CHAPTER 8 – PARTNERSHIP ACCOUNTS – UNIT 1 – INTRODUCTION TO PARTNERSHIP ACCOUNTS P a g e 8.1 | 8.5 Chapter 8 – Partnership Accounts Unit 1 – Introduction to Partnership Accounts Meaning When two or more persons do business together, it is known as partnership. Features 1. Existence of Agreement 2. Business 3. Sharing of Profit 4. Mutual Agency Number of Partners in a Firm 1. Minimum = 2 2. Maximum = 50 Partnership Deed Meaning Written document containing all the terms and conditions of Partnership. Rules in the Absence of Partnership Deed Issues Provision 1. Salary/Commission to Partners No 2. Interest on Capital No 3. Interest on Drawings No 4. Interest on Partner’s Loan 6% 5. Profit Sharing Ratio Equal Accounts of Partnership Firm Charge Against Profit vs. Appropriation of Profit S. No. Charge Against Profit Appropriation of Profit 1. Deducted from Revenue Distribution of Net Profit to Partners under appropriate heads 2. Debited to the Profit & Loss A/c Debited to the Profit & Loss Appropriation A/c Note – Rent Paid to Partner, and Interest on Partner’s Loan are charges against profit. Profit & Loss Appropriation A/c Profit and Loss Appropriation A/c
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CHAPTER 8 – PARTNERSHIP ACCOUNTS – UNIT 1 – INTRODUCTION TO PARTNERSHIP ACCOUNTS
P a g e 8.1 | 8.5
Chapter 8 – Partnership Accounts
Unit 1 – Introduction to Partnership Accounts
Meaning When two or more persons do business together, it is known as partnership.
Features 1. Existence of Agreement
2. Business
3. Sharing of Profit
4. Mutual Agency
Number of Partners in a Firm 1. Minimum = 2
2. Maximum = 50
Partnership Deed
Meaning Written document containing all the terms and conditions of Partnership.
Rules in the Absence of Partnership Deed Issues Provision
1. Salary/Commission to Partners No 2. Interest on Capital No 3. Interest on Drawings No 4. Interest on Partner’s Loan 6% 5. Profit Sharing Ratio Equal
Accounts of Partnership Firm
Charge Against Profit vs. Appropriation of Profit S.
No. Charge Against Profit Appropriation of Profit
1. Deducted from Revenue Distribution of Net Profit to Partners under appropriate heads
2. Debited to the Profit & Loss A/c Debited to the Profit & Loss Appropriation A/c
Note – Rent Paid to Partner, and Interest on Partner’s Loan are charges against profit.
Profit & Loss Appropriation A/c
Profit and Loss Appropriation A/c
CHAPTER 8 – PARTNERSHIP ACCOUNTS – UNIT 1 – INTRODUCTION TO PARTNERSHIP ACCOUNTS
P a g e 8.2 | 8.5
Dr. for the year ended… Cr.
Particulars ₹ Particulars ₹
To Interest on Capitals: By Profit & Loss A/c (Net Profit) ……..
To A's Capital A/c …….. By Interest on Drawings:
To B's Capital A/c …….. …….. By A's Capital A/c …….. To Partners' Salaries A/c …….. By B's Capital A/c …….. ……..
To Partners' Commissions A/c …….. To Reserve A/c ……..
To Profit transferred to:
To A's Capital A/c ……..
To B's Capital A/c …….. ……..
…….. ……..
Partners’ Capital Accounts
Interest on Capital Interest on Partner’s Capital A/c …Dr. To Partner’s Capital/Current A/c
Profit & Loss Appropriation A/c …Dr. To Interest on Partner’s Capital A/c
CHAPTER 8 – PARTNERSHIP ACCOUNTS – UNIT 1 – INTRODUCTION TO PARTNERSHIP ACCOUNTS
P a g e 8.3 | 8.5
OR
Profit & Loss Appropriation A/c …Dr. To Partner’s Capital/Current A/c
Note: If the Capital Accounts are maintained following the Fixed Capital Method, then interest is
allowed only on the balance of the Capital A/c and not on the balance of the Current A/c.
Interest on Drawings
Accounting Treatment Partner’s Capital/Current A/c …Dr. To Interest on Partner’s Drawings A/c
Interest on Partner’s Drawings A/c …Dr. To Profit & Loss Appropriation A/c
OR Partner’s Capital/Current A/c …Dr. To Profit & Loss Appropriation A/c
Calculation of Interest on Drawings
Irregular Drawings No particular method. Calculate normally.
Average Period in Various Cases of Regular Drawings
Case Average Period
1. Beginning of Every Month 6.5 2. Middle of Every Month 6 3. End of Every Month 5.5 4. Beginning of Every Quarter 7.5 5. Middle of Every Quarter 6 6. End of Every Quarter 4.5
Note: In case the date of drawings is not given in the question, assume that it was withdrawn evenly
throughout the year, and calculate the interest on drawings for an average period of 6 months.
Past Adjustments The errors or omissions occurred in the past are accounted for by passing one Journal Entry.
CHAPTER 8 – PARTNERSHIP ACCOUNTS – UNIT 1 – INTRODUCTION TO PARTNERSHIP ACCOUNTS
Guarantee to a Partner of Minimum Profit Incoming Partner is given a guarantee that his share of profit will not be less than a certain
amount.
If his share falls short of the guaranteed amount, the remaining partners bear the deficiency in
the agreed ratio.
In the absence of agreement, the deficiency is borne in the profit sharing ratio.
Profit & Loss Appropriation A/c
Particulars ₹ Particulars ₹
To Profit transferred to: By Profit & Loss A/c (Net Profit) xxx To A's Capital A/c xxx To Less: Deficiency borne xxx xxx To B's Capital A/c xxx To Less: Deficiency borne xxx xxx To C's Capital A/c xxx To Add: Deficiency met by A xxx
CHAPTER 8 – PARTNERSHIP ACCOUNTS – UNIT 1 – INTRODUCTION TO PARTNERSHIP ACCOUNTS