2nd Puc Accountancy Chapter 2 Accounting For Partnership Firms – Basic Concepts Part – 1 Notes | ಪ್ರಥಮ ಪಿ.ಯು.ಸಿ ಲೆಕ್ಕಶಾಸ್ತ್ರ ಆಧ್ಯಾಯ -2‌ ನೋಟ್ಸ್

ಪ್ರಥಮ ಪಿ.ಯು.ಸಿ ಲೆಕ್ಕಶಾಸ್ತ್ರ ಆಧ್ಯಾಯ -2‌ ನೋಟ್ಸ್, 2nd Puc Accountancy Chapter 2 Accounting For Partnership Firms – Basic Concepts Notes Pdf 2023 Karnataka Kannda Kseeb Solutions For Class 12 Accountancy Chapter 2 Notes 2nd Puc Accountancy 2nd Chapter Problems And Solutions 2nd Puc Accountancy Chapter 2 Notes Pdf 2023 Accounting For Partnership Firms : Basic Concepts Notes 2023 Accounting For Partnership Firms : basic Concepts Problems And Solutions Class 12 Accountancy Unit 2 Notes 2023

2nd Puc Accountancy Chapter 2

2nd Puc Accountancy Chapter 2 Accounting For Partnership Firms - Basic Concepts Part - 1 Notes | ಪ್ರಥಮ ಪಿ.ಯು.ಸಿ ಲೆಕ್ಕಶಾಸ್ತ್ರ ಆಧ್ಯಾಯ -2‌ ನೋಟ್ಸ್
2nd Puc Accountancy Chapter 2 Accounting For Partnership Firms – Basic Concepts Part – 1 Notes

2nd Puc Accountancy Chapter 2

short Question Answer

Q1. Define Partnership Deed.

A: When the partnership agreement is written and signed By all the partners and is duly stamped according to the Stamp Act, it is called a “Partnership Deed”.

Q2. Explain in 50 words as to why it is considered desirable to make the partnership agreement in writing.

A: Partnership comes into existence as a result of an agreement among the partners. The agreement can be either oral or written. The Partnership Act does not require that the agreement must be in writing. But wherever it Is in writing, the document,’ which contains terms of the agreement is called ‘Partnership
Deed’. It generally contains the details about all the aspects affecting the relationship between the partners including the objective of business, the contribution of capital by each partner, the ratio in which the profits and the losses will be shared by the partners, and the entitlement of partners to interest on
capital, interest on loan, etc.

Q3. List the items which may be debited or credited in the capital accounts of the partners when:

(i) Capitals are fixed.

(ii) Capital are fluctuating.

A: a) Capitals are fixed.

b) Capital are fluctuating.

 Q4. Why it is considered desirable to make the partnership agreement in writing.

According to the Partnership Act, 1932, having a Partnership deed in writing is not mandatory. However, it is a safe option to have it in writing as it helps avoid any kind of disputes that may arise between partners of a firm in future. It also helps resolution of any kind of disputes as a written partnership that is signed by all the partners is suitable for use as an evidence in the court of law

Q5. Why is Profit and Loss Adjustment Account prepared? Explain.

It is prepared for the following reasons:

1. For recording transactions, errors or omissions which may be left while preparing the final accounts.

2. To act as a account for distributing profit and loss between partners

3. To accommodate for changes in partnership deed.

Q7. Give two circumstances under which the fixed capitals of partners may change.

Following circumstances lead to change in fixed capital of partners

1. Introducing fresh capital in the firm by a partner with consent from other partners.

2. When a portion of capital is withdrawn with consent of partners.

Q8.If a fixed amount is withdrawn on the first day of every quarter, for what period the interest on total amount withdrawn will be calculated?

When there is withdrawal of money on first day of each quarter. Then the corresponding interest is calculated for a period of seven and half months on the total amount that is withdrawn

Q9. In the absence of partnership deed, specify the rules relating to the following:

(i) Sharing of profits and losses.

(ii) Interest on partner’s capital.

(iii) Interest on Partner’s drawings.

(iv) Interest on Partner’s loan

(v) Salary to a partner.

1. Sharing of profits and losses: If a partnership deed is absent, then the profit sharing ratio should be equal among all partners, as per Partnership Act, 1932.

2. Interest on Partner’s capital: If partnership deed is absent, then as per Partnership Act, 1932, the partners are not entitled to interest earned on capital.

3. Interest on Partner’s drawings: If partnership deed is absent, then as per Partnership Act, 1932, in event of drawing money it shall be charged to the partners

4. Interest on Partner’s loan: If partnership deed is absent then the partner is eligible for a 6% interest on loan to the firm

5. Salary to a partner: In case of absence of partnership deed, the partners are not eligible for any salary, any salary whatsoever if paid will be as appropriation of profit (in case there is profit)

Q10. Explain why it is considered better to make a partnership agreement in writing.

According to the Partnership Act, 1932, it is not mandatory to have Partnership deed in writing. However, it is a safe option to have it in writing as there are chances that the partners may have conflicts in the future that gives rise to dispute among the partners regarding the operations of the firm. A partnership deed that is documented helps in proper functioning of the firm and assists in avoiding any kind of disputes that may arise between partners of a firm in future. It also helps resolution of any kind of disputes as, a written partnership that is signed by all the partners is suitable for use as an evidence in the court of law.

Q11. Illustrate how interest on drawings will be calculated under various situations.

A partner whenever withdraws from the firm, any amount which can be in the form of cash or other forms solely for personal use is called drawings. Interest on drawings is referred to the amount that is charged by firm as interest on the total amount taken as drawings. Interest calculation is dependent on the time and the frequency in which drawing is made. Here are some situations that can be shown where calculation is done for interest charged on drawings.

Karnataka 2nd PUC Accountancy Chapter 2 Accounting for Partnership: Basic Concepts Notes

Twelve Marks Qs

Q1. How will you deal with a change in the profit sharing ratio among existing partners? Take imaginary figures to illustrate your answer?

There is change in profit sharing only when there is addition of a new partner, retirement or death of partner or due to mutually agreed decision among the partners. Some of the factors that need to be taken into account while changing the profit-sharing ratio are: goodwill, accumulated profits and reserves, liabilities and adjustment of capitals and profit or loss on the revaluation of the assets, etc.

General reserve is essentially the accumulated profits and profit or loss that is obtained on the revaluation of assets and liabilities, adjustments in capital etc.

If one or more partners decide that it is the right time for changing profit sharing ratio, then the gaining partner shall gain and the other will lose, therefore the gainer should compensate the latter. This results in debiting gaining partner capital account and crediting the sacrificing partners’ capital account.

Gaining Partner’s Capital A/c Dr.

To Sacrificing Partner’s Capital A/c

(Adjustment entry passed) 

Ram, Shyam, and Mohan are partners in a firm sharing profit and loss in 3:2:1 ratio. They decide to share profit and loss equally in future. On that date, the books of the firm shows ₹ 90,000 as general reserve, profit due to revaluation of plant and machinery ₹ 30,000. The following adjustment entry is passed through the capital accounts without affecting the books of accounts.

ParticularsRamShyamMohan
Share of profit as per 3:2:1 45,00030,00015,000
Profit on revaluation of plant and machinery15,00010,0005,000
    
 60,00040,00020,000
Share of profit as per 1:1:150,00050,0005,000
    
Difference (Gain or Loss)25,00025,000
 (Loss) (Gain)
    

Here Mohan gains while Ram loses, so Ram needs to be compensated by Mohan with an amount of ₹ 25,000. The following adjustment entry is passed.

 Adjustment entry:

Mohan’s Capital A/c Dr.25,000 
To Ram’s Capital A/c
( Adjustment entry passed)
 25,000

Q2. What is partnership? What are its chief characteristics? Explain.

According to Section 4 of the Partnership Act, 1932 a partnership is defined as “an agreement between two or more persons who have mutually agreed to share profits or losses that will be carried by all or any one of them acting for all”. The individuals who setup the business jointly are called as partners and all the partners collectively are known as firm.

Following are the important characteristics of a partnership firm:

1. Number of partners: The minimum number of persons to form a partnership is 2 and the maximum is 50 as per the Companies Rules Act, 2014. Any more than the specified limit makes a partnership illegal.

2. Partnership Deed: A partnership deed is a necessary to document that contains all the terms of the partnership and the details about the contribution of each partner towards the firm. It should be in written format as it helps in resolving disputes between partners and acts as evidence in d

3. Business: One of the important characteristics of business is that it is formed in order to do legal business. So any kind of business that is deemed illegal makes the partnership illegal

4. Profit/Loss Sharing: Partners are supposed to take profit and loss as per the ratio that was agreed at the time of partnership.

5. Liability: Firm has unlimited liability and the partners of the firm need to pay from the personal asset if the firm is unable to pay to any concerned third party

6. Mutual Agency: The firm is an agency and all the partners are its agents. Every partner is an agent and binds other partners by his/her act while at the same time is bound by other partners action.

Q3. Tripathi and Chauhan are partners in a firm sharing profits and losses in the ratio of 3:2. Their capitals were ₹ 60,000 and ₹ 40,000 as on January 01, 2015. During the year they earned a profit of ₹ 30,000. According to the partnership deed both the partners are entitled to ₹ 1,000 per month as Salary and 5% interest on their capital. They are also to be charged an interest of 5% on their drawings, irrespective of the period, which is ₹ 12,000 for Tripathi, ₹ 8,000 for Chauhan. Prepare Partner’s Accounts when, capitals are fixed.

a) If interest on Capital and Partners’ salaries and interest on drawings is charged against profit, the solution will be as:

Profit and Loss Appropriation Account

Dr Cr

ParticularsAmountParticularsAmount
Profit transferred to:- 18,000 Profit and Loss30,000
Tripathi’s Current Account18,000 
Chauhan’s Current Account 12,000 
  30,000 30,000

Partners’ Capital Account

Dr Cr

ParticularsTripathiChauhanParticularsTripathiChauhan
   Balance b/d60,00040,000
      
Balance c/d60,00040,000   
 60,00040,000 60,00040,000

Partners’ Current Account

Dr Cr

ParticularsTripathiChauhanParticularsTripathiChauhan
Drawings12,0008,000Interest on Capital3,0002,000
Interest on Drawings600400Partners’ Salaries12,00012,000
Balance c/d20,40017,600Profit & Loss Appropriation18,00012,000
 33,00026,000 33,00026,000

b) ) If interest on Capital and Partners’ salaries and interest on drawings is distributed out of  profit, the solution will be as:

Profit and Loss Appropriation Account

Dr Cr

ParticularsAmountParticularsAmount₹
Partners’ Salary Profit and Loss (Profit)30,000
Tripathi 1,000 × 12 =12,000Interest on Drawings
Chauhan 1,000 × 12 =12,00024,000Tripathi 600
  Chauhan 4001,000
Interest on Capital  
Tripathi 3,000 
Chauhan 2,0005,000 
   
Profit Transferred to  
Tripathi’s Current 1,200 
Chauhan’s Current 8002,000 
  31,000 31,000

Partners’ Capital Account

Dr Cr

ParticularsTripathiChauhanParticularsTripathiChauhan
   Balance b/d60,00040,000
Balance c/d60,00040,000   
      
 60,00040,000 60,00040,000

Partners’ Current Account

Dr Cr

ParticularsTripathiChauhanParticularsTripathiChauhan
Drawings12,0008,000Partners’ Salaries12,00012,000
Interest on Drawings600400Interest on Capital3,0002,000
Balance c/d3,6006,400Profit and Loss Appropriation1,200800
 16,20014,800 16,20014,800

Q4. Anubha and Kajal are partners of a firm sharing profits and losses in the ratio of 2:1. Their capital, were ₹ 90,000 and ₹ 60,000. The profit during the year were ₹ 45,000. According to partnership deed, both partners are allowed salary, ₹ 700 per month to Anubha and ₹ 500 per month to Kajal. Interest allowed on capital @ 5% p.a. The drawings at the end of the period were ₹ 8,500 for Anubha and ₹ 6,500 for Kajal. Interest is to be charged @ 5% p.a. on drawings. Prepare partners’ capital accounts, assuming that the capital account are fluctuating.

a) Note: If Partners’ Salaries, Interest on capital and Interest on Drawing are treated as these have already adjusted in Profit and Loss Account. The Solution will be as

Profit and Loss Appropriation Account\

Dr Cr

ParticularsAmountParticularsAmount
Profit Transferred to Current  A/c  Profit and Loss45,000
Anubha’s Capital 30,000  
Kajal’s Capital 15,00045,000 
    
  45,000 45,000

Partners’ Capital Account

Dr Cr

ParticularsAnubhaKajalParticularsAnubhaKajal
Drawings8,5006,500Balance b/d90,00060,000
Interest on Drawings425325Partners’ Salaries8,4006,000
   Interest on Capital4,5003,000
Balance c/d1,23,97577,175Profit and Loss Appropriation30,00015,000
 1,32,90084,000 1,32,90084,000

b) Alternative Note: If Partners’ salaries, interest on capital and interest on drawings adjusted in Profit and Loss Appropriation Account. The solution will be as.

Profit and Loss Appropriation Account

Dr Cr

ParticularsAmountParticularsAmount
Partners’ Salaries:  Profit and Loss Account45,000
Anubha 8,400 Interest on Drawings
Kajal 6,00014,400Anubha 425
   Kajal 325750
Interest on Capital:   
Anubha 4,500  
Kajal 3,0007,500 
    
Profit transferred to   
Anubha’s Capital 15,900  
Kajal’s Capital 7,95023,850 
    
  45,750 45,750

Partners’ Capital Account

Dr Cr

ParticularsAnubhaKajalParticularsAnubhaKajal
Drawings8,5006,500Balance b/d90,00060,000
Interest on Drawings425325Partners’ Salaries8,4006,000
   Interest on Capital4,5003,000
Balance c/d1,09,87570,125Profit and Loss Appropriation15,9007,950
 1,18,80076,950 1,18,80076,950

Q5. Harshad and Dhiman are in partnership since April 01, 2016. No Partnership agreement was made. They contributed ₹ 4, 00,000 and 1, 00,000 respectively as capital. In addition, Harshad advanced an amount of ₹ 1, 00,000 to the firm, on October 01, 2016. Due to a long illness, Harshad could not participate in business activities from August 1, to September 30, 2017. The profits for the year ended March 31, 2017, amounted to ₹ 1, 80,000. A dispute has arisen between Harshad and Dhiman.

Harshad Claims:

(i)    He should be given interest @ 10% per annum on capital and loan;

(ii)   Profit should be distributed in proportion of capital;

Dhiman Claims:

(i)    Profits should be distributed equally;

(ii)   He should be allowed ₹ 2,000 p.m. as remuneration for the period he managed the business, in the absence of Harshad;

(iii)  Interest on Capital and loan should be allowed @ 6% p.a.

You are required to settle the dispute between Harshad and Dhiman. Also prepare Profit and Loss Appropriation Account.

The solution for this question is as follows:

DISTRIBUTION OF PROFITS

Harshad Claims:

Decisions

(i) If there is no agreement on interest on partner’s capital, according to Indian partnership act 1932, no interest will be allowed to partners.

(ii) If there is no agreement on the matter of profit sharing, according to partnership act 1932, profit shall be distributed equally.

Dhiman Claims:

Decisions

(i) Dhiman’s claim is justified, according to the partnership act 1932 if there is no agreement on the matter of profit distribution, profit shall be distributed equally.

(ii) No salary will be allowed to any partner because there is no agreement on the matter of remuneration.

(iii) Dhiman’s claim is not justified on the matter of interest on capital but justified on the matter of interest on a loan. If there is no agreement on interest on the partner’s loan, Interest shall be provided at 6% p.a. 

Profit and Loss Adjustment Account

Dr Cr

ParticularsAmountParticularsAmount
Interest on Partner’s Loan  Profit and Loss1,80,000
Harshad 1,00,000 × (6/100) × (6/12)3,000  
Profit and Loss Appropriation1,77,000  
  1,80,000 1,80,000

Profit and Loss Account

Dr Cr

ParticularsAmountParticularsAmount
Profit transferred to  Profit and Loss Adjustment1,77,000
Harshad’s Capital88,500  
Sharma’s Capital88,500  
 1,77,000   1,77,000

Q6. Aakriti and Bindu entered into a partnership for making garments on April 01, 2016 without any Partnership agreement. They introduced Capitals of ₹ 5, 00,000, and ₹ 3, 00,000 respectively on October 01, 2016. Aakriti Advanced. ₹ 20,000 by way of loan to the firm without any agreement as to interest. The profit and Loss account for the year ended March 2017 showed a profit of ₹ 43,000. Partners could not agree upon the question of interest and the basis of the division of profit. You are required to divide the profits between them giving a reason for your solution.

The solution to this question is as follows:

Profit and Loss Adjustment Account

Dr Cr

ParticularsAmountParticularsAmount
Interest on Partner’s Loan  Profit and Loss43,000
Aakriti 20,000 × (6/100) × (6/12)600  
Profit transferred to   
Aakriti’s Capital 21,200  
Bindu’s Capital 21,20042,400 
 43,000 43,000

Reason

a) Interest on the partner’s loan shall be allowed at 6% p.a. because there is no partnership agreement.

b) Interest on capital shall not be allowed because there is no agreement on interest on capital.

c) Profit shall be distributed equally because the profit-sharing ratio has not been given.

Q7. Rakhi and Shikha are partners in a firm, with capitals of ₹ 2, 00,000 and ₹ 3, 00,000 respectively. The profit of the firm, for the year ended 2016-17 is ₹ 23,200. As per the Partnership agreement, they share the profit in their capital ratio, after allowing a salary of ₹ 5,000 per month to Shikha and interest on the Partner’s capital at the rate of 10% p.a. During the year Rakhi withdrew ₹ 7,000 and Shikha ₹ 10,000 for their personal use. You are required to prepare Profit and Loss Appropriation Accounts and Partner’s Capital Accounts.

If interest on capital and Partners’ salaries will be provided even if the firm involves in the loss.

The solution for this question is as follows:

Profit and Loss Appropriation Account

Dr Cr

ParticularsAmountParticularsAmount
Partner’s Salaries  Profit and Loss23,200
Shikha 60,000Loss transferred to
   Rakhi Capital 34,720
Interest on Capital  Shikha’s Capital 52,08086,800
Rakhi 20,000  
Shikha 30,00050,000 
 1,10,0001,10,000

Partners’ Capital Account

Dr Cr

ParticularsRakhiShikhaParticularsRakhiShikha
Drawings7,00010,000Balance b/d2,00,0003,00,000
Profit & Loss Appropriation34,72052,080Partner’s Salaries 60,000
Balance c/d1,78,2803,27,920Interest on Capital20,00030,000
      
 2,20,0003,90,000 2,20,0003,90,000

If interest on capital and salaries will be provided out of profit

Profit and Loss Appropriation Account

Dr Cr

ParticularsAmountParticularsAmount
Partner’s Salaries  Profit and Loss23,200
Shikha  {23,200 × (6/11)} 12,655 
Interest on Capital   
Rakhi {23,200 × (2/11)}4,218  
 Shikha {23,200 × (3/11)}6,327 23,200
  23,200  23,200

 If profit is less than the sum of distributable items, distribution shall be in proportion of items for distribution.

Partners SalariesRatio  
Shikhar (₹ 60,000)623,200 × (6/11)12,655
Interest on Capital   
Rakhi (₹ 20,000)223,200 × (2/11)4,218
Shikhar (₹ 30,000)323,200 × (3/11)6,327
 11 23,200

Partners’ Capital Account

Dr Cr

ParticularsRakhiShikhaParticularsRakhiShikha
Drawings7,00010,000Balance b/d2,00,0003,00,000
   Partner’s Salaries 12,655
Balance c/d1,97,2183,08,972Interest on Capital4,2186,327
      
 2,04,2183,18,972 2,04,2183,18,972

Q8. Lokesh and Azad are partners sharing profits in the ratio of 3:2, with capitals of ₹ 50,000 and ₹ 30,000, respectively. Interest on capital is agreed to be paid @ 6% p.a. Azad is allowed a salary of ₹ 2,500 p.a. During 2016, the profits prior to the calculation of interest on capital but after charging Azad’s salary amounted to ₹ 12,500. A provision of 5% of profits is to be made in respect of the manager’s commission. Prepare accounts showing the allocation of profits and partner’s capital accounts.

The solution for this question is as follows:

Profit and Loss Adjustment Account

Dr Cr

ParticularsAmountParticularsAmount
Interest on Capital  By Profit and Loss (12,500 + 2,500)15,000
Lokesh 3,000  
Azad 1,8004,800 
    
Partner’s Salaries   
Azad 2,500 
    
Provision for Manager’s Commission 15,000 × (5/100)750  
Profit transferred to   
Lokesh Capital 4,170  
Azad Capital 2,7806,950 
  15,000 15,000

Partners’ Capital Account

Dr Cr

ParticularsLokeshAzadParticularsLokeshAzad
   Balance b/d50,00030,000
   Interest on Capital3,0001,800
Balance c/d57,17037,080Partner’s Salaries 2,500
   Profit and Appropriation4,1702,780
 57,17037,080 57,17037,080


Q9. The partnership agreement between Maneesh and Girish provides that:

(i)    Profits will be shared equally;

(ii)   Maneesh will be allowed a salary of ₹ 400/month;

(iii)  Girish who manages the sales department will be allowed a commission equal to 10% of the net profits, after allowing Maneesh’s salary;

(iv)  7% interest will be allowed on partner’s fixed capital;

(v)   5% interest will be charged on partner’s annual drawings;

(vi)  The fixed capitals of Maneesh and Girish are ₹ 1, 00,000 and ₹ 80,000, respectively. Their annual drawings were ₹ 16,000 and 14,000, respectively. The net profit for the year ending March 31, 2015 amounted to ₹ 40,000;

 Prepare firm’s Profit and Loss Appropriation Account.

The solution for this question is as follows:

Profit and Loss Appropriation Account

Dr Cr

ParticularsAmountParticularsAmount
Partner’s Salary  Profit and Loss40,000
Maneesh 4,800Interest on Drawings
  Maneesh 800  
Partner’s commission Girish 7001,500
Girish {(40,000 – 4,800) × (10/100)}3,520  
Interest on Capital   
Maneesh 7,000  
Girish 5,60012,600 
    
Profit transferred to   
Maneesh’s Current 10,290  
Girish’s Current 10,29020,580 
 41,500  41,500

Q10. Ram, Raj and George are partners sharing profits in the ratio 5: 3: 2. According to the partnership agreement George is to get a minimum amount of ₹ 10,000 as his share of profits every year. The net profit for the year 2013 amounted to ₹ 40,000. Prepare the Profit and Loss Appropriation Account.

The solution for this question is as follows:

Profit and Loss Appropriation Account

Dr Cr

ParticularsAmountParticularsAmount
Profit transferred to Profit and Loss40,000
Ram’s Capital (20,000 – 1,250)18,750  
Raj’s Capital (12,000 – 750)11,250  
    
George’s Capital (8,000 + 1,250 + 750)10,000  
 40,000 40,000

Q11. Amann, Babita and Suresh are partners in a firm. Their profit sharing ratio is 2:2:1. Suresh is guaranteed a minimum amount of ₹ 10,000 as share of profit, every year. Any deficiency on that account shall be met by Babita. The profits for two years ending March 31, 2016 and March 31, 2017 were ₹ 40,000 and ₹ 60,000, respectively. Prepare the Profit and Loss Appropriation Account for the two years.

The solution for this question is as follows:

Profit and Loss Appropriation Account for the year ended 31st31st March 2016

Dr Cr

ParticularsAmountParticularsAmount
Profit transferred to Profit and Loss40,000
Amann’s Capital  16,00016,000  
Babita’s Capital (16,000 – 2,000)14,000  
Suresh’s Capital (8,000 + 2,000)10,000  
    
 40,000 40,000

Profit and Loss Appropriation Account for the year ended 31st March 2017

Dr Cr

ParticularsAmountParticularsAmount
Profit transferred to Profit and Loss60,000
Amann’s Capital 24,000  
Babita’s Capital24,000  
Suresh’s Capital12,000  
    
 60,000 60,000

Q12. Simmi and Sonu are partners in a firm, sharing profits and losses in the ratio of 3:1. The profit and loss account of the firm for the year ending March 31, 2017 shows a net profit of ₹ 1, 50,000. Prepare the Profit and Loss Appropriation Account by taking into consideration the following information:

(i)    Partners capital on April 1, 2016;

        Simmi, ₹ 30,000; Sonu, ₹ 60,000;

(ii)   Current accounts balances on April 1, 2016;

        Simmi, ₹ 30,000 (cr.); Sonu, ₹ 15,000 (cr.);

(iii)  Partners drawings during the year amounted to

        Simmi, ₹ 20,000; Sonu, ₹ 15,000;

(iv)  Interest on capital was allowed @ 5% p.a.

(v)   Interest on drawing was to be charged @ 6% p.a. at an average of six months;

(vi)  Partners’ salaries: Simmi ₹ 12,000 and Sonu ₹ 9,000. Also show the partners’ current accounts.

The solution for this question is as follows:

Profit and Loss Appropriation Account

Dr Cr

ParticularsAmountParticularsAmount
Interest on Capital  Profit and Loss Account1,50,000
Simmi 1,500 Interest on Drawings
Sonu 3,0004,500Simmi 600
  Sonu 450 1,050
Partners’ Salaries   
Simmi 12,000  
Sonu 9,00021,000 
    
Profit transferred to   
Simmi’s Current 94,162  
Sonu’s Current 31,3881,25,550 
    
  1,51,050 1,51,050

Partners’ Capital Account

Dr Cr

ParticularsSimmiSonuParticularsSimmiSonu
   Balance b/d30,00060,000
Balance c/d30,00060,000   
      
 30,00060,000 30,00060,000

Partners’ Current Account

Dr Cr

ParticularsSimmiSonuParticularsSimmiSonu
Drawings20,00015,000Balance b/d30,00015,000
Interest on Drawings600450Interest on Capital1,5003,000
   Partners’ Salaries12,0009,000
Balance c/d1,17,66243,388Profit and Loss Appropriation94,16231,388
 1,37,66258,388 1,37,66258,388

Q13. Ramesh and Suresh were partners in a firm sharing profits in the ratio of their capitals contributed on commencement of business which were ₹ 80,000 and ₹ 60,000 respectively. The firm started business on April 1, 2016. According to the partnership agreement, interest on capital and drawings are 12% and 10% p.a., respectively. Ramesh and Suresh are to get a monthly salary of ₹ 2,000 and ₹ 3,000, respectively.
The profits for year ended March 31, 2017 before making above appropriations was ₹ 1, 00,300. The drawings of Ramesh and Suresh were ₹ 40,000 and ₹ 50,000, respectively. Interest on drawings amounted to ₹ 2,000 for Ramesh and ₹ 2,500 for Suresh. Prepare Profit and Loss Appropriation Account and partners’ capital accounts, assuming that their capitals are fluctuating.

The solution for this question is as follows:

Profit and Loss Appropriation Account

Dr Cr

ParticularsAmountParticularsAmount
Interest on Capital   Profit and Loss1,00,300
Ramesh 9,600 Interest on Drawings
Suresh 7,20016,800Ramesh 2,000
  Suresh 2,500 4,500
Partners’ Salaries   
Ramesh 24,000  
Suresh 36,00060,000 
    
Profit Transferred to   
Ramesh’s Capital {28,000 × (4/7)}16,000  
Suresh’s Capital {28,000 × (3/7)}12,000  
 1,04,800  1,04,800

Partners’ Capital Account

Dr Cr

ParticularsRameshSureshParticularsRameshSuresh
Drawings40,00050,000Cash80,00060,000
Interest on Drawings2,0002,500Interest on Capital9,6007,200
Balance c/d87,60062,700Partners’ Salaries24,00036,000
   Profit & Loss Appropriation16,00012,000
 1,29,6001,15,200 1,29,6001,15,200
Capital Ratio=Ramesh:Suresh
  80,000:60,000
  4:3

14. Sukesh and Vanita were partners in a firm. Their partnership agreement provides that:

(i) Profits would be shared by Sukesh and Vanita in the ratio of 3:2;

(ii) 5% interest is to be allowed on capital;

(iii) Vanita should be paid a monthly salary of ₹ 600.

The following balances are extracted from the books of the firm, on March 31, 2017.

 SukeshVerma*
 
Capital Accounts40,00040,000
Current Accounts(Cr.)   7,200(Cr.)   2,800
Drawings10,8508,150

Net profit for the year, before charging interest on capital and after charging partner’s salary was ₹ 9,500. Prepare the Profit and Loss Appropriation Account and the Partner’s Current Accounts.

The solution for this question is as follows:

Profit and Loss Appropriation Account

Dr Cr

ParticularsAmountParticularsAmount
Interest on Capital  Profit and Loss 9,500
Sukesh 2,000  
Vanita 2,0004,000 
    
Profit transferred to   
Sukesh’s Current {5,500 × (3/5)} 3,300  
Vanita’s Current {28,000 × (2/5)}2,200  
  9,500  9,500

Partner’s Capital Account

Dr Cr

ParticularsSukeshVanitaParticularsSukeshVanita
   Balance b/d40,00040,000
Balance c/d40,00040,000   
 40,00040,000 40,00040,000

Partner’s Current Account

Dr Cr

ParticularsSukeshVanitaParticularsSukeshVanita
Drawings10,8508,150Balance b/d7,2002,800
   Partner’s Salaries 7,200
   Profit and Loss Appropriation3,3002,200
Balance c/d1,6506,050Interest on capital2,0002,000
 12,50014,200 12,50014,200

Q15. Sunflower and Pink Rose started partnership businesses on April 01, 2016, with capitals of ₹ 2, 50,000 and ₹ 1, 50,000, respectively. On October 01, 2016, they decided that their capital should be ₹ 2, 00,000 each. The necessary adjustments in the capital are made by introducing or withdrawing cash. Interest on capital is to be allowed @ 10% p.a. Calculate interest on capital as on March 31, 2017.

The solution for this question is as follows:

Product Method

Sunflower

01 April 2016 to 30 September 20162,50,000 × 6 =15,00,000
01 October 2016 to 31 March 20172,00,000 × 6 =12,00,000
 Sum of Product27,00,000

Pink Rose

01 April 2016 to 30 September 20161,50,000 × 6 =9,00,000
01 October 2016 to 31 March 20172,00,000 × 6 =12,00,000
 Sum of Product21,00,000

Alternative Method:

Simple Interest Method

Sunflower

April 01, 2016 to September 30, 20162,50,000 ×10
100
×6
12
= ₹ 12,500 
 October 01,  2016 to March 31, 20172,00,000 ×10
100
×6
12
= ₹ 10,000 
Interest on Sunflower’s Capital=₹ 22,500

Pink Rose

April 01, 2016 to September 30, 20161,50,000 ×10
100
× 6
12
= ₹   7,500 
 October 01,  2016 to March 31, 20172,00,000 ×10
100
× 6
12
= ₹ 10,000 
Interest on Pink Rose’s Capital=₹ 17,500

Q16. On March 31, 2017 after the close of accounts, the capitals of Mountain, Hill and Rock stood in the books of the firm at ₹ 4, 00,000, ₹ 3, 00,000 and ₹ 2, 00,000, respectively. Subsequently, it was discovered that the interest on capital @ 10% p.a. had been omitted. The profit for the year amounted to ₹ 1, 50,000 and the partner’s drawings had been Mountain: ₹ 20,000, Hill ₹ 15,000 and Rock ₹ 10,000. Calculate interest on capital.

The solution for this question is as follows:

Generally interest on Capital is calculated on opening balance of capital. If additional capital is not given.

 MountainHillRock
Closing Capital4,00,0003,00,0002,00,000
Add: Drawings20,00015,00010,000
Less: Profit (1:1:1)(50,000)(50,000)(50,000)
Opening Capital3,70,0002,65,0001,60,000

Interest on Capital

Mountain3,70,000 ×10 / 100= ₹ 37,000
Hill2,65,000 × 10 / 100= ₹ 26,500
Rock1,60,000 × 10 / 100= ₹ 16,000

17. Following is the extract of the Balance Sheet of, Neelkant and Mahdev as on March 31, 2017:

Balance Sheet as at March 31, 2017 
LiabilitiesAmountAssetsAmount
Neelkant’s Capital10,00,000Sundry Assets30,00,000
Mahadev’s Capital10,00,000  
Neelkant’s Current Account1,00,000  
Mahadev’s Current Account1,00,000  
Profit and Loss Apprpriation   
(March 2017)8,00,000  
 30,00,000 30,00,000

During the year Mahadev’s drawings were ₹ 30,000. Profits during 2017 is ₹ 10, 00,000. Calculate interest on capital @ 5% p.a for the year ending March 31, 2017.

Interest on Capital

Neelkant’s10,00,000 × 5 / 100= ₹ 50,000
Mahadev’s10,00,000 × 5 / 100= ₹ 50,000

Q18. Rishi is a partner in a firm. He withdrew the following amounts during the year ended March 31, 2018.

May 01, 2017₹ 12,000
July 31, 2017₹   6,000
September 30, 2017₹   9,000
November 30, 2017 ₹ 12,000
January 01, 2018₹   8,000
March 31, 2018₹   7,000

Interest on drawings is charged @ 9% p.a. Calculate interest on drawings.

Interest is calculated as follows:

Product Method

 Drawings × PeriodProduct
01 May, 2017 to 31 March 201812,000 × 11 =1,32,000
31 July, 2017 to 31 March 20186,000 × 8 =48,000
30 September, 2017 to 31 March 20189,000 × 6 =54,000
30 Nov. 2017 to 31 March 201812,000 × 4 =48,000
01 Jan. 2018 to 31 March 20188,000 × 3 =24,000
31 March 2018 to 31 March 20187,000 × 0 =0
 Sum of Product3,06,000

Q19. The capital accounts of Moli and Golu showed balances of ₹ 40,000 and ₹ 20,000 as on April 01, 2016. They shared profits in the ratio of 3:2. They allowed interest on capital @ 10% p.a. and interest on drawings, @ 12 p.a. Golu advanced a loan of ₹ 10,000 to the firm on August 01, 2016. During the year, Moli withdrew ₹ 1,000 per month at the beginning of every month whereas Golu withdrew ₹ 1,000 per month at the end of every month. Profit for the year, before the above mentioned adjustments was ₹ 20,950. Calculate interest on drawings show distribution of profits and prepare partner’s capital accounts.

The solution for this question is as follows:

Profit and Loss Adjustment Account

Dr Cr

ParticularsAmountParticularsAmount₹
Interest on Capital Profit and Loss Account20,950
Moli 4,000Interest on Drawings
Golu 2,0006,000Moli 780
  Golu 6601,440
Interest on Partner’s Loan  
Golu’s {10,000 × (6/100) × (8/12)}400 
   
Profit transferred to  
Moli’s Capital {15,990 × (3/5)}9,594 
Golu’s Capital {15,990 × (2/5)}6,396 
  22,390  22,390

Partners’ Capital Account

Dr Cr

ParticularsMoliGoluParticularsMoliGolu
Drawings12,00012,000Balance b/d40,00020,000
Interest on Drawing780660Interest on Capital4,0002,000
Balance c/d40,81415,736Profit and Loss Adjustment9,5446,396
 53,59428,396 53,59428,396

Q20. Rakesh and Roshan are partners, sharing profits in the ratio of 3:2 with capitals of ₹ 40,000 and ₹ 30,000, respectively. They withdrew from the firm the following amounts, for their personal use:

RakeshMonth
 May 31, 2016600
 June 30, 2016 500
 August 31, 20161,000
 November 1, 2016400
 December 31, 20161,500
 January 31, 2017 300
 March 01, 2017 700
RohanAt the beginning of each month 400

Interest is to be charged @ 6% p.a. Calculate interest on drawings, assuming that book of accounts are closed on March 31, 2017, every year.

The solution for this question is as follows:

Rakesh’s Interest on Drawings

 Drawings × PeriodProduct
31 May 2016 to 31 March 2017600 × 10 =6,000
30 June 2016 to 31 March 2017500 ×   9 =4,500
31 August 2016 to 31 March 20171,000 ×   7 =7,000
1 November 2016 to 31 March 2017400 ×   5 =2,000
31 December 2016 to 31 March 20171,500 ×   3 =4,500
31 January 2017 to 31 March 2017300 ×   2 =6,00
01 March 2017 to 31 March 2017700 ×   1 =700
 Sum of Product25,300

Q21. Raj and Neeraj are partners in a firm. Their capitals as on April 01, 2017 were ₹ 2, 50,000 and ₹ 1, 50,000, respectively. They share profits equally. On July 01, 2017, they decided that their capitals should be ₹ 1, 00,000 each. The necessary adjustment in the capitals were made by introducing or withdrawing cash by the partners’. Interest on capital is allowed @ 8% p.a. Compute interest on capital for both the partners for the year ending on March 31, 2018.

The solution for this question is as follows:

Interest on Capital

Raj 

 Capital × PeriodProduct
1 April 2017 to 30 June 20172,50,000 × 3 =7,50,000
1 July 2017 to 31 March 20181,00,000 × 9 =9,00,000
 Sum of Product16,50,000

Neeraj

 Capital × PeriodProduct
1 April 2017 to 30 June 20171,50,000 × 3 =4,50,000
1 July 2017 to 31 March 20181,00,000 × 9 =9,00,000
 Sum of Product13,50,000

Q22. Harish is a partner in a firm. He withdrew the following amounts during the year 2017:

 
February 014,000
May 0110,000
June 304,000
October 3112,000
December 31 4,000

Interest on drawings is to be charged @ 7.5 % p.a.

Calculate the amount of interest to be charged on Harish’s drawings for the year ending December 31, 2017.

The solution for this question is as follows:

Calculation of interest on Harish’s drawings

 Drawings × PeriodProduct
01 Feb. 17 to 31 Dec. 174,000 × 11 =44,000
01 May 17 to 31 Dec. 1710,000 ×   8 =80,000
30 June 17 to 31 Dec. 174,000 ×   6 =24,000
31 Oct. 17 to 31 Dec. 1712,000×   2 =24,000
31 Dec. 17 to 31 Dec. 174,000 ×   0 =0
 Sum of Product1,72,000

Q23. On March 31, 2017, after the close of books of accounts, the capital accounts of Ram, Shyam and Mohan showed balance of ₹ 24,000 ₹ 18,000 and ₹ 12,000, respectively. It was later discovered that interest on capital @ 5% had been omitted. The profit for the year ended March 31, 2017, amounted to ₹ 36,000 and the partner’s drawings had been Ram, ₹ 3,600; Shyam, ₹ 4,500 and Mohan, ₹ 2,700. The profit sharing ratio of Ram, Shyam and Mohan was 3:2:1. Calculate interest on capital.

The solution for this question is as follows:

 RamShyamMohan
Capital on March 3124,00018,00012,000
Add: Drawings3,6004,5002,700
Less: Profit (3:2:1)(18,000)(12,000)(6,000)
Capital April 01, 20129,60010,5008,700

Q24. Amit, Sumit and Samiksha are in partnership sharing profits in the ratio of 3:2:1. Samiksha’ share in profit has been guaranteed by Amit and Sumit to be a minimum sum of ₹ 8,000. Profits for the year ended March 31, 2017 was ₹ 36,000. Divide profit among the partners.

The solution for this question is as follows:

Guarantee of Profit to the partners

Profit and Loss Appropriation Account

Dr Cr

ParticularsAmount₹ParticularsParticulars
Profit transferred to  Profit and Loss36,000
Amit’s Capital18,000  
Less: Gurantee to Samiksha {2,000 × (3/5)}(1,200)16,800 
    
Sumit’s Capital12,000  
Less: Gurantee to Samiksha {2,000 × (2/5)}(800)11,20011,200 
    
Samiksha Capital6,000  
Add: Amit’s Guarantee1,200  
Add: Sumit’s Guarantee8008,0008,000 
 36,000 36,000

Q25. Pinki, Deepti and Kaku are partners sharing profits in the ratio of 5:4:1. Kaku is given a guarantee that his share of profits in any given year would not be less than ₹ 5,000. Deficiency, if any, would be borne by Pinki and Deepti equally. Profits for the year amounted to ₹ 40,000. Record necessary journal entries in the books of the firm showing the distribution of profit.

The solution for this question is as follows:

Profit and Loss Appropriation Account

Dr Cr

ParticularsAmount₹ParticularsAmount₹
Profit transferred to  Profit & Loss40,000
Pinki’s Capital20,000 
Less: Gurantee to Kaku 

{1,000 × (1/2)}
(500)19,500
   
Deepti’s Capital16,000 
Less: Guarantee to Kaku 

{1,000 × (1/2)}
(500)15,500
   
Kaku’s Capital4,000 
Add: Deficiency received from  
Pinki500 
Deepti5005,000
  40,000 40,000

Q26. Abhay, Siddharth and Kusum are partners in a firm, sharing profits in the ratio of 5:3:2. Kusum is guaranteed a minimum amount of ₹ 10,000 as per share in the profits. Any deficiency arising on that account shall be met by Siddharth. Profits for the years ending March 31, 2016 and 2017 are ₹ 40,000 and 60,000 respectively. Prepare Profit and Loss Appropriation Account.

The solution for this question is as follows:

Profit and Loss Appropriation Account as on March 31, 2016

Dr Cr

ParticularsAmountParticularsAmount
Profit transferred to Profit and Loss 40,000
Abhay’s Capital 20,000 
    
Siddharth’s Capital 12,000  
Less: Guarantee to Kusum’s (2,000)10,000 
    
Kusum’s Capital 8,000  
Add: Deficiency received
from Siddharth 2,000
10,000 
  40,000  40,000

Profit and Loss Appropriation Account as on March 31, 2017

Dr Cr

ParticularsAmountParticularsAmount
Profit transferred to Profit and Loss60,000
Abhay’s Capital30,000  
Siddharth’s Capital18,000  
Kusum’s Capital12,000  
    
 60,000 60,000

Q27. Radha, Mary, and Fatima are partners sharing profits in the ratio of 5:4:1. Fatima is given a guarantee that her share of profit, in any year will not be less than ₹ 5,000. The profits for the year ending March 31, 2017 amount to ₹ 35,000. Shortfall if any, in the profits guaranteed to Fatima is to be borne by Radha and Mary in the ratio of 3:2. Record necessary journal entry to show the distribution of profit among partners.

The solution for this question is as follows:

Profit and Loss Appropriation Account

Dr Cr

ParticularsAmountParticularsAmount
Profit transferred to  Profit and Loss35,000
Radha’s Capital 17,500  
Less: Fatima’s Deficiency
{1,500 × (3/5)} (900)
16,600 
    
Mary’s Capital 14,000  
Less: Fatima’s Deficiency
{1,500 × (2/5)} (600)
13,400 
    
Fatima’s Capital 3,500  
Add: Deficiency born by   
Radha 900  
Mary 6005,000 
 35,000 35,000
Journal 
DateParticularsL.F.DebitAmountCreditAmount
     
 Profit and Loss Appropriation A/cDr. 35,000
 To Radha’s Capital A/c   16,600
 To Mary’s Capital A/c   13,400
 To Fatima’s Capital A/c   5,000
 (Profit distributed among Partners)   

Alternative Method

Journal 
DateParticularsL.F.DebitAmountCreditAmount
 Profit and Loss Appropriation A/cDr. 35,000
 To Radha’s Capital A/c   17,500
 To Mary’s Capital A/c   14,000
 To Fatima’s Capital A/c   3,500
 (Profit distributed among Partners)   
     
 Radha’s Capital A/cDr. 900
 Mary’s Capital A/cDr. 600
 To Fatima’s Capital A/c   1,500
 (Deficiency of Fatima’s Share taken from Radha and Mary)    

FAQ:

1. Define Partnership Deed.

A: When the partnership agreement is written and signed By all the partners and is duly stamped according to the Stamp Act, it is called a “Partnership Deed”.

2. Why it is considered desirable to make the partnership agreement in writing.

A: According to the Partnership Act, of 1932, having a Partnership deed in writing is not mandatory. However, it is a safe option to have it in writing as it helps avoid any kind of disputes that may arise between partners of a firm in the future. It also helps resolution of any kind of dispute as a written partnership that is signed by all the partners is suitable for use as evidence in a court of law

3. Give two circumstances under which the fixed capitals of partners may change.

The following circumstances lead to change in the fixed capital of partners
1. Introducing fresh capital in the firm by a partner with consent from other partners.
2. When a portion of capital is withdrawn with the consent of partners.

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