Fundamental of Partnership ( Practical )

SPECIMEN OF PROFIT AND LOSS APPROPRIATION ACCOUNT

Profit and Loss Appropriation Account For the year ending on _______________

Partner’s Capital Accounts

Partner’s Capital Accounts : It is an account which represents the partners interest in the

business.

In case of partnership business, a separate capital account is mainted for each partner. The

capital accounts of partners may be maintained by any of the following two methods.

1. Fixed Capital Accounts

2. Fluctuating Capital Accounts

1. Fixed Capital Accounts

Under this method the original capitals invested by the partners remain constant, unless

additional capital is introduced by an agreement. All entries relating to drawings, interest on

capitals, interest on drawings, salary to partner, share of profits/losses are made in separate

account whihc is called as Current Account. Thus the following two accounts are maintained

when capitals are fixed.

(i) Capital Account

This account will always show a credit balance: Balance of Capital account remains fixed,

it does not change every year that is why it is called fixed capital method and only the

following two transactions are recorded in the Fixed Capital Accounts:

Permanent·Additional Capital Introduced

·Permanent Capital Withdrawn or Drawings out of Capital only

Partner’s Capital A/Cs

(ii) Current Account

The Current account may show a debit or credit balance. All the usual adjustments such as

interest on Capital, partner’s salary/commission, drawings (out of profits), interest on

drawings and share in profits or losses etc. are recorded in this account.All the Current

Year's adjustments are recorded in this account, that is why it is called Current account.

Partner’s Current A/Cs

Note :

1. Debit balance of Current Account is shown in Assets side of Balance Sheet.

2. Credits balance of Current Account A/c is shown in Liabilities side of balance Sheet.

3. Balance of Fixed Capital Accounts are always shown in Liabilities side of Balance Sheet as

it will be always be credit balance.

2. Fluctuating Capital Accounts

In this method only one account i.e., Capital Account of each and every partner is prepared

and all the adjustment such as interest on capital interest on drawings etc, are recorded in

this account under this method, Capital account may show a debit or credit balance and the

balance of this account changes frequently from time to time therefore it is called fluctuating

Capital Account.In this method the capitals are not fixed. In the absence of information,

the Capital Accounts should be prepared by this method.

Partner’s Capital

Interest On Capital

Interest on partners capital will be allowed only when it has been specifically mentioned in

the partnership deed. If interest on capital is to be allowed as per the agreement, it should be

calculated with respect to the time, rate of interest and the amount of capital. Interest on

Capital can be treated as either:

a. An Appropriation of profit; or

b. A charge against profit.

A. Interest on Capital: An Appropriation of Profits:

B. Interest on Capital: As a Charge against Profits:

Interest on Capital is always allowed in full irrespective of amount of profits of losses.

Note:

Interest on Capital is always calculated on the OPENING CAPITAL.

 Opening Capital is not given in the question, it should be ascertained as follows:

Interest On Drawing

Interest on drawing is charged by the firm only when it is clearly mentioned in Partnership

Deed. It is calculated with reference to the time period for which the money was withdrawn.

There are two cases in which calulation of interest on drawings may arise:

Case 1: When Rate of Interest on Drawings is given in %

Interest on Drawings is calculated on flat rate irrespective of period.

Case 2: When Rate of Interest on Drawings is given in % p.a.

1. When date of Drawing is not given

Note: Interest on Drawing is calculated for a period of 6 months , we assume that drawing have been done evenly during the year ,that 's why we take average six months tenure.

2. When date of Drawings is given

Interest on Drawing =

Case 3: When different amount are withdrawn on different dates:

We have the following two methods to calculate the amount of interest on Drawing:

1. Simple Interest Method

In this method, interest on drawing is calculated for each amount of drawing individually on

the basis of periods for which it remained withdrawn till the close of accounting period.

2. Product Method

In this method, the amounts of drawings are multiplied by the period for which it remained

withdrawn during the period;Thereafter the products are added and interest is calculated on

the total of products so arrived at for one month. The advantage of this system is that

separate calculations are not required each time.

We can explain the above mentioned two methods with the help of an example.

Interest on drawings is to be charged @ 9% p.a

SIMPLE METHOD

Interest = Total of products * 9/100* 1/12= 306000*9/100*1/12 = Rs 2295/-.

Case 4: When an equal amount is withdrawn regularly

Interest on Drawing can be calculated using either Product Method or Direct Method (i.e.

Short Cut Method)

Direct Method will be used only if all the following three conditions are satisfied:

1. Amount should be same throughout the period

2. Date of Drawings should be same throughout the period

3. Drawings should be made regularly without any gap.

T = Time (in months) for which interest is to be charged

Value of T under Different circumstances will be as under:

 Interest On Partner's Loan

If a partner has given loan to the firm, he is entittled to receive interest on such loan at an

agreed rate.

It is a charge against profits. It is provided irrespective of profits or loss. It will also be

provided in the absence of Partnership Deed @ 6% per annum.

The following entries are passed to record the interest on partner’s loan

1. For allowing Interest on loan:

Interest on Partner’s Loan A/cDr.

To Partner’s Loan A/c

(Being interest on loan allowed @ % p.a.)

2. For transferring Interest on Loan to Profit and Loss A/c:

Profit and Loss A/cDr.

To Interest on Loan A/c

(Being Interest on loan transferred to P & L A/c)

It is always DEBITED to Profit and Loss A/c

Rent Paid to Partner.

Rent paid to a partner is also a charge against profits and it will also be

DEBITED to Profit and Loss A/c

Note:

Interest on A’s Loan = loan Amount × Rate/100 × Time left after loan taken/12

=2,00,000 × 6/100 × 5/12 =Rs. 5,000

Past Adjustments

If, after preparation of Final Accounts of firm, it is found that some errors or commission in

accounts has occurred than such errors or omissions are rectified in the next year by passing

an adjustment entry.

A statement is prepared to ascertain the net effect of such errors or omissions on partner’s

capital/current accounts in the following manner.

Statement showing adjustment

Guarantee Of Profits To A Partner

Guarantee is an assurance given to the partner of the firm that at least a fixed amount shall be given to him/her irrespective of his/her actual share in profits of the firm. If actual share in profits is less than the guaranteed amount in that case the deficit amount shall be borne either by the firm or by any partner as the case may be or as may have been decided by an agreement.

Note:

Guarantee to a partner is given for minimum share in profits. If the actual share in profits is more than the minimum share in profits, then the actual profits will be allowed to the partner.

Case 1. When guarantee is given by FIRM (i.e. by all the Partners of the firm)

1. If share in actual profits is less than the guaranteed amount then. Guaranteed amount to a

partner is first written off against the profits and then,

2. Remaining profits are distributed among the remaining partners in the remaining ratio.

Case 2. When guarantee is given by a partner or partners to another partner.

1. Calculate the share in profits for the partner to whom guarantee is given.

2. If share in profits is more than the guaranteed amount, distribute the profit as per the profit and loss sharing ratio in usual manner.

3. If share in profits is less than the guaranteed amount, find the difference between the share in profits and the guaranteed amount and the difference known as deficiency.

Deficiency is contributed by the partner or partners who guaranteed in certain ratio and subtracted from his or their respective shares.