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Accounting for partnership part 1

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its my first !
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it is according to class 12 syllabus ! hopefully it will weak students like me ! it contains all fundamentals of partnership firm.
it also usefull in xam times as revision notes!
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class 12 / completeguide

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Accounting for partnership part 1

  1. 1. CH : 1 ACCOUNTING FOR PARTNERSHIP FIRM – FUNDAMENTALS
  2. 2. Meaning of Partnership • A partnership firm is an association of two or more persons to carry on a legal business and share its profits or losses. The persons who join hands together to do a business are individually known as partners and collectively a firm.
  3. 3. . • According to Sec 4 of the Indian Partnership Act, 1932, "the term partnership is the relation between two or more persons who have agreed to share the profit of the business carried on by all or any of them acting for all
  4. 4. Essential elements of Partnership •1. At least two persons: There must be at least two persons to form a partnership and all such persons must be competent to contract. •2. Agreement: There must be an agreement to form a partnership. This agreement can be oral or written. •3. Legal Business: An agreement should be for the purpose of carrying on the business or profession. The business to be carried on by the partners should be legal.
  5. 5. . • •4. Profit Sharing: The agreement between the partners must be to share the profits or losses of the business in the particular ratio. • •5 Mutual agency: There should be a mutual agency relationship among the partners. 'Mutual Agency' relationship means that each partner is both an agent and the principal. Each partner is an in the sense that he can bind the other partners by his acts done. 6. Number of partners: The minimum limit of the partners in a firm is two and maximum number of partners in a banking firm should be 10 and in the other firm should be 20.
  6. 6. Meaning of Partnership Deed • As stated above a partnership is formed by an agreement. This agreement can be oral or written. Though the law does not expressly require that there should be an agreement in writing but the absence of written agreement may be the source of problem in managing the affairs of the partnership firm.
  7. 7. Contents of Partnership deed • 1.Nameof the firm. • 2.Nameand addressesof allthepartners. • 3.Natureandplace ofthebusiness. • 4.Durationof partnership. • 5.Dateof commencementof partnership. • 6.Amountofcapitalcontributedby each partners. • 7.Ratioin which profitsandlosses are tobe shared.
  8. 8. • 8.Intereston partner's capitalanddrawings. • 9.Intereston loan by thepartner to thefirm. • 10.Salary, Commission,etc.if any payableto a partner. • 11.Methodof computationandtreatmentof Goodwillon the reconstitutionofthe firm. • 12.Mode ofsettlementofaccounts in case ofretirement/deathof a partner. • 13.Mode ofsettlementofaccounts in case ofdissolution ofthe firm.
  9. 9. Rules in the absence of the Partnership Deed • (i) The partners will share the profits and losses in the equal ratio. • (ii) Interest on loan will be given @ 6% p.a. to the partners. • (iii) No interest is allowed to partners on the capital invested by them.
  10. 10. .• (iv) No partner .is toget any remuneration such as salary, commission etc for participating in the business. • (v) No interest will be charged on drawings made by the partners.
  11. 11. Meaning of Profit and Loss Appropriation Account: • Profit andLoss AppropriationAccountis an extension ofProfit and Loss Accountthat is prepared to distribute the net profit amongthe partners. Alladjustments relating to partners like interest oncapital, interest ondrawings, commissionto partners etc. are made inthis Account.
  12. 12. Purpose of Profit & Loss Appropriation Account: • Themainpurpose of preparing Profit& Loss Appropriation Account of a Partnershipconcern is to calculate and distribute thedivisible Profit & Loss. The Income Tax Act and the audit rule does notpermit thepartnership firm to consider the amountas business expenditurewhich is payable to the partners
  13. 13. AccountingTreatment Items Accounting Entries Capital contributed in cash Dr. Cash Cr. Partners’ Capital Accounts Share of profits Dr. Profit and Loss Appropriation Cr. Partners’ Current Accounts Share of losses Dr. Partners’ Current Accounts Cr. Profit and Loss Appropriation Interest on capital Dr. Profit and Loss Appropriation Cr. Partners’ Current Accounts Partners’ salaries Dr. Profit and Loss Appropriation Cr. Partners’ Current Account
  14. 14. Items Accounting entries Interest on partners’ loan Dr Profit and loss appropriation Cr Partners’ current Partners’ drawings Dr Partners’ current Cr Partners Drawings Interest on drawings Dr Partners’ current Cr Profit and loss appropriation
  15. 15. Methods ofMaintaining Capital Accounts of the Partners •The partner's Capital Accounts are maintained according to Fluctuating Capital Method or Fixed Capital Method.
  16. 16. Fluctuating Capital Method • Under fluctuating capital method, only one account viz. capital account for each partner is maintained and all the transactions relating to a partner are recorded in his capital account. As a result, the balance in the Capital Account keeps on fluctuating.
  17. 17. PARTNER’S CAPITAL A/C Particular Rs. Particular Rs. To balance b / f To cash/bank A/c ( withdrawl ] To drawings To interest on drawings To Profit & Loss A/c (share of loss) To balance c/f **** **** **** **** **** **** By balance b/f By cash/bank (additional capital) By interest on capital By salary By Commission By P&L Appropriation A/c (share of profits) By balance c/f **** **** **** **** **** **** **** **** **** Dr. Partner's Capital Account Cr.
  18. 18. Fixed Capital Account: • Under FixedCapitalmethod, two accountsviz. capital accountand current accountfor each partner are maintained.The transactions relatingto introduction or withdrawalof capital arerecorded in Capital Account and other transactionslikeinterest oncapital, salary,interest ondrawings, drawings are recorded in Current Account.
  19. 19. , Particular Rs. Particular Rs. To cash/bank A/c (withdrawal) To balance c/f **** **** By balance b / f By cash/bank (additional capital) By balance c/f **** **** **** **** **** Dr. Partner's Capital Account Cr.
  20. 20. . Particular Rs. Particular Rs. To balance b/f To drawings To interest on drawings To Profit & Loss A/c (share of loss) To balance c/f **** **** **** **** **** By balance b/f By interest on capital By salary By Commission By P&L Appropriation A/c (share of profits) By balance c/f **** **** **** **** **** **** **** **** Dr. Partner's Current Account Cr.
  21. 21. , Basis Fixed Capital Method Fluctuating Capital Method Change in Capital The capital remains unchanged except in some special circumstances The capital fluctuates quite frequently from period to period No of accounts Two accounts are maintained viz: capital account and current account One account is prepared i.e. capital account. Adjustments of drawings etc. All adjustments of drawings, salary etc are done in capital account All adjustments of drawings, salary etc are done in current account Negative Balance Fixed Capital Account can never show a negative balance. Fluctuating Capital Account can show a negative balance. Distinction betweenFixed Capital Methodand Fluctuating Capital Method
  22. 22. Basis Capital Account Current Account Need Capital Account is opened in the case fluctuating capital method and fixed capital method Current account is prepared only in case of fixed capital method. Nature of accountCapital account in fixed capital method remains fixed from year to year. Current account fluctuates from year to year. Accounting treatment Amount invested by the partner is to be recorded. Transactions such as drawings, salary, and interest on capital are recorded. Balance of account Capital account in fixed method show only credit balance. Current account can show a credit or debit balance Following are some of the differences between Capital Account and Current Account DIFF. B/W CAPITAL AND CURRENT A/C
  23. 23. Basis Drawings against capital Drawings against profits Debited It is debited in capital account It is debited in drawings account Part It is a part of capital It is a part of expected profits Interest It is considered in calculation of interest on capital It is not considered in calculating the interest on capital Effect It reduces capital It does not reduce capital.
  24. 24. . Basis Capital Account Current Account Need Capital Account is opened in the case fluctuating capital method and fixed capital method Current account is prepared only in case of fixed capital method. Nature of account Capital account in fixed capital method remains fixed from year to year. Current account fluctuates from year to year. Accounting treatment Amount invested by the partner is to be recorded. Transactions such as drawings, salary, and interest on capital are recorded. Balance of account Capital account in fixed method show only credit balance. Current account can show a credit or debit balance
  25. 25. Calculation ofInterest ondrawings: • The drawings are usually made by the partners at regular intervals. Thus, the interest on drawings is calculated with reference to the time period involved. It can be worked out by any one of the following methods:
  26. 26. 1. When dates of drawings are not given • (i) Averageperiodmethod:Ifthe datesofdrawings arenot given, theintereston drawings iscalculatedon theaverage basis on thetotalamountof drawings madeduring theaccounting periodfor halfof theaccounting period.Itis basedon the assumptionthatthe amountsweredrawn evenly through out the accounting year. Formula: • Interest on drawings= Total drawings× Rate/100× 6/12
  27. 27. .(ii) Averagerateofinterestmethodorwhendrawingsare madeirrespective ofthetimeperiod:Sometimestheaverage rate of interestis given in thequestion, in such a case; it is assumed thatthe rate of interest is already halfon thebasis of 6 months.Thus, timewill notbe considered. • Formula: Interest on drawings = Total drawings × Average Rate/100 •
  28. 28. When dates of drawings are given: • (i) Product Method: When different amounts are withdrawn at different intervals, the interest will be calculated with the help of product method. In this each amount of drawings is multiplied with number of days/months (from the date of drawings to the date of final accounts) to find out the product and then products are totaled. Interest is calculated on total product at the rate of interest for one month or one day. • Formula: Interest on drawings = Total of Product × Rate/100 × 1/365 or 1/12
  29. 29. . • (ii) Monthly/quarterlydrawingsmethod:If uniformamount is withdrawn at each time and the interval between two withdrawals also is uniform.In such a case interest ondrawings is calculated with monthlydrawings method. Time periodinthis methodis calculated as follows:
  30. 30. In that case there will be following cases: • Whendrawingsarefor12monthsperiod At the beginningof each month= Total drawings × Rate/100 × 6.5/12 At the endof every month= Total drawings × Rate/100 × 5.5/12 At the middleof every month= Total drawings × Rate/100× 6/12
  31. 31. When drawings are for 6 months period • o At the beginning of each month = Totaldrawings× Rate/100 × 3.5/12 • o At the end of every month = Totaldrawings× Rate/100 × 2.5/12 • o At the middle of every month = Totaldrawings× Rate/100 × 3/12
  32. 32. When drawings are made quarterly during the period • o Atthe beginningof eachquarter =Total drawings×Rate/100×7.5/12 • o Atthe end ofeveryquarter= Total drawings×Rate/100×4.5/12
  33. 33. Interest on Partner's Capital: • Intereston capital is to be allowed to thepartners if thesame is provided in the partnership deed and is allowed at thegiven rate with reference to timeperiod for which thecapital has been used in thebusiness. • Formula:Interestoncapital=AmountofCapital× Rate/100×Time
  34. 34. Case Provision 1. If the partnership agreement is silent for interest on capital. No interest on capital will be allowed. 2. If the partnership agreement provides for interest on capital but is silent as to treatment of interest as a charge or appropriation. Interest on capital will be allowed only if there are profits (a) In case of loss - No interest on capital will be allowed (b) Profit > Interest - Full interest on capital (c) Profit < Interest -Profit will be given capital ratio 3. If the partnership agreement provide for interest on capital as a charge. Full interest on capital will be provided whether there is profit or loss.
  35. 35. Salary or Commission to a Partner • Salary or Commission to a partner is to be allowed if the partnership agreement provides for thesame.Theseare allowed only if there are profits.
  36. 36. . • Calculation-Commissionmaybeallowedas a percentageofNet Profitsbefore charging such commissionsor aftercharging such commissions. • 1. Commissionas % of NetProfitbeforechargingsuch Commissions =Netprofitbeforecommissionx Rateof commission/100 • 2. Commissionas % of NetProfitafterchargingsuch Commissions =Netprofit beforecommissionx Rateofcommission/100 +Rateof Commission
  37. 37. Accounting Treatment Salary or Commission to a partner being an appropriation out of profits shall be transferred to the debit of P& L Appropriation A/c and credit of the Partner's Capital A/c.
  38. 38. Interest on Partner's Loan to a Firm • Rate of Interest- In case any partner has given loan to the firm; he is entitled to interest on such loan at an agreed rate of interest. If there is no agreement as to the rate of interest on loan, the partner is entitled to rate of interest on loan @ 6% per annum. • Interest on loan is debited to P& L A/c and is credited to the Partner's Loan A/c.
  39. 39. Guarantee of minimumprofit to a partner • Sometimes a partner may be guaranteed a minimum amount of his share in Profit. Such a partner to whom such guarantee has been provided is called guaranteed partner and the partner who had given such guarantee is called guaranteeing partner. Such minimum amount is called guaranteed amount.
  40. 40. STEPS: • Step 1: Calculate the Actual share of Profit/Loss of Guaranteed Partner for the given accounting period. • Step 2: Calculate the amount of deficiency as follows: Deficiency = Guaranteed amount - Actual share of profits • Step 3: Distribute the amount of deficiency among the guaranteeing partners in their guaranteed ratio.
  41. 41. .• Step 4: Distribute the actual profit/loss among all the partners in their profit sharing ratio as if there is no guarantee arrangement. • Step 5: Recover share of deficiency (as per step 3) from the guaranteeing partners and give credit for the same to the guaranteed partner.
  42. 42. • THANK YOU • ANKUSH • CONTACT FOR MORE ON INSTAGRAM • @AN_KUSH_AK47 • FACEBOOK • @VENUANKUSH

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