accounting for partnership firms

7/23/2019 Accounting for Partnership Firms

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http://anilchauhan1978.blogspot.com/2012/01/reconstitution-of-partnership-firm.html

Accounting For Partnership Firms: Funamentals

!ature of partnership firms:-

Partnership is a relation of mutual trust and faith. Partnership accounts should present a

true and fair picture of the partnership business.

"efinition:-

It is a relationship between persons who have agreed to share the profit of a business.

Carried on by all or any of them acting for all (Sec.4 of Indian Partnership Act, !"#$ .

#haracteristics of partnership

. %here must be at least two persons to form a partnership ma&imum ' persons in

baning business and #' persons in case of other business to form a partnership.

#. Partnership is an agreement between two or more persons.

". Partners must agree to carry on business.

4. %he agreement between the partners must be aimed at sharing the profits of the business.

). *ach partner is an agent as well as partner of the firm.+. *ach partner can participate in the conduct of business.

Partnership "ee:

. It Contains following points

#. %he name and address of the firm-

". ames and addresses of the partners.4. %he type and nature of the business the firm proposes to do.

). Amount of capital /fi&ed or fluctuating0 to be contributed by each partner.+. %he rate of interest is to be allowed on capitals.1. 2ow much amount withdrawn by partners for personal use.

3. %he rate of interest charged on partners drawings.

!. 5ormula of valuation of goodwill in case of retirement or admission of a partner.'. In which ratio profits or losses are to be divided among the partners.

. Salary to any partner for the wor done by him.

#. Accounting period of the firm. 6early or half7yearly and the date on which accounts areto be closed every year.

". Safe custody of the boos of accounts and other documents of the firm.

4. 8hether the firms boos will be audited or not9 If so, the mode of auditors appointment.

). :ate of commencement of the partnership.+. %he period for which the partnership has been established and the mode of dissolution of

partnership.

1. 8hether decision in the case of garner vs. ;urray is to apply in the case of insolvency of a partner.

3. Account in the ban will be opened in firms name or in some partners name9 8ho will

have the right to sign the che<ues 9!. =ules to be followed in case of admission of a partner.



#'. =ules to be followed while settling the accounts on retirement.

#. In case of dispute among the partners. 2ow the dispute will be solved9

$mportance of Partnership "ee

. It regulates the rights, duties and liabilities of each partner.

#. It helps to avoid any misunderstanding amongst the partners.

". Any dispute amongst the partners may be settled easily as the partnership deed may bereadily referred to.

%ules Applicable in the Absence of Partnership "ee

. Profits and >osses are to be shared e<ually irrespective of their capital contribution.

#. o interest in capitals shall be allowed to the partners.

". o interest is to be charged on drawings.

4. Interest at the rate of +? per annum is to be allowed on a partners loan to the firm.). o entitlement of salary to any partners.

+. 8ithout the consent of all e&isting partners, o new partner can be admitted to the firm.

1. *ach partner can participate in the conduct of business.

3. *ach partner can inspect the boos of firm and can tae a copy of the same.

&he 'ournal entries that are passe for (arious items )ho*n in the profit an loss

appropriation account are as follo*s:

1. +ntr, for $nterest on #apital

($ on allowing interest on capital

interest on capital A@c :r %o partners capital a@c @ current a@c.

(interest on capital at 77777? p.a.$

(#$ on closure of interest on capital A@c

profit loss appropriation A@c :r %o interest on capital A@c

2. +ntr, for $nterest on "ra*ings

($ on charging interest on drawings

Partners capitals A@c @current a@c :r %o interest on drawings A@c

(Interest on drawings at77777? p.a.$

(#$ on closure of interest on drawings A@c

Interest on drawings A@c :r



%o profit loss appropriation a@c

. +ntr, for )alar, or #ommission Pa,able to a Partner

($ on allowing salary or commission to a partner

Partners salary @ commission A@c :r

%o partners capital A@c @ current A@c

(#$ on closure of salary or commission account

profit loss appropriation A@c :r %o partners salary @ commission a@c.

. +ntr, for &ransferring a Part of Profit to %eser(e:

Profit loss appropriation A@c :r %o reserve A@c

. +ntr, for transfer of creit balance of profit loss appropriation A/c being profit

Profit loss appropriation A@c :r

%o partners capital or current A@c

3. +ntr, for &ransfer of ebit balance of profit loss appropriation A/c being loss

Partners capital or current a@c :r

%o profit loss appropriation A@c

Profit an 4oss Appropriation Account

"r. #r.

Particulars %s Particulars %s

%o Salary to Partners B

6

%o Commission to Partners B 6

%o Interest on Partners Capital B

6%o =eserve A@c

%o Profit transferred to Partners

Capital or Current A@c B 6

y Profit >oss A@c

y Interest on :rawingss B

6y >oss %ransferred to Partners

Capital or current a@c. B

6



#alculation of $nterest on "ra*ings:

Amount of :rawings B =ate of interest B number of months

'' #

Proforma of Capital Accounts 8hen the capitals are fi&ed

Partner5s #apital A/c.

Particulars A 6 # Particulars A 6 #

%o Cash @

an a@c(permanent

withdrawn of

capital$

%o balance c@d

(closing balance$

y balance b@d

(opening balance $

y case @ banA@c (additional

capital$

Partner5s #urrent Account

Particulars A C Particulars A C

%o alance b@d

/In case of debitopening balance0

%o :rawings

%o Interest on:rawings

%o P> A@c

(Share of loss, incase of loss $

%o alance c@d

y alance @d

(In case of credit opening balance $

y Interest on Capital

y Salaryy Commission

y P> Appropriation

a@c(Share of Profit, in case

of profit$



hen the capitals are fluctuating:

Partner5s #apital Account


%o :rawingss%o Interest on

:rawingss

%o Profit and>oss A@c (In case

of loss, share of

loss $%o alance c@d

y alance @d(opening balance$

y Cash @ an a@c

(Additional capital$y Interest on Capital

y Salary

y Commissiony P>appropriation

(share of profit $

"istinction 6et*een Fie #apital Accounts an Fluctuating #apital Accounts

5i&ed Ca pital Accounts 5luctuating Capitals Accounts. %he balance in capital account usuallyremains unchanged e&cept in

e&traordinary circumstances.

#. Partners have two accounts capital

accounts and current accounts

". All transactions relating to partner

account are not made in capital account

but are entered in separate currentaccount.

4. %his cannot show a negative balance.

. %he alance of Capital accounts changein time to time

#. Partners have only capital account -

". All transactions relating to partner

account are made in their capitalaccounts.

4. %his can show a negative balance

#alculation of anager5s #ommission on !et Profits

($ on profits before charging such commission

Profit (before commission$ B =ate of Commission

''

(#$ on profits after charging such commission

Profit (before commission$ B =ate of Commission

'' D =ate of Commission



$nterest on Partner5s 4oan to the Firm

%ate of $nterest If there is no agreement for the rate of interest, then charge interest on loanE +? per annum.

!ature of $nterest interest against partners loan allowed whether there are profit or not.

Accounting &reatment It is treated as a charge against the profits and hence interest on partners loan is debited to profit loss A@c and not to profit

loss appropriation A@c.

Interest on partners loan is recorded in Finterest accrued account F.

. *ntries for interest on partners loan

($ for providing interest on partners loan

Interest on partners loan a@c :r

%o interest accrued a@c

(#$ for closing the interest on partners loan

P> a@c :r%o interest on partners loan a@c.

"istinction 6et*een #harge Against Profit an Appropriation out of Profit

S.o. Charge Against Profit Appropriation out of Profit

.

#.

".

It indicates e&penses to be deducted from

profits while calculating net profit or loss.

It is debited to profit and loss account

It is necessary to mae charge against

profits even if there is loss.

It indicates distribution of net profit to

various heads.

It is debited to profit and loss

appropriation account.

Appropriations are made only when

there is profit.

;ethods of calculating interest on drawings. Simple method

Interest on drawings G Amount of drawings B =ate of Interest B ;onths '' #

#. Product ;ethod Interest on drawings G %otal of products B =ate of Interest B

'' #



". Average ;ethod

#ase 1: hen "ra*ings is mae in the beginning of e(er, month: $f the ra*ings of

eual amount

Average period G %ime left after first drawings D %ime left after last drawings #

G # ;onths D ;onth G +½ ;onths #

#ase 2: hen "ra*ings are mae at the en of e(er, month:


G ;onths D ' ;onth G )½ ;onths

#

#ase : hen "ra*ings are mae in mile or at an, time uring the month:mile

Average period G %ime left after first drawings D time left after last drawings

#

G .) ;onths D '.) ;onth G + ;onths #

#ase : hen ra*ings of eual amount are mae in the beginning of each uarter:

Average period G %ime left after first drawings D %ime left after last drawings

# G # ;onth D " month G 1H ;onths

#

#ase hen ra*ings of eual amount are mae at the en of each uarter:


#

G ! ;onths D ' ;onth G4H ;onths

#

#ase 3: hen ra*ings of eual amount are mae uring the mile of each uarter:


G '.) ;onths D .) ;onths G + ;onths

#

#ase 7: hen ra*ings of eual amount are mae onl, uring a perio of 3 onths:

(i$ In the beginning of each month

Average period G + ;onths D ;onth G "H ;onths #



(ii$ At the end of each month

Average period G ) ;onths D ' ;onth G #H ;onths #

(iii$ In the middle of each month

Average period G )H ;onths D H ;onth G " ;onths

#

#ase 8: hen ra*ings of eual amount are mae uring 9 months.

(i$ $n the beginning of each month


G ! ;onths D ;onth G ) ;onths

#

(ii$ At the en of each month


G 3 ;onths D ' ;onth G 4 ;onths

#(iii$ $n the mile of each month


# G 3.) ;onths D '.) ;onth G 4.) ;onths

#

#ase 9: hen the rate of interest is gi(en *ithout the *or ;per annum5 interest *ill

be charge *ithout consiering time or ate of ra*ings.

1. $nterest on "ra*ings is charge < 10= per anum

Amount on :rawings B =ate of Interest B +

'' #

#. $nterest on "ra*ings is charge < 10=

Amount on :rawings B =ate of Interest

''

A'ustment in the #lose Accounts:

Accounts have been closed after the financial year, it is discovered that there have been some

errors or omission in the old accounts. In such cases instead of altering the old accounts, and the

signed balance sheet an adustment entry for such error or omission is made at the beginning of

the ne&t year. 5ollowing adustments are made



. 8hen Interest on Capitals or :rawings may have been omitted.

#. 8hen profits and losses have been distributed among the partner in a wrong proportion.

". 8hen profit sharing ratio has been altered with effect from some past date.

4. 8hen salary or commission payable to a partner has been omitted.

>uarantee of Profit to a Partner :

Sometimes a partner is guaranteed that he shall get a certain minimum amount of profits of the

firm. Such a guarantee may be given either (i$ any one of the partners or (ii$ by all other partners

in a particular ratio. 8hen the profits of the firm are not ade<uate then the Je&cess paid to the

guaranteed partner should be charged to the partner who has given the guarantee.



A"$))$?! ?F A PA%&!+%

%econstitution of a Partnership Firm

Admission of a Partner

A ne* partner is neee into the business ue to the follo*ing reasons:-

. 8hen more capital is needed for the e&pansion of the business.

#. 8hen a competent and e&perienced person is needed for the efficient running of the business.

". %o increase the goodwill and reputation of the business by taing a reputed and renowned

person into the partnership.4. %o encourage a capable employee by taing him into the partnership.

Follo*ing A'ustments are neee at the time of the amission of a ne* partner :-

. Calculation of new profit sharing ratio.

#. Accounting treatment of goodwill.". Accounting treatment for revaluation of Assets and >iabilities.

4. Accounting treatment of reserves and accumulated profits.). Adustment of capitals on the basis of new profit sharing ratio.

#alculation of !e* Profit )haring %atio:

. 8hen only the ratio of new partner is given in the <uestion, then in the absence of any

instructions. It is presumed that the old partner will continue to share the remaining profits in the

same ratio in which they were sharing before the admission of a new partner.

#. %he new partner FpurchasesK his share of profit from the old partners e<ually. In such

cases the new profit sharing ratios of the old partners will be as certained by deducting the

sacrifice made by them from their e&isting share of profits.

!e* Profit %atio @ ?l %atio - )acrifice

". %he new partner FpurchasesK his share of profit from the old partners in particular ratio. In

such cases the new profit sharing ratio of the old partners will be calculated after deducting the

sacrifice made by a partner from his e&isting share of profit.

!e* Profit %atio @ ?l %atio - )acrifice

http://anilchauhan1978.blogspot.com/2012/01/admission-of-partner.html

http://anilchauhan1978.blogspot.com/2012/01/admission-of-partner.html



4. 8hen the old partners surrender a particular fraction of their share in favour of the new

Partner then

Surrendering Share G Surrendered Share X Lld =atio. ew =atio G Lld =atio 7 Surrendering Share.

Sacrifice =atio G Lld =atio 7 ew =atio.

Accounting &reatment of >oo*ill on the Amission of a Partner:

1. hen the amount of goo*ill premium is pai pri(atel,.

7 o *ntry

2. hen the ne* partner brings his share of goo*ill premium in cash:

a.$ 8hen the amount of goodwill@ premium brought in by the new partner is retained

in the business7

i.$ Cash@ an A@c :r.

%o goodwill A@c

ii.$ Moodwill A@c :r (in sacrifice ratio$

%o Lld partners capital A@c

b.$ 8hen goodwill@premium brought in by the new partner is withdrawn by the old

partners7 i.$ Lld Partners capital A@c :r.

%o Cash @ an A@c

8hen goodwill already appears in the boos and new partners brings his share of goodwill@premium in cash7

5irst of all the e&isting goodwill account will have to be written off. 5or this purpose old partners capital accounts are debited in old ratio and goodwill account is credited.

Lld partners capital A@c :r.%o goodwill A@c (in old ratio$

=emaining entries remains same for bring goodwill in cash.

hen the ne* partner oes not bring his share of goo*ill/premium in cash:-

ew partners current A@c :r. (from his share of goodwill$

%o old partners capital A@c (in sacrifice ratio$



hen goo*ill alrea, appears in the booBs an ne* partner oes not bring his share of

goo*ill/premium in cash:-

i.$ Lld partners capital A@c :r.

%o goodwill A@c (in old ratio$

ii.$ ew partners current A@c :r.

%o old partners capital A@c (in sacrifice ratio $

hen ne* partner brings in onl, a part of his share of goo*ill:-

i.$ Cash@ban A@c :r.

%o goodwill A@c

ii.$ Moodwill A@c :r.

ew partners current A@c :r.

%o Lld partners capital A@c (in sacrifice ratio$

%e(aluation of assets liabilities :-

=evaluation account 7

Account which is prepared to record changes in the value of assets liabilities at time of

admission, retirement, death and change in profit ratio of e&isting partners. Proforma of

=evaluation Account is given below 7

=evaluation Account

Particulars Amoun

t

Particulars Amount

%o :ecrease in value of assets

%o Increase in value of liabilities

%o Nnrecorded liabilities%o Profit on revaluation

transferred to partners capital

accounts (in old ratio$

y Increase in value of assets

y :ecrease in value of liabilities

y unrecorded assetsy loss on revaluation

transferred to partners capital

accounts (in old ratio$



Partners Capital Account


%o drawings

%o interest ondrawings

%o profit loss (Shareof loss$%o revaluation A@c

(share of loss$

%o balance c@d

y balance b@d

y cash@ban A@cy interest on capital

y salaryy commissiony P> appropriation

A@c (share of profit$

y revaluation A@c

(share of profit$

i. For ecrease in the (alue of assets increase in the (alue of Assets / unrecore Assets:-

. =evaluation A@c :r.

%o assets A@c (decrease $

#. Assets A@c :r.

%o revaluation A@c (increase$

". Nnrecorded assets A@c :r.

%o revaluation A@c

ii. For increase / ecrease of liabilities or unrecore liabilities :-

. =evaluation A@c. :r. %o liabilities A@c (increase $

#. >iabilities A@c :r. %o =evaluation A@c (decrease$

". =evaluation A@c :r

%o unrecorded liabilities A@c

iii. %e(aluation A/c sho*s profit or loss :-

. =evaluation A@c. :r. (in profit$

%o Lld partners capital A@c (in old ratio$

#. Lld partners capital A@c. :r. (in loss$

%o revaluation A@c (in old ratio$



Accounting treatment of reser(es an accumulate profits or losses:-

i.$ 5or distributing reserves and accumulated profits among old partners in old ratio 7 Meneral reserve A@c :r.

=eserve A@c :r.

P> A@c Ocr. alance :r. %o old partners capital a@c @ current a@c.

ii.$ 5or distributing accumulated losses among old partners in old ratio7 Lld partners capital A@c :r.

%o P> A@c O :r. balance

iii.$ 5or distributing surplus of specific funds7 8ormens compensation fund A@c :r.

Investment fluctuation fund A@c :r.

%o Lld Partners Capital a@c. @ Current a@c.

A'ustment of ol partner5s capital accounts on the basis of ne* partner5s capital:-

i.$ If the e&isting capital of any partner is less then his newly calculated capital7

an A@c @ Partners Current a@c. :r.

%o Lld Partners Capital A@c.

ii$ If the e&isting capital of any partner is more than his newly calculated capital

Lld Partners Capital A@c. :r.

%o an A@c. @ Partners Current A@c.

accounting for partnership firms

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