.8,000; Deficiency of B: Rs.3,000] Q-73: X, Y and Z are partners in the ratio of 3 : 2 : 1. X gives guarantee to the firm that his contribution in firm’s profit would not be less than Rs.24,000 in any year. The partnership deed also provides that Z’s share of profit will not be less than Rs.10,000. Further, X has personally guaranteed Y that his share of profit including his salary and interest on capital will not be less that Rs.20,000. Terms of the deed provides for Rs.100 p.m. to each partner as salary and interest comes to Rs.1,200 for X; Rs.800 for Y and Rs.600 for Z. The profit after charging partner’s salary and interest on capital is determined as Rs.42,000 in which X contributed to extent of Rs.18,000 only. [X- Rs.20,000; Y- Rs.18,000; Z- Rs.10,000; Deficiency of X: Rs.6,000] Q-74: A, B and C are partners in a firm. A and B sharing profits in the ratio of 3 : 2 and C receiving a salary of Rs.6,000 p.a. plus a commission of 10% on the profits after charging such salary and commission or 1/4th of the profits of the firm, whichever is larger. Any excess of the later over the former is, under the partnership agreement, to be borne personally by A.

38

Fundamentals of Partnership

losses in the ratio of 4 : 3 : 3. A, however personally guaranteed that C’s share of profit after charging interest on capitals @ 5% p.a. would not be less than Rs.40,000 in any year. The capital contributions were : A- Rs.3,00,000; B- Rs.2,00,000 and C- Rs.1,50,000. The profit for the year ended on 31.03.2012 amounted to Rs.1,60,000. Show the Profit and Loss Appropriation Account. [CBSE (Delhi)] [Profits: A- Rs.49,250; B- Rs.38,250; C- Rs.40,000] Q-66: A, B and C entered into a partnership on 01.04.2011 to share profits and losses in the ratio of 4 : 3 : 3. A, however, personally guaranteed that C’s share of profit after charging interest on capitals at 5% p.a. would not be less than Rs.40,000 p.a. The capital contributions were A- Rs.3,00,000, B- Rs.2,00,000 and CRs.1,00,000. The profits for the year ended 31.03.2012 were Rs.1,20,000. Show the distribution of profits. [Delhi 2001 Compartment ; All India 2002 Compartment] [Share of Profits: A- Rs.23,000; B- Rs.27,000; C- Rs.40,000] Q-67: A, B and C are partners sharing profit and losses in the ratio of 5 : 4 : 1. C is given a guaranteed that his share of profit in any year would not be less than Rs.5,000. Deficiency, if any would be borne by A and B equally. The profits for the year 2012 amounted to Rs.40,000. Pass Journal Entries in the Books of the firm. [CBSE (Delhi) 2002] [Profits: A- Rs.19,500; B- Rs.15,500; C- Rs.5,000] Q-68: A and B are partners in a firm sharing profits in the ratio of 2 : 1. On 01.04.2011 they decided to admit C for 1/5 share in profits with a guaranteed amount of Rs.25,000 p.a. A undertook to meet the liability arising out of the guaranteed amount to C. The firm earned a profit of Rs.75,000 for the year ended 31.03.2012. Prepare Profit and Loss Appropriation Account. [Delhi 2004 Compartment] [Share of Profits: A- Rs.30,000; B- Rs.20,000; C- Rs.25,000] Q-69: A and B sharing profits and losses in the ratio of 3 : 2 admit C for 1/10 share in the firm. He is guaranteed a minimum of Rs.15,000 profits. Any deficiency arising due to gaurantee to be contributed by A and B in the ratio of 4 : 1. Calculate profits of A, B and C. Profits of the firm for the year are Rs.1,00,000. [Delhi 1997 Compartment] [Share of Profits: A Rs.50,000; B Rs.35,000; C Rs.15,000] Q-70: P, Q and R are partners in a firm. Their profit sharing ratio is 3 : 2 : 1. However, R is guaranteed a minimum amount of Rs.10,000 as share of profit every year. Any deficiency arising on that account shall be met by P only. The profits for two years ending December 31, 2011 and 2012 were Rs.45,000 and Rs.75,000 respectively. Prepare Profit and Loss Appropriation Account for the two years. [Delhi 2002 Compartment] [Share of Profits(2011): P- Rs.20,000; Q- Rs.15,000; R- Rs.10,000 Share of Profits(2012): P- Rs.37,500; Q- Rs.25,000; R- Rs.12,500]

3

Practice in Accountancy

CA. Naresh Aggarwal’s

ACADEMY of ACCOUNTS Accounts • Costing • Tax • FM • Maths • Stats • English • E conomics West Patel Nagar, New Delhi. Ph:8010444896. Website: www.academyofaccounts.org Solution: Dr.

Profit and Loss Appropriation Account

Particulars To Profit transferred to : Hema 1,850 Jaya 1,850

Amount Particulars By Profit & Loss A/c (Net Profit)

Cr. Amount 3,700

3,700 3,700

3,700

Working Notes: Interest on Loan @ 6% (for 6 months only) Net Profit

= 10,000 x

6 x 6 . 100 12

= Rs. 300 = Rs.4,000 - Rs.300 = Rs.3,700

Illustration-3: Ram and Shyam start business on 1st January 2012 with capital of Rs.1,00,000 and Rs.40,000 respectively. According to the deed Ram is entitled to salary of Rs.1,000 p.m. and Shyam is to be allowed a commission at the rate of 10% of net profit. Interest on capital is also allowed @ 5% p.a. During the first year of partnership they earn a net profit of Rs.50,000. You are to show a Profit and Loss Appropriation Account to allocate the profit and necessary Journal Entries. Solution: Dr. Profit and Loss Appropriation Account Cr. Particulars To Salary to Ram To Commission to Shyam To Interest on Capitals: Ram 5,000 Shyam : 2,000 To Profit transferred to: Ram (1/2) 13,000 Shyam (1/2) 13,000

Amount Particulars 12,000 By Profit & Loss A/c 5,000 (Net Profit)

Amount 50,000

7,000

26,000 50,000

50,000

4

Fundamentals of Partnership

Date Particulars L.F. Debit Credit ____________________________________________________________________ (i)

(ii)

(iii)

(iv)

(v)

Partner’s Salary A/c Dr. To Ram’s Capital A/c (Being salary allowed to Ram) ___________________________________________

12,000

Partner’s Commission A/c Dr. To Shyam’s Capital A/c (Being commission allowed to Shyam) ___________________________________________

5,000

Interest on Capital A/c Dr. To Ram’s Capital A/c To Shyam’s Capital A/c (Being interest on capital allowed to partners) ___________________________________________

7,000

Profit and Loss Appropriation A/c Dr. To Partner’s Salary A/c To Partner’s Commission A/c To Interest on Capital (Being remuneration of partner transferred to Profit and Loss Appropriation A/c) ___________________________________________

24,000

Profit and Loss Appropriation A/c Dr. To Ram’s Capital A/c To Shyam’s Capital A/c (Being remaining profit distributed to partners)

26,000

12,000

5,000

5,000 2.000

To Interest on Capital to : Seeta 900 Geeta 600

Amount Particulars By Profit & Loss A/c (Profit) 1,500

37

CA. Naresh Aggarwal’s

ACADEMY of ACCOUNTS Accounts • Costing • Tax • FM • Maths • Stats • English • E conomics West Patel Nagar, New Delhi. Ph:8010444896. Website: www.academyofaccounts.org 4 : 2 : 1 respectively It was provided that in no case C’s share in profit should be less than Rs.7,500. The profits for the year 2012 amount to Rs.31,500. You are required to show the appropriation amongst the partners. Profit and Loss Appropriation Account is not required. [CBSE (Delhi)] [Profits: A- Rs.16,000; B- Rs.8,000; C- Rs.7,500]

12,000 5,000 7,000

Q-61: A, B and C are partners sharing profits in the ratio of 16 : 12 : 7 with a minimum profit of Rs.10,000 for C. The profit for the year ended December 31, 2012 amounted to Rs.39,500. Pass the journal entries in the books of the partnership firm for distributing the profit. [Adopted CBSE (Compt.)] [Deficiency met by: A- Rs.1,200; B- Rs.900; Profit of A Rs.16,857; B Rs.12,643; C Rs.10,000]

13,000 13,000

Q-62: X, Y and Z are partners sharing profit and losses in the ratio of 5 : 3 : 2. Z is given a guarantee that his share of profit in any year will not be less than Rs.10,000. During the year 2012, firm earns a profit of Rs.40,000. You are required to show Profit and Loss Appropriation Account to allocate the profits. [X- Rs.18,750; Y- Rs.11,250; Z- Rs.10,000]

Illustration-4: Seeta and Geeta are partners with capital of Rs.15,000 and Rs.10,000 respectively. The terms of partnership deed is as follows: (i) Interest on capital is allowed at the rate of 6% p.a. (ii) Salary is allowed to Seeta at Rs.500 p.a. (iii) Commission to Geeta at the rate of 10% on net profit. (iv) Remaining profits is to be shared by Seeta and Geeta in the ratio of 3 : 2. During the year they earned a profit of Rs.7,000 after charging Seeta’s salary but before making other adjustments. Prepare an account showing distribution of profits. Show calculations clearly. Solution: Dr. Profit and Loss Appropriation Account Cr. Particulars

Practice in Accountancy

Amount 7,500

Q-63: P, Q and R are partners sharing profit and losses in the ratio of 3 : 2 : 1. R is guaranteed that his share of profit including his salary will not be less than Rs.12,000 in any year. It is further decided that any loss arising from the guarantee will be borne by other partners in equal proportions. The profit, after charging R’s salary Rs.3,000; amounted to Rs.48,000. You are required to allocate the profit though proper accounts. [P- Rs.23,500; Q- Rs.15,500; R- Rs.9,000] Q-64: A, B and C are partners sharing profit and losses in the ratio of 5 : 4 : 1. C is guaranteed that his share of profit will not be less than Rs.10,000 in any year. It is further decided that any loss arising from the guarantee will be borne by A only. You are required to allocate the profit though proper accounts, if : (i) The profit for the year amounted to Rs.80,000. (ii) The profit for the year amounted to Rs.1,20,000. [(i): A’s Profit - Rs.38,000; B’s Profit - Rs.32,000; C’s Profit - Rs.10,000] [(ii): A’s Profit - Rs.60,000; B’s Profit - Rs.48,000; C’s Profit - Rs.12,000] Q-65: A, B and C entered into partnership on 01.04.2011 to share profits and

36

Fundamentals of Partnership

Q-57: Mohan, Vijay and Anil are partners, the balance on their capital accounts being Rs.30,000; Rs.25,000 and Rs.20,000 respectively. In arriving at these figures, the profits for the year ended 31.03.2012, Rs.24,000 had already been credited to partners in the proportion in which they shared profits. Their drawings were Rs.5,000 (Mohan); Rs.4,000 (Vijay) and Rs.3,000 (Anil) in 2012-2011. Subsequently the following omissions were noticed and it was decided to bring them into account: (i) Interest on capital at 10% p.a. (ii) Interest on drawings (Mohan Rs.250; Vijay Rs.200; Anil Rs.150). Make the necessary corrections through Profit and Loss Adjustment Account and through a journal entry. [CBSE] [Anil- Rs.550 (Dr.); Mohan- Rs.550 (Cr.); Correct profit: Rs.18,300] Q-58: A and B are partners sharing profits and losses in the ratio of 3 : 2. They employed C as their manager to whom they paid a salary of Rs.750 p.m. C had deposited Rs.20,000 on which interest was payable @ 9% p.a. At the end of 2012 (after division of the year’s profit), it was decided that C should be treated as partner with effect from 1st January 2009 with 1/6 share of profits, his deposit being considered as capital carrying interest at 6% p.a. like capitals of other partners. The firms’s profits and losses after allowing interest on capitals were as follows: 2009 Profit 59,000 2010 Profit 62,600 2011 Loss 4,000 2012 Profit 78,000 Record the necessary Journal Entries to give effect to the above. [Adapted SSC (All India)] [A- Rs.360 (Dr.); B- Rs.240 (Dr.); C- Rs.600 (Cr.)] Q-59: X and Y are partners sharing profits and losses in the ratio of 3 : 2. At the end of the year, i.e., on 31.12.2012 they decided to take their manager Z into partnership. As manager Z was getting annual salary of Rs.9,000. He had also advanced Rs.60,000 to the firm by way of a loan on which he is getting interest @ 10% p.a. During the three years, firm’s profits after adjusting salary to Z, interest on loan and interest on capital of partners were : 2010 Profit 80,000 2011 Loss 40,000 2012 Profit 1,20,000 According to the new agreement, Z is to be given annual salary of Rs.7,000 and 1/5th share in the profits of the firm. Z’s loan shall be treated as his capital from the beginning and similar to other partners, his capital will carry interest @ 6% p.a. Record the necessary Journal Entries to give effect to the above arrangement. [X- Rs.12,864 (Dr.); Y- Rs.8,576 (Dr.); Z- Rs.21,440 (Cr.)] GUARANTEE IN PARTNERSHIP Q-60: A, B and C were in partnership sharing profit and losses in the ratio of

5

Practice in Accountancy

CA. Naresh Aggarwal’s

ACADEMY of ACCOUNTS Accounts • Costing • Tax • FM • Maths • Stats • English • E conomics West Patel Nagar, New Delhi. Ph:8010444896. Website: www.academyofaccounts.org To Commission to Geeta To Salary to Sita To Profit transferred to : Seeta (3/5) : 2,850 Geeta (2/5) : 1,900

750 500

4,750 7,500

7,500

Working Notes: Net profit

= Profit after Seeta’s Salary + Seeta’s Salary = 7,000 + 500 = 7,500 Geeta’s Commission = 7,500 x 10 = Rs. 750 100  ‘Net profit’ is the profit earned by the business after debiting all expenses. Any remuneration (e.g. salary, commission etc.) given to partner is not an expenses but it is an appropriation of profit. Therefore, if any calculation is based on ‘Net Profit’ then such remuneration (if already given to partners) should be added back to determine the real ‘Net Profit’. Illustration-5: A and B started a partnership business on 01.04.2011. They contributed Rs.90,000 and Rs.60,000 respectively, as their capitals. The terms of the partnership agreement are as under : (i) A and B to get a monthly salary of Rs.1,000 and Rs.1,500 respectively (ii) B is allowed a commission at the rate of 5% on Net Profit. (iii) Interest on capital and drawings will be at the rate of 10% p.a. (iv) Sharing of profit or loss will be in the ratio of their capital contribution. The profit for the year ended 31.03.2012, before making the above appropriations was Rs.80,000. The drawings of A and B were Rs.20,000 and Rs.30,000 respectively. Interest on drawings amounted to Rs.1,000 for A and Rs.1,500 for B. Prepare Profit and Loss Appropriation Account and Partners Capital Accounts assuming that their capitals are : (i) fluctuating (ii) Fixed Solution: As Capital Ratio is the Profit Sharing ratio of the partners and Capitals are in proportions of 90,000 : 60,000 it may be simplified as 3 : 2.

6 Dr.

Fundamentals of Partnership Profit and Loss Appropriation Account

Particulars

Cr.

Amount Particulars

To Salary to : A 12,000 B 18,000 To Commission to B To Interest on Capital to : A 9,000 B 6,000

Amount

By Profit & Loss A/c (Profit) By Interest on Drawings: 30,000 A 1,000 4,000 B 1,500

80,000

2,500

15,000

To Profit transferred to: A (3 / 5 ) 20,100 B (2 / 5 ) 13,400

33,500 82,500

82,500

(i) When capitals are fluctuating : Dr. Partner’s Fluctuating Capital Accounts

Particulars

A

To Cash (Drawings) 20,000 To Interest on Drawings 1,000 To Balance c/d 1,10,100

B Particulars 30,000 By Cash 1,500 By Salaries 69,900 By Commission By Interest on Capital By P&L App A/c (Profit)

1,31,100 1,01,400

Cr.

A

B

90,000 12,000 9,000 20,100

60,000 18,000 4,000 6,000 13,400

1,31,100 1,01,400

(ii) When capitals are Fixed : Dr. Partner’s Fixed Capital Accounts

Particulars To Balance c/d

Dr.

Particulars To Cash (Drawings) To Interest on Drawings To Balance c/d

A

B Particulars

Cr.

A

B

90,000

60,000 By Cash

90,000

60,000

90,000

60,000

90,000

60,000

Partner’s Current Capital Accounts

A

B Particulars

Cr.

A

B

20,000 1,000 20,100

30,000 By Salaries 1,500 By Commission 9,900 By Interest on Capital By P&L App A/c (Profit)

12,000 9,000 20,100

18,000 4,000 6,000 13,400

41,100

41,400

41,100

41,400

Practice in Accountancy

35

CA. Naresh Aggarwal’s

ACADEMY of ACCOUNTS Accounts • Costing • Tax • FM • Maths • Stats • English • E conomics West Patel Nagar, New Delhi. Ph:8010444896. Website: www.academyofaccounts.org Q-52: A and B had been sharing profits and losses equally. After dividing the profits for the year 2012, Rs.60,000 it was agreed that they would share profits and losses from 01.01.2012 in the ratio of 3 : 2. At that time it was also found that while preparing accounts for 2012 interest on capitals @ 5% p.a. was ignored. The fixed capitals of A and B were Rs.1,00,000 and Rs.80,000 respectively. Pass a single adjustment entry to adjust the accounts of the partners. [A: Rs.5,600 (Cr.); B: Rs.5,600 (Dr.)] Q-53: Ram and Mohan are equal partners with capital of Rs.5,000 and Rs.9,000 respectively. After accounts of the year are prepared, it is discovered that interest at 7% p.a. has not been credited to capital account before distribution of profits. It is decided to make an adjustment entry at the beginning of next year. Give the necessary journal entry. [All India 2003] [Ram: Rs.140 (Dr.); Mohan: Rs.140 (Cr.)] Q-54: A, B and C are partners in a firm with capitals of Rs.40,000; Rs.60,000 and Rs.80,000 respectively. After the accounts of the firm for the year have been closed, it is discovered that interest @ 8% p.a. was allowed to each partner although no such agreement was made in the partnership agreement. It is decided to make an adjustment entry at the beginning of the next year. Pass necessary journal entry. [AlI India 2004 Compartment] [A: Rs.1,600 (Cr.); C: Rs.1,600 (Dr.)] Q-55: Ram, Shyam and Mohan are partners in a firm sharing profits in the ratio of 2 : 1 : 2. Their fixed capitals were Rs.3,00,000; Rs.1,00,000 and Rs.2,00,000 respectively. Interest on capital for the year 2012 was credited to them @ 9% instead of 10% p.a. Showing your working notes clearly, pass the necessary adjustment journal entry. [CBSE Outside] [Shyam- Rs.200 (Dr.); Mohan- Rs.400 (Dr.); Ram- Rs. 600 (Cr.)] Q-56: Ram and Mohan were partners in a firm sharing profits in 3 : 2 ratio. Their fixed capitals were : Ram- Rs.1,20,000 and Mohan- Rs.90,000. For the year 2012, interest on capital was credited to them at the rate of 6% instead 5%. Give necessary adjusting entry for the rectification of the error. Show also the working notes clearly. [Delhi 2000 Compartment] [Ram: Rs.60 (Cr.); Mohan: Rs.60 (Dr.)]

34

Fundamentals of Partnership

for Ram and Shyam are ascertained as under: Year 2012 - 2 : 1, Year 2011 - 2 : 3, Year 2010 - 4 : 1. Show a journal entry to make adjustment in capital accounts. [Ram- Rs.1,500 (Cr.); Mohan- Rs. 1,500 (Dr.)] Q-48: Jagdish, Ashish and Deepak are partners sharing profits in the ratio of 3 : 2 : 1. The firm has been in existence for many years. Now the partners decide to share profits in the ratio of 2 : 2 : 1. They also decided that the change shall be carried out with retrospective effect from 2009. The profit and loss during the last few years have been: 2008 - Rs.16,000; 2009 - Rs.12,000; 2010 - Rs.14,000; 2011 - Rs.19,000; 2012 - Rs.15,000 (Loss). Show the adjustment of profits for the last four years by means of a single journal entry. [CBSE Compt. (Delhi) 2001] [Jagdish- Rs.3,000 Dr.; Ashish- Rs.2,000 Cr.; Deepak- Rs. 1,000 Cr.] Q-49: P, Q and R were partners in a firm sharing profits in the ratio of 1 : 2 : 2. After the division of the profits for the year ended 31.3.2012 their capitals were: P: Rs.1,50,000; Q: Rs.1,80,000; R: Rs.2,10,000 During the year they withdrew Rs.20,000 each. The profit for the year was Rs.60,000. The Partnership Deed provided that interest on capital will be allowed @ 10% p.a. While preparing the final accounts, interest on Partner’s Capital was not allowed. You are required to calculate the capitals of P, Q and R on 01.04.2011 and pass the necessary adjustment entry for providing interest on capitals. Show your working clearly. [CBSE (Delhi) 2002] [Q- Rs.4,000 (Dr.); R- Rs.1,000 (Dr.); P- Rs. 5,000 (Cr.)] Q-50: After including the profits for the year ended 31.03.2012 the capital accounts of A, B and C stood at Rs.20,000, Rs.15,000 and Rs.10,000 respectively. Subsequently, it was discovered that interest on capitals at 10% p.a. had inadvertently been ignored. The profits for the year in arriving at the above figures of capitals amounted to Rs.10,000. They shared profits and losses in the ratio of 2 : 1 : 1 respectively. Give the necessary journal entry to rectify the above. [Modified Foreign 2003] [A: Rs.250 (Dr.); B: Rs.375 (Cr.); C: Rs.125 (Dr.)] Q-51: On 31.12.2012 after closing the capital accounts, capitals of X, Y and Z stood at Rs.80,000; Rs. 60,000 and Rs.40,000 respectively. It was subsequently discovered that interest @ 5% p.a. on capitals at the beginning of the year was left out. Their drawings during the year were Rs.20,000; Rs.15,000 and Rs.9,000 respectively. Profit for the year was Rs.1,20,000. Partners share profits as 3 : 2 : 1. Give necessary adjustment entry and show the working notes. [All India 1999] [Opening Capital of X, Y and Z are: Rs.40,000; Rs.35,000 and Rs.29,000 respectively; Adjustment entry:- X: Rs.600 (Dr.); Y: Rs.17 (Cr.); Z: Rs.583 (Cr.)]

7

Practice in Accountancy

CA. Naresh Aggarwal’s

ACADEMY of ACCOUNTS Accounts • Costing • Tax • FM • Maths • Stats • English • E conomics West Patel Nagar, New Delhi. Ph:8010444896. Website: www.academyofaccounts.org



When ‘Fluctuating Capital A/c’ is prepared then all transactions related with partners are transferred in that Account only.  When ‘Fixed Capital A/c’ and ‘Current Capital A/c’ is prepared then all transactions from Profit & Loss Appropriation A/c and ordinary drawings are transferred to Current Account and only capital contribution of partner and capital withdrawal (not ordinary drawings) of partners are shown in the Fixed Capital A/c.  Difference between ‘Ordinary Drawings’ and ‘Capital Drawings’ : ‘Capital Drawings’ are the drawings from the contributions (i.e. capital invested to run business) of partners, while ‘Ordinary Drawings’ are withdrawn from the profits in regular intervals. In the normal circumstances owner of business never makes ‘Capital Drawings’, therefore unless the question specifically recognize it, we should always assume that drawings given are ‘Ordinary Drawings’. Illustration-6: A and B are partners sharing profits in the ratio of 3 : 2 with capitals of Rs.1,00,000 and Rs.60,000 respectively. Interest on capital is allowed at the rate of 6% p.a. B is to be allowed an annual salary of Rs.5,000. During 2012, the profits of the year prior to calculation of interest on capital but after charging B’s Salary amounted to Rs.25,000. A provision of 5% of Net Profit is to be made in respect of manager’s commission. Drawings of partners are Rs.12,000 and Rs.9,000 respectively. Prepare Profit & Loss Appropriation A/c and Partners Capital A/c. Solution: Dr. Profit and Loss Appropriation Account Cr. Particulars To Salary to B To Interest on Capital to : A 6,000 B 3,600 To Profit transferred to : A (3 / 5 ) 8,340 B (2 / 5 ) 5,560

Amount Particulars 5,000 By Profit & Loss A/c (Net Profit)

Amount 28,500

9,600

13,900 28,500

28,500

8 Dr.

Particulars To Cash (Drawings) To Balance c/d

Fundamentals of Partnership Partner’s Fluctuating Capital Accounts

A

B Particulars

Cr.

A

B

1,00,000 6,000 By P&L App A/c (Profit) 8,340

60,000 3,600 5,000 5,560

1,14,340

74,160

12,000 1,02,340

9,000 By Balance b/d 65,160 By Interest on Capital By Salaries

1,14,340

74,160

Working Notes: Profit for manager’s commission = =

Profit after B’s Salary + B’s Salary 25,000 + 5,000= 30,000 Manager’s Commission = 30,000 x 5 = Rs.1,500 100 Net Profit = Profit before manager’s commission - Manager’s Commission = 30,000 - 1,500 = Rs.28,500 Manager is an employee of the business, therefore his salary or commission  should be shown in Profit and Loss Account itself. His remuneration can not be called as appropriation of the profits. Therefore, we should not show his commission in the Profit and Loss Appropriation A/c. INTEREST ON DRAWINGS Interest on drawings is calculated only when it is specifically mentioned in the Partnership Deed. It may be calculated by using following methods: 1. Product Method : In this method, first we generate a statement indicating the date of drawings, amount, months (between date of drawings and ending date of financial year) and product of drawings and months. Then amount of interest is determined by the following formula : Interest on Drawings = Total of Products x Rate x 1 . 100 12 Illustration-7: Ajay is a partners in a firm. During the year, Ajay has withdrawn Rs.1,000 at the beginning of each month. Calculate his interest on drawings, if the rate of interest is 6% p.a. Solution: Date Amount Months Product 1st January 1,000 12 12,000 1st February 1,000 11 11,000 1st March 1,000 10 10,000 1st April 1,000 9 9,000 1st May 1,000 8 8,000 1st June 1,000 7 7,000 1st July 1,000 6 6,000 1st August 1,000 5 5,000 1st September 1,000 4 4,000

Practice in Accountancy

33

CA. Naresh Aggarwal’s

ACADEMY of ACCOUNTS Accounts • Costing • Tax • FM • Maths • Stats • English • E conomics West Patel Nagar, New Delhi. Ph:8010444896. Website: www.academyofaccounts.org (b) Partners were entitled to interest on capital at 5% p.a. (c) Profits were to be shared in the ratio of capitals. The net profit for the year 2012 of Rs.33,000 was divided equally without providing for the above terms. Pass an adjustment entry to rectify the above error. [AlI India 1999] [A: Rs.500 (Dr.); B: Rs.5,750 (Dr.); C: Rs.6,250 (Cr.)] Q-45: X and Y are partners. At the end of the year 2012, their fixed capital accounts shows the balance of Rs.50,000 and Rs.30,000 respectively. After crediting the profit of Rs.25,000 in their current capital account, they noticed the following errors: (i) Commission was given to X and Y as Rs.3,000 and Rs.1,000 respectively; instead of Rs.1,000 and Rs.2,000 respectively. (ii) There was an agreement for allowing Y an annual salary of Rs.2,000 which is not yet provided. (iii) Interest on drawings of Rs.500 for X and Rs.300 for Y has not been recorded. (iv) Interest on capital was allowed to them @ 5% p.a., though no agreement was made in the partnership deed. You are asked to prepare a single journal entry to rectify the above mistakes. Working notes should also be shown clearly. [X- Rs.3,100 (Dr.); Y- Rs.3,100 (Cr.)] Q-46: X, Y and Z are partners for the last three years and till now they were sharing profits or losses in the ratio of 3 : 2 : 1 respectively. During the 1st year of partnership they got a loss of Rs.3,000 but during 2nd and 3rd year they earned profits of Rs.9,000 and Rs.18,000 respectively. Now they decide to share profit or losses in equal proportions with effect form the beginning of the partnership. You are required to pass a single journal entry to give effect to new agreement. [X- Rs.4,000 (Dr.); Z- Rs. 4,000 (Cr.)] Q-47: Ram and Mohan are partners in a firm sharing profit and loss equally. During the Last three years they were distributed following profits : Year 2012: Rs.15,000; Year 2011: Rs.10,000; Year 2010: Rs.5,000. Now all partner decide to share profits in their capital ratios with retrospective effect for last two completed years. From the capital accounts of the partners, ratio

32

Fundamentals of Partnership

During the year partners withdrawn Rs. 3,000 each. Further capital introduced by Monu during the middle of the year was Rs.4,000. The profit earned and distributed between the partners was Rs.15,000. Calculate interest on capital to be allowed at the end of the year @ 10% p.a. [Sonu- Rs.2,500; Monu- Rs.2,200] Q-41: Ajay and Vijay are partners sharing profits in the ratio of 3 : 2. Their capitals at the end of the year after division of profits were Rs.50,000 and Rs.30,000 respectively. During the year Ajay and Vijay were got total salaries of Rs.2,000 and Rs.1,000 respectively. The drawings of Ajay was Rs.5,000 and of Vijay was Rs.3,000. Vijay had also introduced Rs.5,000 as new capital after the expiry of six months of the financial year. Divisible profit of the year was Rs.15,000. Calculate interest on capital at the rate of 10% p.a. [Ajay- Rs.4,400; Vijay- Rs.2,350] Q-42: Ram and Mohan are partners sharing profits and losses in the ratio of 3 : 2 respectively. Their capitals at the end of the year were Rs.50,000 and Rs.30,000 respectively. The profit of the year distributed to them in their profit sharing ratio was Rs.15,000. Ram had got an annual salary of Rs.2,000 and Mohan had got an annual salary of Rs.1,000. During the year Ram’s drawings were Rs.5,000 and Mohan’s drawings were Rs.3,000. In the exact middle of the year Mohan had also invested Rs.5,000 as further capital in the firm. You are required to calculate interest on capital @ 10% p.a. in the following cases: (i) If the closing capital given in the above question is of fluctuating Capital A/c (ii) If the closing capital given in the above question is of Fixed Capital A/c [(i) : Ram’s Interest - Rs.4,400; Mohan’s Interest - Rs.2,350; (ii) : Ram’s Interest - Rs.5,000; Mohan’s Interest - Rs.2,750] ADJUSTMENT ENTRY Q-43: A, B and C started a business with capital of Rs.50,000; Rs.30,000 and Rs.20,000 respectively. During the year they earned a profit of Rs.27,000 which was distributed among them in their profit sharing ratio without taking into consideration the following matters of the Deed. (i) Interest on Capital at the rate of 5% p.a. (ii) Salary to B and C Rs.2,000 each. (iii) Special commission to A Rs.3,000. You are asked to prepare a single journal entry to rectify the above mistake. Working notes should also be shown clearly. [B- Rs.500 (Dr.); C- Rs.1,000 (Dr.); A- Rs. 1,500 (Cr.)] Q-44: A, B and C were partners in a firm. On 01.01.2012 their capitals stood at Rs.50,000; Rs.25,000 and Rs.25,000 respectively. As per the provisions of the partnership deed : (a) C was entitled for a salary of Rs.1,000 p.m.

9

Practice in Accountancy

CA. Naresh Aggarwal’s

ACADEMY of ACCOUNTS Accounts • Costing • Tax • FM • Maths • Stats • English • E conomics West Patel Nagar, New Delhi. Ph:8010444896. Website: www.academyofaccounts.org 1st October 1st November 1st December

1,000 1,000 1,000 12,000

3 2 1 78

3,000 2,000 1,000 78,000

Rate x 1 . 100 12 6 x 1 . 100 12

Interest on Drawings = Total of Products x = 78,000 x

= Rs.390 2. Direct Method (Short-cut Method) : This method can calculate interest in relatively very low time. But this method can not be used always. The conditions for applicability of this method is that amount are constantly withdrawn in similar amounts and in similar interwals during the year. Interest on drawings may be calculated by using following formulae which depends upon the time schedule of the drawings : Interest on Drawings = Total Drawings x Rate x Average Months 100 12 Average Months will be counted by adding months from first and last drawings and dividing by two. If amount withdrawn at the beginning of every month, then average months are : 12 + 1 = 6.5 Months 2 If amount withdrawn at the end of every month, then average months are : 11 + 0 = 5.5 Months 2 If amount withdrawn at the Middle of every month, then average months are : 11.5 + 0.5 = 6 Months 2 If amount withdrawn at the beginning of every quarter, then average months are: 12 + 3 = 7.5 Months 2 If we continue the previous illustration then we could have found the interest by using the following alternative method : Interest on Drawings = Total Drawings x Rate x 6.5 . 100 12

10

Fundamentals of Partnership = 12,000 x

6 x 100

6.5 . 12

= Rs. 390 Illustration-8: Bimal is a partner in a firm. During the year, Bimal has withdrawn Rs. 1,000 at the end of each month. Calculate interest on drawings, if the rate of interest is 6% p.a. Solution: By Product method: Date Amount Months Product 31st January 1,000 11 11,000 28th February 1,000 10 10,000 31st March 1,000 9 9,000 30th April 1,000 8 8,000 31st May 1,000 7 7,000 30th June 1,000 6 6,000 31st July 1,000 5 5,000 31st August 1,000 4 4,000 30th September 1,000 3 3,000 31st October 1,000 2 2,000 30th November 1,000 1 1,000 31st December 1,000 0 0 12,000 66 66,000 Interest on Drawings = Total of Products x Rate x 1 . 100 12 6 1 . = 66,000 x x 100 12 = Rs.330 By Direct Method: Interest on Drawings = Total Drawings x Rate x 5.5 . 100 12 6 5.5 . = 12,000 x x 100 12 = Rs. 330 Illustration-9: X and Y are partner in a firm. During the year, X has withdrawn Rs.2,000 per month and Y has withdrawn as follows: Feb.1: Rs.4,000; April 1: Rs.2,000; June1: Rs.6,000; Aug.30: Rs.5,000; Nov.1: Rs.4,000. Calculate interest on drawings, if the rate of interest is 12% p.a. Solution: As X has withdrawn similar drawings in regular manner in every month of the year, therefore his interest on drawings may be calculated by Direct method in the following way:

Practice in Accountancy

31

CA. Naresh Aggarwal’s

ACADEMY of ACCOUNTS Accounts • Costing • Tax • FM • Maths • Stats • English • E conomics West Patel Nagar, New Delhi. Ph:8010444896. Website: www.academyofaccounts.org Q-37: From the following information related with A and B whose capital as on 01.04.2011 were Rs.20,000 and Rs.10,000 respectively. You are required to calculate their capital ratio and interest on capital, if the rate of interest is 6% p.a. A B Date Introduced Withdrawn Introduced Withdrawn June-1 6,000 2,000 Aug.-31 7,000 8,000 Oct.-31 6,000 Dec.-1 3,000 3,000 Jan.-31 4,000 10,000 March.-1 5,000 6,000 [Capital Ratio- 7 : 4; Interest: A- Rs.1,750; B- Rs.1,000] Q-38: A and B start business on 1st April with capital of Rs.37,500 and Rs.15,000 respectively. They agree to share profits in the proportion to their capital after allowing interest on capital at 12% p.a. You are to show proper accounts to allocate the net profit of Rs.30,000 taking into consideration the following further information: A B Date Introduced Withdrawn Introduced Withdrawn July-1 5,000 6,000 Sept.-30 4,000 6,500 Nov.-1 5,000 6,000 Dec.-31 2,500 March-1 3,500 3,000 [Ratio- 3 : 2; Interest: A- Rs.4,500; B- Rs.3,000; Divisible Profit Rs.22,500] Q-39: A and B are partners in equal ratio. Their capital at the end of the year are Rs.48,000 and Rs.36,000 respectively. A is entitled to an annual Salary of Rs.4,000. During the year A has withdrawn Rs.8,000 and B Rs.6,000. The profit distributed after charging A’s Salary was Rs.24,000. You are required to calculate interest on capital @ 5% p.a. [A- Rs.2,000; B- Rs.1,500] Q-40: Sonu and Monu are partners in a firm sharing profits in the ratio of 3 : 2. Their capital at the end of the year were Rs.31,000 and Rs.27,000 respectively.

30

Fundamentals of Partnership

Q-31: Ram and Mohan are partners in a firm. The drawings of partners during the current year were Rs.8,400 of Ram and Rs.6,000 of Mohan. Calculate interest on drawings, if the rate of interest is 10% p.a. [Ram: Rs.420; Mohan: Rs.300] Q-32: Reena and Meena are in partnership with profit ratio of 3 : 2. At the end of year 2012 it is ascertained that Reena had withdrawn regularly Rs.500 at the end of every month upto 30th June but she did not withdraw anything after that date, while Meena did not made any drawings upto 30th June and after that she started a monthly drawing of Rs.500 at the beginning of the each month. Calculate interest on drawings for both the partners, to be charged at the end of the year 2012, if the rate of interest is 12% p.a. [Reena: Rs.255; Meena: Rs.105] Q-33: P, Q, R, S and T are partners having following drawings : ‘P’ has withdrawn Rs.1,000 at the beginning of each month. ‘Q’ has withdrawn Rs.2,000 at the end of each month. ‘R’ has withdrawn Rs.1,000 in each month. ‘S’ has withdrawn total Rs.24,000 in complete year. ‘T’ has withdrawn as follows : Feb-1: Rs.5,000; May-31: Rs.5,000; Sept-30: Rs.10,000; Dec-31: Rs.7,000 Calculate interest on drawings, if the rate of interest is 12% p.a. [P- Rs.780; Q- Rs.1,320; R- Rs.720; S- Rs.1,440; T- Rs.1,200] INTEREST ON CAPITAL AND CAPITAL RATIO Q-34: Amar and Akber start business on 1st January 2012 with capitals of Rs.25,000 and Rs.20,000 respectively. On 1st July 2012 Akber brings more money to make his capital equal to Amar. Calculate interest on capital to be allowed at the end of the year 2012, if the rate of interest is 10% p.a. [Amar: Rs.2,500; Akber: Rs.2,250] Q-35: A and B start business as equal partners on 1st January 2012. On that date A brings Rs.40,000 but B could arrange only Rs.10,000. B, then promise to bring balance of his capital in three equal installments at the end of the each quarter of the year. Calculate interest on capital to be allowed at the end of the year 2012 to each partner assuming that B kept his promise and the rate of interest is 6% p.a. [A: Rs. 2,400; B: 1,500] Q-36: A and B started business on 01.01.2012 with capitals of Rs.60,000 and Rs.40,000 respectively. During the year, A introduced Rs.10,000 to the firm as additional capital on 01.07.2012. Interest on capital is to be allowed @ 10% per annum. Calculate the interest payable to A and B for the year ending 31.12.2012. [CBSE Delhi] [Interest on A’s Capital: Rs.6,500; Interest on B’s Capital: Rs.4,000]

Practice in Accountancy

11

CA. Naresh Aggarwal’s

ACADEMY of ACCOUNTS Accounts • Costing • Tax • FM • Maths • Stats • English • E conomics West Patel Nagar, New Delhi. Ph:8010444896. Website: www.academyofaccounts.org Interest on Drawings = Total Drawings x Rate x 6 . 100 12 = 24,000 x 12 x 6 . 100 12 = Rs.1,440 As Y has neither withdrawn money in similar figures, nor continuity of every month is maintained, therefore his interest may be calculated only by product method: Date Amount Months Product 1st February 4,000 11 44,000 1st April 2,000 9 18,000 1st June 6,000 7 42,000 30th August 5,000 4 20,000 1st November 4,000 2 8,000 1,32,000 Interest on Drawings = Total of Products x Rate x 1 . 100 12 = 1,32,000 x 12 x 1 . 100 12 = Rs.1,320 INTEREST ON CAPITAL / CAPITAL RATIOS Interest on capital is calculated only when it is specifically mentioned in the partnership deed. The formulae to calculate it is given as under : (i) If there is no change in the Capital throughout the period: Interest = Capital x Rate 100 (ii) If there are frequent changes in the Capital throughout the period: Interest = Total of Products x Rate x 1 . 100 12 (This is the same formula which we had used for calculating interest on Drawings. The way of calculating products for interest on Capital is also similar to the way of calculating products in case of interest on drawings.) Illustration-10: A and B start business as equal partners on 1st January 2012. On that date A brings Rs.80,000 but B could arrange only Rs.20,000. B, then promise to bring balance of his capital in 3 equal installments at the end of each quarter of the year.

12

Fundamentals of Partnership

Calculate interest on capital to be allowed at the end of year 2012 to each partner assuming that B kept his promise and rate of interest is 6% p.a. Solution: As A’s Capital is constant throughout the year, his interest may be calculated as follows: Interest = Capital x Rate 100 Interest = 80,000 x 6 = Rs.4,800 100 As B’s Capital is changing throughout the year, his interest may be calculated by product method in the following way: Date Amount Months Product 1st January 20,000 12 2,40,000 31st March 20,000 9 1,80,000 30th June 20,000 6 1,20,000 30th September 20,000 3 60,000 6,00,000 Interest = Total of Products x Rate x 1 . 100 12 6 1 = 6,00,000 x x = Rs.3,000 100 12 Illustration-11: Silver and Gold start business on 1st January with capital of Rs.75,000 and Rs.30,000 respectively. They agree to share profits in the proportion to their capital after allowing interest on capital at 10% p.a. You are to show proper accounts to allocate the net profit of Rs.50,000, taking into consideration the following further information: Silver Gold Date Introduced Withdrawn Introduced Withdrawn April-1 10,000 12,000 June-30 8,000 13,000 Aug.-1 10,000 12,000 Sept.-30 5,000 Dec.-1 7,000 6,000 Solution: Calculations for Silver: Date Amount Months Product 1st January 75,000 12 9,00,000 1st April (-) 10,000 9 (-) 90,000 30th June 8,000 6 48,000 1st August 10,000 5 50,000 30th September (-) 5,000 3 (-) 15,000 1st December 7,000 1 7,000 9,00,000

Practice in Accountancy

29

CA. Naresh Aggarwal’s

ACADEMY of ACCOUNTS Accounts • Costing • Tax • FM • Maths • Stats • English • E conomics West Patel Nagar, New Delhi. Ph:8010444896. Website: www.academyofaccounts.org Prepare Profit and Loss Appropriation Account showing the distribution of profit and the Capital Accounts of partners. [Net Divisible Profit: Rs.48,000; A Rs.21,000; B Rs.15,000 and C Rs.12,000 Closing Balance of Capital A/cs : A Rs.1,17,000; B Rs.97,500 and C Rs.88,500] INTEREST ON DRAWINGS Q-27: Ajay, Bimal and Chandan are partners in a firm. During the year, Ajay has withdrawn Rs.1,000 at the beginning of each month; Bimal has withdrawn Rs.500 at the end of each month and Chandan has withdrawn Rs.1,500 each month Calculate interest on drawings, if the rate of interest is 6% p.a. [Ajay: Rs.390; Bimal: Rs.165; Chandan: Rs.540] Q-28: Chander and Dhanesh are partner in a firm. During the year ending 31st December, Chander has withdrawn Rs.1,000 per month and Dhanesh has withdrawn as follows : Feb.1: Rs.2,000; April 30: Rs.1,000; June1: Rs.3,000; Aug.31: Rs.2,500; Nov.1: Rs.2,000. Calculate interest on drawings, if the rate of interest is 12% p.a. [Chander: Rs.720; Dhanesh: Rs.650] Q-29: X and Y are partners in a firm. During the year ending 31st March, X has withdrawn Rs.24,000 while Y has withdrawn in the following manner: May-1: Rs.5,000; Aug.-31: Rs.5,000; Dec.-31: Rs.10,000; March-31: Rs.4,000 Calculate interest on drawings, if the rate of interest is 9% p.a. [X: Rs.1,080; Y: Rs.900] Q-30: Vinod and Mohan were partners in a firm. The partnership agreement provided that interest on drawings was to be charged @ 12% p.a. Vinod had withdrawn the following amounts during the year ended 31.12.2012. Date Amount (Rs.) 01.01.2012 10,000 31.03.2012 16,000 01.07.2012 20,000 31.12.2012 4,000 Calculate interest on Vinod’s drawings. [All India 2000 Compartment] [Rs.3,840]

28

Fundamentals of Partnership

Q-23: A and B are partners in a firm sharing profits and losses as 3 : 2. Their Capital Accounts, as on 01.01.2012 stand as A: Rs.50,000 and B: Rs.30,000. The partners are allowed 5% p.a. by way of interest on capitals. The drawings of the partners during the year ended 31.12.2012 amounted to Rs.7,000 and Rs.6,000 respectively. The profit during the year, before charging interest on capital and annual salary of B at the rate of Rs.6,000; amounted to Rs.50,000. 10% of this profit is to be kept in a Reserve Account. You are required to prepare Profit & Loss Appropriation A/c and Partners Capital A/cs. [Divisible profit: Rs.35,000; A’s Capital: 66,500; B’s Capital: 45,500] Q-24: A, B and C are partners sharing profits and losses in the ratio of 2 : 2 : 1 after providing for interest at 5% on their respective capitals and allowing B and C a salary of Rs.10,000 each p.a. Capital of A is Rs.1,00,000; B is Rs.60,000 and C is Rs.40,000. During the year 2012, A has drawn Rs.15,000 and B and C in addition to their salaries have drawn Rs.3,000 and Rs.2,000 respectively. The Profit and Loss Account for the year ended 31.12.2012 showed a net profit of Rs.90,000. On 01.01.2012, the balances in the Current Account of the partners were: A Rs.7,500 (Cr.); B Rs.4,500 (Cr.) and C Rs.1,000 (Dr.). Show the Partners Capital and Current Accounts after division of profits in accordance with the partnership agreement. [Divisible Profit: Rs.60,000; Current Alcs: A Rs.21,500(Cr.); B Rs.28,500(Cr.); C Rs.11,000(Cr.)] Q-25: A and B are partners sharing profits in the ratio of 3 : 2. Their capitals at the beginning was Rs.1,50,000 and Rs.1,00,000 respectively. Prepare Profit and Loss Appropriation Account, Fixed Capital Accounts and Current Capital Accounts from the information given as under : (i) Profit shown by Profit and Loss Account is Rs.1,80,000. (ii) B will get 5% commission on trading profit. (iii) Allow interest on capital @ 10% p.a. (iv) A and B are to get salaries of Rs.2,000 p.m. and Rs.1,000 p.m. respectively. (iv) Charge interest on drawings as A- Rs.2,000 and B- Rs.1,000. (v) Drawings of A and B were Rs.20,000 and Rs.10,000 respectively. [Commission of B: Rs.9,000; Fixed Capital: A- Rs.1,50,000; B- Rs.1,00,000; Current Capital: A- Rs.84,800; B- Rs.65,200; Divisible Profit: Rs.1,13,000] Q-26: A, B and C are in partnership and as on 1st April, 2011 their respective capitals were: Rs.1,20,000, Rs.90,000 and Rs.90,000. B is entitled to a salary of Rs.18,000 and C Rs.12,000 per annum, payable before division of Profit. Interest is allowed on capital at 5% per annum and is not charged on drawings. Of the divisible Profits A is entitled to 50% of the first Rs.30,000; B to 30% and C to 20%, over that amount of Profits are shared equally. The profit for the year ended 31st March 2012, after debiting partner's salaries, but before charging interest on capital was Rs.63,000 and the partners had drawn Rs.30,000 each on account of salaries, interest and profit.

13

Practice in Accountancy

CA. Naresh Aggarwal’s

ACADEMY of ACCOUNTS Accounts • Costing • Tax • FM • Maths • Stats • English • E conomics West Patel Nagar, New Delhi. Ph:8010444896. Website: www.academyofaccounts.org Calculations for Gold: Date Amount 1st January 30,000 1st April 12,000 30th June 13,000 1st August 12,000 1st December (-) 6,000

Months 12 9 6 5 1

Product 3,60,000 1,08,000 78,000 60,000 (-) 6,000 6,00,000

Capital ratio of Silver and Gold : Total of products of Silver’s Capital : Total of products of Gold’s Capital i.e. 9,00,000 : 6,00,000 or 3 : 2 Interest on Capitals: Interest = Total of Products x Rate x 1 . 100 12 10 1 . Silver’s Interest = 9,00,000 x x = Rs.7,500 100 12 Gold’s Interest = 6,00,000 x 10 x 1 . = Rs.5,000 100 12 Dr. Profit and Loss Appropriation Account Particulars To Interest on Capital to : Silver 7,500 Gold 5,000 To Profit transferred to: Silver (3/5) 22,500 Gold (2/5) 15,000

Amount Particulars By Profit & Loss A/c (Profit)

Cr. Amount 50,000

12,500

37,500 50,000

50,000

Illustration-12: A and B are partners in a firm sharing profits in the ratio of 3 : 2. Their capital at the end of the year 2012, were Rs.93,000 and Rs.81,000 respectively. During the year partners withdrawn Rs.9,000 each. Further capital introduced by B during the middle of the year was Rs.12,000. The profit earned and distributed between the partners was Rs.45,000. Calculate interest on capital to be allowed at the end of the year @ 10% p.a. Solution:

14

Fundamentals of Partnership

Calculations for Opening Capital of the Partners : A Capital at the end of the current year 93,000 Add : Drawings 9,000 1,02,000 Less : Further Capital 1,02,000 Less : Profits 27,000 Capital at the beginning of year 2012 75,000

B 81,000 9,000 90,000 12,000 78,000 18,000 60,000

Now interest on capital may be calculated as given bellow : A’s Interest = 75,000 x 10 = Rs. 7,500 100 B’s Interest = 60,000 x 10 + 12,000 x 10 x 6 = Rs. 6,600 100 100 12 Alternative solution by product method for calculating B’s Interest on Capital: Date Amount Months Product 1st January 60,000 12 7,20,000 1st July 12,000 6 72,000 7,92,000 Interest = Total of Products x Rate x 1 . 100 12 10 1 = 7,92,000 x x = Rs. 6,600 100 12



If we are given closing balance of capital then first of all we will have to determine its opening balance by simply reversing the effects of all the transactions which took place in Capital A/c during that year. Thereafter interest can be calculated on the opening capital in simple way or by product method (if there are frequent changes in capitals).  For finding the opening balance of capital a statement in following way may be drawn: Capital at the end of the current year xxxxx Add : Drawings xxxx Less : Further Capital xxxx Less : Salary or other remuneration to Partners xxxx (only if it was already given to them) Add : Losses xxxx Less : Profits xxxx Capital at the beginning of year xxxxx ADJUSTMENT ENTRY Adjustment entry is made in accounts when some errors or omissions is noticed after closing the accounts of that year. It may also be required if a change occurred

Practice in Accountancy

27

CA. Naresh Aggarwal’s

ACADEMY of ACCOUNTS Accounts • Costing • Tax • FM • Maths • Stats • English • E conomics West Patel Nagar, New Delhi. Ph:8010444896. Website: www.academyofaccounts.org interest on drawings from the partners as follows: A - Rs.3,000; B - Rs.4,000. Prepare Profit and Loss Appropriation Account and Partners Capital Accounts assuming that their capitals are fluctuating. [Adopted All India] [Divisible Profit: 1,32,000; A’s Capital: Rs.1,85,200; B’s Capital: Rs.1,24,800] Q-20: A and B are partners sharing profits in the ratio of 3 : 2 with capitals of Rs.50,000 and Rs.30,000 respectively. Interest on capital is agreed @ 6% p.a. B is to be allowed an annual salary of Rs.2,500. During 2012, the profits of the year prior to calculation of interest on capital but after charging B’s Salary amounted to Rs.12,500. A provision of 5% of the net profit is to be made in respect of manager’s commission. Prepare Profit & Loss Appropriation A/c and Partners Capital A/c. [CBSE] [Commission: Rs.750; Profit: Rs.6,950; Capitals: A- Rs.57,170; B- Rs.37,080] Q-21: A and B are partners with capital of Rs.20,000 and Rs.15,000 respectively, on 01.01.2012. The trading profit earned during the year 2012, before considering the provisions of the deed is Rs.13,350. According to the deed Interest on capital is to be allowed @ 10% p.a. and B is entitled to a salary of Rs.200 p.m. Interest on drawings is also charged which is calculated as Rs.300 for A and Rs.250 for B. Total drawings of A and B were Rs.3,000 and Rs.2,000 respectively. Partners are agreed to share profits in the proportion of 7/10 for A and 3/10 for B. You are required to show profit and loss Appropriation Account and Partners Fixed and Current Capital Accounts. [Divisible Profit: 8,000; Fixed Capital: A- 20,000; B- 15,000; Current Capital: A- 4,300; B- 4,050] Q-22: A and B are partners sharing profits in the ratio of 3 : 2. Their capitals at the beginning was Rs.75,000 and Rs.50,000 respectively. Prepare Profit and Loss Appropriation Account, Fixed Capital Account and Current Capital Account from the information given as under : (a) Profit shown by Profit and Loss Account is Rs.90,000. (b) B will get 5% commission on trading profit. (c) Allow interest on capital @ 10% p.a. (d) Charge interest on drawings as Rs.1,000 for A and Rs.500 for B. (e) Drawings of A and B were Rs.10,000 and Rs.5,000 respectively. [Commission of B: Rs.4,500; Fixed Capital: A- Rs.75,000; B- Rs.50,000 Current Capital: A- Rs.41,200; B- Rs.33,800; Divisible Profit: Rs.74,500]

26

Fundamentals of Partnership

together with a commission of 10% of Net Profit after charging all commission and partners salaries. Net Profit before providing for partners salaries and commission for the year 2012 was Rs.8,40,000. Show the distribution of profit. [A's commission Rs.55,000; B's commission Rs.45,000; Net Profit Rs.4,50,000; A's and B's share Rs.2,25,000 each] Q-17: Ravi and Vijay are partners sharing profits and losses in the ratio of 3 : 1. On 1st April, 2011, their capitals were: Ravi Rs.2,00,000 and Vijay Rs.1,20,000. During the year ended 31st March, 2012 they earned a Net profit of Rs.2,00,000. The terms of partnership are as follows: (a) Interest on capital is to be allowed @ 6% per annum. (b) Ravi will get a commission of 2% on turnover. (c) Vijay will get a salary of Rs.24,000 per annum. (d) Vijay will get a commission of 5% on profit after deduction of all expenses including such commission. Partners drawings for the year were: Ravi Rs.32,000 and Vijay Rs.24,000. Turnover for the year was Rs.12,00,000. After considering the above facts, you are required to prepare the Profit and Loss Appropriation Accounts. [Commission of Vijay Rs.6,324; Divisible Profit: Ravi Rs.94,857; Vijay Rs.31,619] Preparation of Profit & Loss Appropriation A/c and Partners Capital A/cs Q-18: X and Y started a partnership business on 01.01.2012. They contributed Rs.80,000 and Rs.60,000 respectively as their capitals. The terms of the partnership agreement are as under : (i) Interest on capital and drawings will be allowed @ 12% p.a. (ii) X and Y to get a monthly salary of Rs.2,000 and Rs.3,000 respectively. (iii) Sharing of profit or loss will be in the ratio of their capital contribution. The profit for the year ended 31.12.2012, before making the above appropriations was Rs.1,00,300. The drawings of X and Y were Rs.40,000 and Rs.50,000 respectively. Interest on drawings amounted to Rs.2,000 for X and Rs.2,500 for Y. Prepare Profit and Loss Appropriation Account and Partners Capital Accounts assuming that their capitals are fluctuating. [Divisible Profit: Rs.28,000; Profit Sharing Ratio 4 : 3; X’s Capital: Rs.87,600; Y’s Capital: Rs.62,700] Q-19: A and B are partners in a firm sharing profits and losses in the ratio 3 : 2. The balances standing to the credit of their capital accounts as on 01.04.2011 were : A - Rs.1,00,000; B - Rs.80,000. The terms of the partnership deed provide for the following : (i) That the partners will be paid interest on their capitals @ 15% p.a. (ii) Both the partners to get a monthly salary of Rs.2,000 each. The profits of the firm for the year ended 31.03.2012, before making the above appropriations and charging interest on capital were Rs.2,00,000. The drawings of A and B were Rs.30,000 and Rs.40,000 respectively. The firm decided to charge

15

Practice in Accountancy

CA. Naresh Aggarwal’s

ACADEMY of ACCOUNTS Accounts • Costing • Tax • FM • Maths • Stats • English • E conomics West Patel Nagar, New Delhi. Ph:8010444896. Website: www.academyofaccounts.org in the partnership agreement with retrospective effect. A single adjustment entry may adjust many errors, omissions and changes. For this, we have to make a statement to find out the amounts which are to be filled in Adjustment Journal Entry. In this statement some mathematical calculations is done to give effect to rectifications and changes. If a partner’s capital increases by rectification it is added in his column but at the same time firm gets a loss therefore it is subtracted in firm’s column. Similarly if a partner’s capital decreases by rectification it is subtracted from his column but at the same time firm gets a profit therefore it is added in firm’s column. After all adjustments are done the total of firm’s profit or loss is divided in all the partners as per their profit sharing ratios. Now if partner’s balance is negative then it will be debited and if partner’s balance is positive then it will be credited in Adjustment Journal Entry. Illustration -13: X, Y and Z started a business with capital of Rs.1,00,000; Rs.60,000 and Rs.40,000 respectively. During the year they earned a profit of Rs.54,000 which was distributed among them in their profit sharing ratio without taking into consideration the following matters of the Deed. (i) Interest on Capital at the rate of 5% p.a. (ii) Salary to Y and Z Rs.4,000 each. (iii) Special commission to X Rs.6,000. You are asked to prepare a single journal entry to rectify the above mistake. Working notes should also be shown clearly. Solution: Calculations for Adjustment Entry : Particulars X Interest on capital + 5,000 Salary to partners Commission to X + 6,000 Total + 11,000 Loss Adjustment (1 : 1 : 1) - 8,000 Balance + 3,000 Journal Entry :

Y + 3,000 + 4,000 + 7,000 - 8,000 - 1,000

Z + 2,000 + 4,000 + 6,000 - 8,000 - 2,000

Firm - 10,000 - 8,000 - 6,000 - 24,000 + 24,000 Nil

16

Fundamentals of Partnership

Date Particulars L.F. Debit Credit ____________________________________________________________________ Y’s Capital A/c Dr. Z’s Capital A/c Dr. To X’s Capital A/c (Being adjustment entry recorded for omission of interest on capital, salary and commission)

25

CA. Naresh Aggarwal’s

ACADEMY of ACCOUNTS

1,000 2,000 3,000

Illustration-14: Ravi and Vijay are partners in a firm sharing profit and loss equally. During the Last three years they were distributed following profits : Year 2012: Rs.60,000; Year 2011: Rs.40,000; Year 2010: Rs.20,000. Now all partner decide to share profits in their capital ratios with retrospective effect for last two completed years. From the capital accounts of the partners, ratio for Ravi and Vijay are ascertained as follows : Year 2012:- 2 : 1, Year 2011:- 2 : 3, Year 2010:- 4 : 1. Show a journal entry to make adjustment in capital accounts. Solution: Calculations for Adjustment Entry : Particulars Ravi Vijay Firm Profit of year 2012 and year 2011 taken back in old ratio (1 : 1) - 50,000 - 50,000 + 1,00,000 Profit Adjustment for year 2012 in ratio (2 : 1) + 40,000 + 20,000 - 60,000 Profit Adjustment for year 2011 in ratio (2 : 3) + 16,000 + 24,000 - 40,000 Balance + 6,000 - 6,000 Nil Journal Entry : Date Particulars L.F. Debit Credit ____________________________________________________________________ Vijay’s Capital A/c Dr. To Ravi’s Capital A/c (Being adjustment entry recorded for change in profit sharing ratio with retrospective effect)

Practice in Accountancy

6,000 6,000

Illustration-15: A, B and C were partners in a firm sharing profits in the ratio of 1 : 2 : 2. After the division of the profits for the year ended 31.03.2012 their capitals were: A: Rs.75,000; B: Rs.90,000; C: Rs.1,05,000 During the year 2012-11 they withdrew Rs.10,000 each and the profit of the year was Rs.30,000. The Partnership Deed provided that interest on capital will be allowed @ 10% p.a. and a salary of Rs.5,000 p.a. to each partner. While preparing the final accounts, interest on Partner’s Capital and salary was not allowed. You are required to pass the necessary adjustment entry for providing interest on capitals. Show your working clearly. Solution: As we are given closing capital of partner for the year 2012-11, therefore to calculate interest on capital first of all we will have to determine Opening Capitals of partners:

Accounts • Costing • Tax • FM • Maths • Stats • English • E conomics West Patel Nagar, New Delhi. Ph:8010444896. Website: www.academyofaccounts.org (i) Interest on capital at 10% p.a. (ii) Amit to get salary of Rs.2,000 p.m. and Vijay Rs.3,000 p.m. (iii) Profits are to be shared in the ratio of 3 : 2. The profits for the year ended 31.03.2012 before making above appropriations were Rs.2,16,000. Interest on drawings amounted to Rs.2,200 for Amit and Rs.2,500 for Vijay. Prepare Profit and Loss Appropriation Account [CBSE (Delhi)] [Divisible Profit: Rs.1,25,700; Amit’s: Rs.75,420; Vijay’s: Rs. 50,280] Q-13: Mahesh and Ramesh are partners with capitals of Rs.50,000 and Rs.60,000 respectively. On 1st January, 2012, Mahesh gives a loan of Rs.10,000 and Ramesh introduced Rs.20,000 as additional capital. Profit for the year ending 31st March 2012 was Rs.15,200. There is no partnership deed. Both Mahesh and Ramesh expect interest @ 10% p.a. on the loan and additional capital advanced by them. Show how the profits would be divided ? Give reasons. [Delhi, 2001 Compt.] [Divisible Profit: Rs.15,050; Interest on Loan: Rs.150; Interest on Capital: Nil] Q-14: X and Y contribute Rs.50,000 and Rs.30,000 respectively. They decide to allow interest on capital @ 6% per annum. Their respective share of profits is 3 : 2 and the business profit (before interest) for the year is Rs.4,000. Show the distribution of profits if : (i) There is no agreement except for interest on capitals. (ii) There is a clear agreement that the interest on capitals will be allowed even if it involves the firm in loss. [(i): Interest on capitals: A- Rs.2,500; B- Rs.1,500; (ii): Interest on capitals: A- Rs.3,000; B- Rs.1,800; Loss: A- Rs.480; B Rs.320] Q-15: A, B and C are partners sharing profits and losses equally. As per partnership deed, C is entitled to a commission of 10% on net profit after charging such commission. Net profit before charging commission is Rs.66,000. Show Profit and Loss Appropriation A/c. [C’s Commission: Rs.6,000; Divisible Profit: Rs.60,000] Q-16: A and B are partners in a firm. A is entitled to a salary of Rs.2,40,000 per annum together with a commission of 10% of Net Profit after partners salaries but before charging any commission. B in entitled to a salary of Rs.12,500 per quarter

24

Fundamentals of Partnership

Rs.3,000 respectively. They are also allowed interest on capital @ 6% p.a. Remaining profits is to be distributed in the ratio of 3 : 2. You are required to distribute the total profit of Rs.38,000 which is earned during the current financial year. Show proper accounts. [Divisible Profit: Rs.25,000] Q-8: A and B are partners with capital of Rs.30,000 and Rs.20,000 respectively. The terms of partnership deed is as follows: (i) Interest on capital is allowed at the rate of 6% p.a. (ii) Salary is allowed to A at Rs.1,000 p.a. (iii) Commission to B at the rate of 10% on net profit. (iv) Remaining profits is to be shared by A and B in the ratio of 3 : 2. During the year they earned a profit of Rs.14,000 after charging A’s salary but before making other adjustments. Prepare an account showing distribution of profits. Show calculations clearly. [B’s Commission: Rs.1,500; Divisible Profit: Rs.9,500] Q-9: P and Q are partners sharing profits in proportion of 3 : 2 with capitals of Rs.40,000 and Rs.30,000 respectively. Interest on capital is agreed at 5% p.a. Q is to allowed an annual salary of Rs.3,000 which has not been withdrawn. During 2012 the profits for the year prior to calculation of interest on capital but after charging Q’s salary amounted to Rs.12,000. A provision of 5% of this amount is to be made in respect of the manager’s commission. Prepare an account showing the allocation of profits. [Adopted CBSE (Delhi)] [Manager’s Commission: Rs.600; Divisible Profit: Rs.7,900] Q-10: A and B are partners in a firm. A’s capital is Rs.10,000 and B’s capital is Rs.6,000. Interest is payable @ 6% p.a. B is entitled to a salary of Rs.300 p.m. Profit for the current year before interest and salary to B is Rs.8,000. Distribute the profit between A and B. [CBSE (Delhi)] [Divisible Profit: Rs.3,440; A’s Share: Rs.1,720; B’s Share: Rs.1,720] Q-11: X, Y and Z are partners in a firm sharing profits in the ratio of 2 : 2 : 1. The fixed capitals of the partners were: X Rs.4,00,000; Y Rs.3,00,000; and Z Rs.2,00,000. The partnership deed provides that interest on capital should be allowed at the rate of 5% p.a. and that Z should be allowed a salary of Rs.2,500 p.m. The profit of the firm for the year ended 31.03.2012 after debiting Z’s salary were Rs.2,95,000. Prepare Profit & Loss Appropriation A/c. [Divisible profit: Rs.2,50,000] Q-12: Amit and Vijay started a partnership business on 01.04.2011. Their capital contributions were Rs.2,00,000 and Rs.1,50,000 respectively. The partnership deed provided that :

17

Practice in Accountancy

CA. Naresh Aggarwal’s

ACADEMY of ACCOUNTS Accounts • Costing • Tax • FM • Maths • Stats • English • E conomics West Patel Nagar, New Delhi. Ph:8010444896. Website: www.academyofaccounts.org Calculations for Opening Capital : Particulars Capital at the end (as on 31.03.2012) Add : Drawings Less : Profit Capital at the beginning (as on 01.04.2011) Interest on Capital @ 10% p.a.

A 75,000 10,000 85,000 6,000 79,000 7,900

Calculations for Adjustment Entry : Particulars A Interest on capital + 7,900 Salary to partners +5,000 Total +12,900 Loss Adjustment (1 : 2 : 2) - 8,400 Balance + 4,500

B + 8,800 +5,000 +13,800 - 16,800 - 3,000

B 90,000 10,000 1,00,000 12,000 88,000 8,800

C + 10,300 +5,000 +15,300 - 16,800 - 1,500

C 1,05,000 10,000 1,15,000 12,000 1,03,000 10,300

Firm - 27,000 -15,000 -42,000 + 42,000 Nil

Journal Entry : Date Particulars L.F. Debit Credit ____________________________________________________________________ B’s Capital A/c Dr. C’s Capital A/c Dr. To A’s Capital A/c (Being adjustment entry recorded for omission of interest on capital and salary)

3,000 1,500 4,500

Illustration-16: A and B are partners sharing profits and losses in the ratio of 3 : 2. At the end of the year on 31.12.2012 they decided to take their manager C into partnership for past three years. As a manager C was getting an annual salary of Rs.4,500. He had also advanced Rs.30,000 to the firm by way of a loan on which he was getting interest @ 10% p.a. During the three years, firm’s profits after adjusting salary to C, interest on loan and interest on capital of partners were : 2010 Profit 40,000 2011 Loss 20,000 2012 Profit 60,000 According to the new agreement, C is to be given annual salary of Rs.3,500 and 1/5th share in the profits of the firm. C’s loan shall be treated as his capital from the

18

Fundamentals of Partnership

beginning and similar to other partners, his capital will carry interest @ 6% p.a. Record the necessary Journal Entries to give effect to the above arrangement. [Adapted SSC (Delhi)] Solution: C’s total remunerations as a manager : Interest on loan @ 10% on Rs. 30,000 for 3 years (3,000 x 3) 9,000 Salary Rs. 4,500 p.a. for 3 years 13,500 Total (a) 22,500 C’s total remunerations (except share in profits) as a partner : Interest on Capital @ 6% on Rs. 30,000 for 3 years (1,800 x 3) 5,400 Salary Rs. 3,500 p.a. for 3 years 10,500 Total (b) 15,900 Total profits of the firm of 3 years when C was manager : Year 2010 40,000 Year 2011 - 20,000 Year 2012 60,000 Total (c) 80,000 Revised Total profits of the firm for last 3 years after C is admitted as a partner with retrospective effect = c + a - b = 80,000 + 22,500 - 15,900 = Rs. 86,600 C’s Share in profit i.e. 1/5 = 86,600 x 1 . 5 = Rs.17,320 (d) Net increase in C’s profit = b+d-a = 15,900 + 17,320 - 22,500 = Rs.10,720 As C’s profit has been increased by Rs.10,720 therefore it will be sacrificed by old partners A and B in their profit sharing ratio i.e. 3 : 2. Therefore, A’s sacrifice B’s sacrifice

3 = Rs.6,432 5 = 10,720 x 2 = Rs.4,288 5 = 10,720 x

Date Particulars L.F. Debit Credit ____________________________________________________________________ A’s Capital A/c Dr. B’s Capital A/c Dr. To C’s Capital A/c (Being adjustment entry for change in agreement)

6,432 4,288 10,720

23

Practice in Accountancy

CA. Naresh Aggarwal’s

ACADEMY of ACCOUNTS Accounts • Costing • Tax • FM • Maths • Stats • English • E conomics West Patel Nagar, New Delhi. Ph:8010444896. Website: www.academyofaccounts.org Dr.

Profit and Loss Appropriation Account

Particulars To Salary to A To Interest on Capital to : A 3,500 B 1,500 To Interest on A’s Loan (At the rate of 8% p.a.) To Profit transferred to: A (5/8) 50,000 B (3/8) 30,000

Amount Particulars 6,000 By Profit & Loss A/c (Net Profit) By Interest on Drawings: 5,000 A 2,000 8,000 B 1,000

Cr. Amount 96,000

3,000

80,000 99,000

99,000

You are required to point out any contravention of the law, found in above account and draw it in proper manner. [Correct Interest on Loan: Rs.6,000; Correct Profit: A- Rs.45,000; B- Rs.45,000] Q-5: X and Y started business on 1st January 2012 with capital of Rs.40,000 and Rs.30,000 respectively. Due to further need of money Y gave a loan of Rs.20,000 to the firm on 1st July 2012. At the end of year 2012 they earned a net profit of Rs.8,000. You are to draw their Profit and Loss Appropriation Account to show allocation of the profit. [Interest on Y’s Loan Rs.600; Divisible Profit: Rs.7,400] Q-6: Ram and Mohan start business on 01.04.2011 with capital of Rs.50,000 and Rs.20,000 respectively. According to the deed Ram is entitled to salary of Rs.500 p.m. and Mohan is to be allowed a commission at the rate of 10% of net profit. Interest on capital is also allowed @ 5% p.a. During the first year of partnership they earn a net profit of Rs.25,000. You are to show a Profit and Loss Appropriation Account to allocate the profit for the year ended 31.03.2012. [Mohan’s Commission: Rs.2,500; Divisible Profit: Rs.13,000] Q-7: A and B are partners in a business for last three years. The balance in their capital accounts at he beginning of current year was Rs.60,000 and Rs.40,000 respectively. A and B are allowed an annual remuneration of Rs.4,000 and

22

Fundamentals of Partnership

Q-2: X, Y and Z are in partnership where no partnership agreement is made. You are required to draw a correct Profit and Loss Appropriation Account form the wrong Profit and Loss Appropriation Account given as : Dr. Profit and Loss Appropriation Account Cr. Particulars To Profit & Loss A/c (Profit) To Interest on Capital X 2,500 Y 2,000 Z 1,500 To Commission to X To Interest on Z’s Loan (At the rate of 6% p.a.) To Salary to Y

Amount Particulars

Amount

10,500 By Loss transferred to: X (3/ 6) 11,850 Y (2 / 6 ) 7,900 Z (1 / 6 ) 3,950 6,000 1,200 3,000

23700

3,000 23700

23700 [Divisible Profit: Rs.7,500]

Q-3: Kapil and Dev are partners in a firm without any agreement. After the end of first year of partnership Kapil presents the following Profit and Loss Appropriation Account to his partner Dev : Dr. Profit and Loss Appropriation Account Cr. Particulars To Remunerations to: Kapil 2,000 Dev 1,500 To Interest on Dev’s Loan (At the rate of 9% p.a.) To Profit transferred to: Kapil (2/3) 1,800 Dev (1/3) 900

Amount Particulars By Profit & Loss A/c (Net Profit) 3,500 By Interest on Drawings: 900 Kapil 200 Dev 100

Amount 6,800

300

2,700 7,100

7,100

You are required to point out any contravention of the law, found in above account and draw it in proper manner. [Correct Interest on Loan: Rs.600; Divisible Profit: Rs.6,200] Q-4: A and B are partners in a firm without any agreement. A presents the following Profit and Loss Appropriation Account to his partner B.

19

Practice in Accountancy

CA. Naresh Aggarwal’s

ACADEMY of ACCOUNTS Accounts • Costing • Tax • FM • Maths • Stats • English • E conomics West Patel Nagar, New Delhi. Ph:8010444896. Website: www.academyofaccounts.org GUARANTEE IN PARTNERSHIP Sometimes a partner is admitted in a firm with a guarantee of a minimum amount of profit. In such case if the partner gets less than minimum amount then other partners have to contribute for him as per the guarantee agreement. Guarantee may be of following types: 1. Partner to Firm (when a partner promise to earn a minimum amount for firm) 2. Firm to Partner (when all remaining partners give guarantee to a partner) 3. Partner to partner (when one partner gives guarantee to another partner) If more than one type of guarantee are involved in a partnership deed then they all are done in the same sequence as stated above. Illustration-17: X, Y and Z were in partnership sharing profit and losses in the ratio of 4 : 2 : 1 respectively. It was provided that in no case Z’s share in profit should be less than Rs.15,000. The profits for the year 2012 amounted to Rs.63,000. You are required to show the appropriation amongst the partners. Solution: Dr. Profit and Loss Appropriation Account Cr. Particulars To X : less: for Z To Y : less: for Z To Z : Add: from X Add: from Y

Amount Particulars 36,000 4,000 18,000 2,000 9,000 4,000 2,000

32,000

By Profit & Loss A/c (Net Profit)

Amount 63,000

16,000

15,000 63,000

63,000

Illustration-18: A, B and C are partners sharing profit and losses in the ratio of 5 : 4 : 1. C is guaranteed that his share of profit will not be less than Rs. 5,000 in any year. It is further decided that any loss arising from the guarantee will be borne by A only. You are required to allocate the profit though proper accounts for the two years : (i) The profit for the year 2011 amounted to Rs.40,000. (ii) The profit for the year 2012 amounted to Rs.60,000. Solution:

20

Fundamentals of Partnership

(i) For the year 2011 Dr. Profit and Loss Appropriation Account Particulars To A : less: for C To B : To C : Add: from A

Amount Particulars 20,000 1,000 4,000 1,000

19,000 16,000

By Profit & Loss A/c (Net Profit)

40,000

40,000

(ii) For the year 2012 Dr. Profit and Loss Appropriation Account Amount Particulars

To Profit transferred to : A: B: C:

Amount

5,000 40,000

Particulars

Cr.

30,000 24,000 6,000

By Profit & Loss A/c (Net Profit)

60,000

Cr. Amount

To A : less: for C less: for B To B : less: for C Add: from A To C : Add: from A Add: from B

Amount Particulars 48,000 2,400 5,600 32,000 1,600 30,400 5,600 16,000 2,400 1,600

By Balance b/d (Divisible Profit) 40,000 By A’s Capital A/c (Deficiency)

ACADEMY of ACCOUNTS Accounts • Costing • Tax • FM • Maths • Stats • English • E conomics West Patel Nagar, New Delhi. Ph:8010444896. Website: www.academyofaccounts.org Note: B has been given a composite guarantee of Rs.40,000 including his salary and interest on capital, therefore we will have to determine his only profit guarantee. This may be calculated by following way : B’s Profit + Salary + Interest on Capital = 40,000 Therefore, B’s Profit = 40,000 - Salary - Interest on Capital = 40,000 - 2,400 - 1,600 = Rs.36,000

Excercise 60,000

Amount 84,000 12,000

36,000

PREPARATION OF PROFIT AND LOSS APPROPRIATION ACCOUNT Q-1: A and B form a partnership without any partnership agreement. After the end of first year of partnership A draw the following Profit and Loss Appropriation A/c : Dr. Profit and Loss Appropriation Account Cr. Particulars To Salary to: A 2,400 B 1,500 To Interest on Capital @ 6% A 1,200 B 600 To Interest on B’s Loan (At the rate of 6% p.a.) To Commission to A To Profit transferred to: A 3,000 B 2,000

Amount Particulars By Profit & Loss A/c (Net Profit) 3,900 By Interest on Drawings: A 125 B 75 1,800 2,000

96,000

Amount 14,000

200

1,500

5,000 14,200

20,000 96,000

CA. Naresh Aggarwal’s

60,000

Illustration-19: A, B and C are partners in the ratio of 3 : 2 : 1. A gives guarantee to the firm that his contribution in firm’s profit would not be less than Rs.48,000 in any year. The partnership deed also provides that C’s share of profit will not be less than Rs.20,000. Further, A has personally guaranteed B that his share of profit including his salary and interest on capital will not be less that Rs.40,000. Terms of the deed provides for Rs.200 p.m. to each partner as salary and interest on capital was calculated as Rs.2,400 for A; Rs.1,600 for B and Rs.1,200 for C. The profit after charging partner’s salary and interest on capital is determined as Rs.84,000 in which A contributed to extent of Rs.36,000 only. Solution: Dr. Profit and Loss Appropriation Account Cr. Particulars

21

Practice in Accountancy

14,200

You are required to point out any contravention of the law found in above account and draw it in proper manner. [Divisible Profit: Rs.12,000]