Partnership Fundamentals:Final Accounts

  • Profit and Loss Appropriation account discloses how net profits of an accounting period have been appropriated. It comprises of all adjustments relating to partners like salaries, interest on capital etc.
  • It is different from profit & loss account. P&L shows incomes and expenses for a particular period to arrive at the profit earned or loss incurred.
  • In capital accounts of partners transactions relating to partners are recorded in their respective accounts. It Includes capital, drawings, salaries, interest on capital, etc.
  • Capital accounts can be either fixed or fluctuating.
  • In fixed capital account capital of the partners remains fixed except if additional capital is introduced or capital is withdrawn as per agreement between the partners. Adjustments regarding share of profit/ loss, salaries, interest on capital, interest on drawings etc are done through partners’ current accounts.
  • In fluctuating capital method, the capital of partners keep on changing because all the adjustments are done through partners’ capital accounts only, like share of profit/ loss, salaries, interest on capital, interest on drawings, etc.
  • Drawings means the amount withdrawn in cash or in kind from the partnership firm for personal purpose by partners.
  • Interest on drawings is calculated with reference to the time period for which the money is withdrawn.
  • Interest on capital is credited to a partner on the basis of agreed rate; and with reference to the time period for which the capital remained in the business.
  • Manager's commission is charge against profits and not an appropriation of profits and is shown in profit & loss account.
  • Partner's commission is allowed when partnership deed provides for the same. It is an appropriation of profits and not a charge against profits.
  • Sometimes a partner may lend personal asset to the firm. It is a charge against profit, hence, it is debited to profit & loss a/c. If a partner has given loan to the firm, he is entitled to receive interest on such loan at an agreed rate of interest.

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  • Q1

    X, Y and Z are partners sharing profits and losses in the ratio of 3:2:1. After the preparation of the accounts, it was discovered that interest on drawings @ 5% p.a. had not been taken into consideration. The drawings of the partners were X 15,000, Y 12,600 Z 12,000. Give the necessary adjusting entry.

    Marks:3
    Answer:

    JOURNAL ENTRIES

    Date

    Particulars

    L.F.

    Dr.

    Cr.

    Z’s Capital A/c……Dr.

    135

    To X’s capital A/c

    120

    To Y’s capital A/c

    15

    (Being interest on drawings omitted now adjusted)

    Statement showing adjustment:

    Particulars

    X

    Y

    Z

    TOTAL

    Interest on drawings should be debited

    375

    315

    300

    990

    Amount wrongly debited due to reduction in profits

    495

    330

    165

    990

    120 (Cr.)

    15 (Cr.)

    135 (Dr.)

    View Answer
  • Q2

    A, B and C are partners in a firm sharing profits and losses in the ratio of 5:3:2. Their capitals were 3,00,000, 2,00,000 and 1,00,000 respectively. For the year 2015, interest on capital was credited to them @ 10 per cent per annum instead of 8 per cent per annum. How will the readjustment be done?

    Marks:3
    Answer:

    Particulars

    A

    B

    C

    Wrongly credited—Interest on capital

    (-)30,000

    (-)20,000

    (-)10,000

    Has to be credited—

    1. Interest on capital

    (+)24000

    (+)16,000

    (+)8,000

    2. Share of profit

    (+)6,000

    (+)3,600

    (+)2,400

    Net effect

    Nil

    (-) 400 (Dr)

    (+) 400(Cr)

    Working Notes:

    Interest on capital

    Capital

    10%

    8%

    A

    3,00,000

    30,000

    24,000

    B

    2,00,000

    20,000

    16,000

    C

    1,00,000

    10,000

    8,000

    Total

    60,000

    48,000

    Excess interest amount (60,000-48,000) = 12,000 has to be distributed among partners in their profit sharing ratio.

    A will receive = 12,000 5/10 = 6,000

    B will receive = 12,000 3/10 = 3,600

    C will receive = 12,000 2/10 = 2,400

    View Answer
  • Q3

    Preeti, Mona and Nisha share profits in the ratio of 3 : 2 : 1. The profits of the last three years were 1,40,000; 84,000 and 1,06,000 respectively. These profits were by mistake shared equally for all the three years. It is now decided to correct the error. Give necessary Journal entry for the same.

    Marks:4
    Answer:

    ADJUSTING JOURNAL ENTRY

    Particulars

    L.F.

    Dr. ()

    Cr.()

    Nisha’s Capital A/c………Dr.

    55,000

    To Preeti’s Capital A/c

    55,000

    (Being entries wrongly done now rectified)

    Working Notes:

    Profit of the last three years = 1,40,000 + 84,000 + 1,06,000 = 3,30,000

    Calculation of Excess or Short Profit:

    Particulars

    Preeti

    Mona

    Nisha

    Profit that should have been credited ( 3,30,000 in 3:2:1)

    1,65,000

    1,10,000

    55,000

    Profit Credited 3,30,000 equally

    1,10,000

    1,10,000

    1,10,000

    Difference to be Credited or (Debited)

    55,000

    ---

    (55,000)

    View Answer
  • Q4

    Write down the difference between Fixed and Fluctuating Capital.

    Marks:4
    Answer:

    Basis of distinction

    Fixed capital

    Fluctuating capital

    1.

    No. Of accounts maintained

    Two accounts are maintained: fixed capital account and current account

    Only one account (viz. capital account) is maintained for each partner

    2.

    Frequency of change

    Balance in fixed capital account does not change

    The balance changes frequently from period to period

    3.

    Adjustment for drawings etc.

    All adjustments for drawings interest or drawings, interest on capital, salary, share of profit/loss are made in current account

    All adjustments for drawings, interest on capital, salary, share of profits are made in capital account

    4.

    Balance

    It always shows credit or positive balance in capital account

    Fluctuating capital account may sometimes show a debit or negative balance

    View Answer
  • Q5

    A partner makes a drawing of 1,000 per month. Under the partnership deed, interest is to be charged at 15% per annum. What is the interest that should be charged to the partner if drawing is made:

    (i) In the beginning of the month

    (ii) In the middle of the month

    (iii) At the end of the month

    Marks:3
    Answer:

    (i) When drawing is made in the beginning of the month:

    (ii) When drawing is made in the middle of the month:



    (iii)
    When drawing is made at the end of the month:

    View Answer