Partnership Fundamentals

1. Partnership –I
(Fundamentals)



Meaning of Partnership and its features
Partnership Deed and its contents
Rules applicable in the absence of Partnership
deed…
Profit is to divided equally.
 No interest on capital, drawings
 No salary, or commission.
 Interest on loan of a partner @ 6 %


2. Profit and Loss appropriation
Account
This account is prepared to show
distribution of profit as per the
terms of partnership deed.

3. It is prepared based on the basis of
following items:Credit side


Net profit b/d
Interest on Drawings
Debit Side




Interest on Capital
Salary to partner
Commission to partner
The remaining profit is to be divided in the profit
ratio…

4. Profit and Loss Appropriation
Account
To Interest on Capital
A
….
B ….
To Salary to partner
To Commission to Partner (name)
To General Reserve/ Reserve Fund
(transfer of profit to any fund or
reserve)
To Profit transferred to
capitals/current accounts
A
B
-----
By Net Profit b/d …..
*Less Interest on loan of
Partner
……
By Interest on drawings
A
….
B
….

5. Notes:
1.
Treatment of Interest on loan
Interest on loan of a partner is a
business expense, and should be
subtracted from Net Profit
2.
If Profit given in the question is
after salary, it may be added to N.P.
before solving the question, so that
Salary is shown as an appropriation on
the debit side.

6. 3.Commission of Manager is also a
business expense.
Therefore it should be
subtracted from the Net Profit.
a) Commission on Net Profit before
charging such commission :N.P. × Rate/100
b) Commission on Net Profit after Charging such
commission:-
N.P. × Rate/100 +Rate

7. CAPITAL ACCOUNTS

The capital accounts of the partners can be
maintained in any of the following two ways:1) Fixed Capital Accounts
2) Fluctuating Capitals

8. Fluctuating Capital Account
To Cash (capital Withdrawn) …
To Drawings
…
To Interest on Drawings ..
To balance c/d
?__
By balance b/d
By cash (additional capital) …
By interest on capital …
By Salary/commission …
By P & L App. A/c
( profit)
…_

9. Fixed Capitals

No change is made in the capitals except with
-additional capital or
- capital withdrawn

Current accounts are prepared for to reflect
adjustments for interest on capital, drawings,
interest on drawings, salary or commission and
profit share.

10. Capital accounts
To Cash ( capital
withdrawn if any)
T balance c/d
..
?
By balance b/d (Opening
balance)
...
By Cash (additional capital
if any)
...

11. CURRENT ACCOUNTS
To balance b/d
( Dr. balance )
To drawings
To Interest on Drawings
To Balance c/d
…
…
...
?
By balance b/d
…
( Cr. Balance)
By Interest on Capital
…
By Salary
…
By Commission
…
By Profit & Loss Appropriation
A/c
(profit )
…
By Balance c/d
?

12. Calculation of interest on Drawings

Case 1: When total amount of drawings are given (i.e. the date of
drawings is not given),
e.g. Drawings of A= Rs.7000 and of B= Rs. 6000, interest on
drawings being 5% p.a.
In such a case, interest should be calculated on an average for
6 months.
i.e. interest on drawings
of A =
7,000 × 5 × 6 = Rs. 175
100 12
of B = 6,000 × 5 × 6 = Rs. 150
100
12

13. 

Case 2. Suppose in the above illustration rate
is given i.e. interest on drawings (Av.) is 5%
(not 5% p.a.), then interest should be calculated
for full year
Interest on drawings of A =
7,000 x 5
100

= Rs. 350
Interest on drawings of B =
6,000 x 5
100
= Rs. 300

14. Case 3 . When dates of drawings are given , we can
calculate interest with help of a) Table method ( i.e.
according to time) or b) by using product method.
Example: Drawings of A during the year were as
under : calculate interest on drawings @6% p.a.
31st March Rs.2,000
30th June
Rs. 1,000
31st August Rs. 500
Calculate Interest on Drawing for the year ending 31st
Dec.


15. a) Calculation according to time

Interest on Drawings:
On 2,000 × 6 × 9
= 90
100 12
On 1,000 × 6 × 6 = 30
100 12
On 500 x 6 x 4
= 10
100
12 _____
Total
Rs130

16. b) In case we use product method
Date
Amount
31st March
2,000
9
18,000
30th June
1,000
6
6,000
500
4
2,000
31st August
Period
(months)
Product
26,000

17. 
Interest = Product × Rate × _1__
100
12
26,000 × 6 × _1__
100
12
= Rs. 130

18. In case partners withdraw equal amount each
month and throughout the year

--- If a partner withdraws at the beginning of
each month, interest should be charged on an
average for 6 ½ months i.e. 6.5 months. { Being
Average of (12 + 1) ÷ 2 }
Example:- Calculate interest on Drawing at the rate of 8%p.a if
A withdraws Rs.2,000 at the beginning of each month
Interest = 24,000 × 8 × 6.5 = = Rs.1,040
100
12

19. 
--- If a partner withdraws at the end of each
month, interest should be charged on an average
for 5 ½ months i.e. 5.5 months.
Example:- Calculate interest on Drawing at the rate of 8%p.a if
A withdraws Rs.1,500 at the end of each month
Interest = 18,000 × 8 × 5.5
100
12
= Rs.660

20. 
--- If a partner withdraws at the middle of each
month, interest should be charged on an average
for 6 months.
Example:- Calculate interest on Drawing at the rate of 8%p.a if
A withdraws Rs.2,500 at the middle of each month
Interest = 30,000 × 8 × 6__
100
12
= Rs.1,200

21. Practice these :



If a partner withdraws twice a year, one on 30th
June and the other on 31st Dec.
If a partner withdraws some amount at the end
of each quarter.
If he withdraws at the beginning of each quarter.
If accounts are to be made for six months.