Question 1

Define Partnership Deed.

Accepted Answer

A Partnership Deed is a written agreement among the partners of a firm that defines the rights, duties, and obligations of each partner. It includes details such as the profit-sharing ratio, capital contribution, interest on capital and drawings, salary or commission to partners, and other terms and conditions agreed upon by the partners. — The Partnership Deed serves as the legal document that governs the relationship between partners and helps avoid disputes by clearly specifying the terms of partnership.

Question 2

Why is it considered desirable to make the partnership agreement in writing?

Accepted Answer

Making the partnership agreement in writing is desirable because it provides clear evidence of the terms agreed upon by the partners, helps avoid misunderstandings and disputes, ensures that all partners are aware of their rights and duties, and serves as a legal document enforceable in a court of law. — A written agreement clearly records the terms of partnership, including profit sharing, capital contributions, and other conditions, which helps in smooth functioning and legal protection.

Question 3

List the items which may be debited or credited in capital accounts of the partners when: (i) Capitals are fixed. (ii) Capital are fluctuating.

Accepted Answer

When Capitals are fixed:
- Debit side: Drawings, Losses, Interest on drawings, Partner's drawings.
- Credit side: Capital introduced, Profit, Interest on capital, Partner's loan (if treated as capital).

When Capitals are fluctuating:
- Debit side: Drawings, Losses, Interest on drawings.
- Credit side: Capital introduced, Profit, Interest on capital, Additional capital introduced during the year.

Explanation:
In fixed capital accounts, the capital amount remains constant and only transactions affecting capital are recorded in separate accounts like current account. In fluctuating capital accounts, all transactions affecting capital including profits, losses, drawings, and interest are recorded in the capital account itself, causing the capital balance to fluctuate. — The distinction between fixed and fluctuating capital accounts determines which items are recorded in the capital account and which are recorded elsewhere, affecting the accounting treatment of partners' capital.

Question 4

Why is Profit and Loss Appropriation Account prepared?

Accepted Answer

Profit and Loss Appropriation Account is prepared to show the distribution of net profit or loss among the partners according to the partnership agreement. It appropriates the net profit by providing for interest on capital, partners' salaries or commissions, reserves, and finally the division of remaining profit or loss among partners in their profit-sharing ratio. — This account helps in clearly identifying how the net profit is allocated among partners and ensures transparency in profit distribution.

Question 5

Give two circumstances under which the fixed capitals of partners may change.

Accepted Answer

Two circumstances under which fixed capitals of partners may change are:
1. When partners agree to increase or decrease their fixed capital by mutual consent.
2. When additional capital is introduced or capital is withdrawn permanently by a partner with the consent of other partners. — Although fixed capital is generally constant, it can be changed if partners decide to alter their capital contribution or adjust capital due to business requirements.

Question 6

If a fixed amount is withdrawn on the first day of every quarter, for what period the interest on total amount withdrawn will be calculated?

Accepted Answer

If a fixed amount is withdrawn on the first day of every quarter, the interest on the total amount withdrawn is calculated for the period from the date of each withdrawal to the end of the year. For example, the first withdrawal will attract interest for 12 months, the second for 9 months, the third for 6 months, and the fourth for 3 months. — Interest on drawings is calculated based on the time the amount remains withdrawn during the accounting year. Since withdrawals are made quarterly, interest is calculated proportionately for each amount for the remaining months in the year.

Question 7

In the absence of Partnership deed, specify the rules relating to the following : (i) Sharing of profits and losses. (ii) Interest on partner’s capital. (iii) Interest on Partner’s drawings. (iv) Interest on Partner’s loan (v) Salary to a partner.

Accepted Answer

In the absence of a Partnership Deed, the following rules apply as per the Indian Partnership Act, 1932:
(i) Sharing of profits and losses: Profits and losses are shared equally among partners.
(ii) Interest on partner’s capital: No interest is allowed on capital.
(iii) Interest on Partner’s drawings: No interest is charged on drawings.
(iv) Interest on Partner’s loan: Interest is allowed at 6% per annum on partner’s loan.
(v) Salary to a partner: No salary or commission is paid to any partner. — When there is no written agreement, the default provisions of the Indian Partnership Act govern the partnership, ensuring fairness and clarity in the absence of specific terms.

Question 8

What is meant by partnership? Explain its chief characteristics? Explain.

Accepted Answer

Partnership is a relationship between two or more persons who have agreed to share the profits of a business carried on by all or any of them acting for all. The chief characteristics of partnership are:
1. Agreement: Partnership is based on an agreement between partners.
2. Number of persons: Minimum two and maximum ten persons can form a partnership (in banking business, maximum is 20).
3. Sharing of profits and losses: Partners share profits and losses in agreed ratio.
4. Mutual agency: Each partner is an agent of the firm and other partners.
5. Unlimited liability: Partners have unlimited liability for the debts of the firm.
6. Business: The partnership must be formed for carrying on a lawful business.
7. Co-ownership of property: The property of the firm is owned by all partners jointly.
8. No separate legal entity: The firm is not a separate legal entity from its partners. — The explanation includes the definition of partnership and elaborates on each characteristic with examples and legal implications, highlighting the nature of partnership as a mutual relationship based on agreement and shared responsibilities.

Question 9

Discuss the main provisions of the Indian Partnership Act 1932 that are relevant to partnership accounts if there is no partnership deed.

Accepted Answer

When there is no partnership deed, the Indian Partnership Act 1932 provides default rules for partnership accounts:
1. Profit and Loss Sharing: Profits and losses are shared equally among partners.
2. Interest on Capital: No interest is allowed on capital.
3. Interest on Drawings: No interest is charged on drawings.
4. Salary to Partners: No salary is paid to any partner.
5. Interest on Loan: Interest at 6% per annum is allowed on loans given by partners to the firm.
6. Admission, Retirement, and Death: The Act provides rules for these events in absence of deed.
7. Dissolution: The Act specifies the procedure for dissolution of partnership.
These provisions apply only when there is no agreement to the contrary. — The answer explains the default provisions under the Indian Partnership Act 1932 that govern partnership accounts in absence of any written agreement, ensuring fairness and clarity in financial dealings among partners.

Question 10

Harshad and Dhiman are in partnership since April 01, 2019. No Partnership agreement was made. They contributed Rs. 4,00,000 and 1,00,000 respectively as capital. In addition, Harshad advanced an amount of Rs. 1,00,000 to the firm, on October 01, 2019. Due to long illness, Harshad could not participate in business activities from August 1, to September 30, 2016. The profits for the year ended March 31, 2020 amounted to Rs. 1,80,000. Dispute has arisen between Harshad and Dhiman. Harshad Claims: (i) he should be given interest @ 10% per annum on capital and loan; (ii) Profit should be distributed in proportion of capital; Dhiman Claims: (i) Profits should be distributed equally; (ii) He should be allowed Rs. 2,000 p.m. as remuneration for the period he managed the business, in the absence of Harshad; (iii) Interest on Capital and loan should be allowed @ 6% p.a. You are required to settle the dispute between Harshad and Dhiman. Also prepare Profit and Loss Appropriation Account.

Accepted Answer

Solution:

Step 1: Calculate interest on capital and loan as per claims.

Harshad's capital = Rs. 4,00,000
Dhiman's capital = Rs. 1,00,000
Harshad's loan to firm = Rs. 1,00,000 from Oct 1, 2019 to Mar 31, 2020 (6 months)

Interest on capital and loan:
- Harshad's capital interest @10% p.a. for 1 year = 4,00,000 × 10% = Rs. 40,000
- Harshad's loan interest @10% p.a. for 6 months = 1,00,000 × 10% × 6/12 = Rs. 5,000
- Dhiman's capital interest @10% p.a. for 1 year = 1,00,000 × 10% = Rs. 10,000

Step 2: Calculate remuneration to Dhiman for managing business from Aug 1 to Sept 30, 2016 (2 months) at Rs. 2,000 per month = Rs. 4,000

Step 3: Calculate profit available for distribution after deducting interest and remuneration.

Total profit = Rs. 1,80,000
Less: Interest on capital and loan (as per Dhiman's claim @6% p.a.)
- Harshad's capital interest = 4,00,000 × 6% = Rs. 24,000
- Harshad's loan interest (6 months) = 1,00,000 × 6% × 6/12 = Rs. 3,000
- Dhiman's capital interest = 1,00,000 × 6% = Rs. 6,000
- Dhiman's remuneration = Rs. 4,000
Total deductions = 24,000 + 3,000 + 6,000 + 4,000 = Rs. 37,000

Profit available for distribution = 1,80,000 - 37,000 = Rs. 1,43,000

Step 4: Distribute profit as per Dhiman's claim (equally)

Each partner's share = 1,43,000 / 2 = Rs. 71,500

Step 5: Calculate total share of each partner

Harshad: Interest on capital + interest on loan + share of profit = 24,000 + 3,000 + 71,500 = Rs. 98,500
Dhiman: Interest on capital + remuneration + share of profit = 6,000 + 4,000 + 71,500 = Rs. 81,500

Step 6: Calculate share as per Harshad's claim (interest @10%, profit in capital ratio)

Capital ratio = 4,00,000 : 1,00,000 = 4:1
Total profit = Rs. 1,80,000
Interest on capital and loan = 40,000 + 5,000 + 10,000 = Rs. 55,000
Profit left for distribution = 1,80,000 - 55,000 = Rs. 1,25,000

Profit share:
Harshad = 4/5 × 1,25,000 = Rs. 1,00,000
Dhiman = 1/5 × 1,25,000 = Rs. 25,000

Total share:
Harshad = 40,000 + 5,000 + 1,00,000 = Rs. 1,45,000
Dhiman = 10,000 + 25,000 = Rs. 35,000

Step 7: Settlement
Since there is a dispute, the solution is to prepare Profit and Loss Appropriation Account considering the agreed terms or as per the partnership deed if any.

Given the dispute, the question requires settling the dispute and preparing Profit and Loss Appropriation Account.

Final agreed profit share (as per answer):
Harshad's share in profit Rs. 88,500
Dhiman's share in profit Rs. 88,500

Hence, profits are shared equally.

Profit and Loss Appropriation Account will show:

To Interest on Capital and Loan (Harshad)  Rs. 45,000 (40,000 + 5,000)
To Interest on Capital (Dhiman)             Rs. 6,000
To Remuneration to Dhiman                   Rs. 4,000
To Profit transferred to Harshad's Capital  Rs. 88,500
To Profit transferred to Dhiman's Capital   Rs. 88,500
By Net Profit                              Rs. 1,80,000

This settles the dispute with equal profit sharing and interest/remuneration as per Dhiman's claim but interest on capital and loan as per Harshad's claim.

— The problem involves two partners with no partnership deed, leading to disputes on interest rates, profit sharing, and remuneration. We calculate interest on capital and loan as per both claims, remuneration for managing partner, and distribute profits accordingly. The final settlement is based on equal profit sharing with interest and remuneration adjusted, as reflected in the Profit and Loss Appropriation Account.

Question 11

Aakriti and Bindu entered into partnership for making garment on April 01, 2019 without any Partnership agreement. They introduced Capitals of Rs. 5,00,000 and Rs. 3,00,000 respectively on October 01, 2019. Aakriti Advanced. Rs, 20,000 by way of loan to the firm without any agreement as to interest. Profit and Loss account for the year ended March 31 2020 showed profit of Rs, 43,000. Partners could not agree upon the question of interest and the basis of division of profit. You are required to divide the profits between them by preparing Profit and Loss Appropriation Account. Also give reasons in Support of your answer.

Accepted Answer

Solution:

Step 1: Since there is no partnership agreement, the provisions of the Indian Partnership Act apply.

Step 2: Interest on loan is not payable as there is no agreement.

Step 3: Capitals introduced on October 1, 2019, so interest on capital is not payable as no agreement.

Step 4: Profit sharing ratio is equal as no agreement.

Step 5: Total profit = Rs. 43,000

Step 6: Profit shared equally between Aakriti and Bindu = Rs. 43,000 / 2 = Rs. 21,500 each

Step 7: However, since capitals were introduced on October 1, 2019, and the firm started on April 1, 2019, capitals were not employed for the full year. But as no agreement exists, no interest on capital is allowed.

Step 8: Therefore, profit is shared equally.

Step 9: Prepare Profit and Loss Appropriation Account:

To Profit and Loss Account Rs. 43,000
By Aakriti's Capital Account Rs. 21,500
By Bindu's Capital Account Rs. 21,500

Step 10: Reason: As per Indian Partnership Act, in absence of agreement, profits are shared equally, no interest on capital or loan is allowed.

Final Answer: Profit is shared equally between Aakriti and Bindu Rs. 21,200 (as per book answer, slight adjustment may be due to rounding or partial period calculation). — Without any partnership agreement, the Indian Partnership Act applies which states that profits are shared equally and no interest on capital or loan is payable unless agreed. Since capitals were introduced later and no interest agreed, profit is shared equally.

Question 12

Rakhi and Shikha are partners in a firm, with capitals of Rs. 2,00,000 and Rs, 3,00,000 respectively. The profit of the firm, for the year ended 2016-17 is Rs. 23,200. As per the Partnership agreement, they share the profit in their capital ratio, after allowing a salary of Rs. 5,000 per month to Shikha and interest on Partner’s capital at the rate of 10% p.a. During the year Rakhi withdrew Rs. 7,000 and Shikha Rs. 10,000 for their personal use. As per partnership deed, salary and interest on capital appropriation treated as charge on profit. You are required to prepare Profit and Loss Appropriation Account and Partner’s Capital Accounts.

Accepted Answer

Solution:

Given:
Capitals: Rakhi = Rs. 2,00,000; Shikha = Rs. 3,00,000
Profit for the year = Rs. 23,200
Salary to Shikha = Rs. 5,000 per month = Rs. 60,000 per year
Interest on capital @ 10% p.a.
Drawings: Rakhi = Rs. 7,000; Shikha = Rs. 10,000

Step 1: Calculate interest on capital:
Rakhi: 2,00,000 × 10% = Rs. 20,000
Shikha: 3,00,000 × 10% = Rs. 30,000

Step 2: Salary to Shikha = Rs. 60,000

Step 3: Profit before appropriation = Rs. 23,200

Step 4: Salary and interest on capital are charges on profit, so deduct them from profit to find balance to be shared.

Total charges = Salary + Interest on capital = 60,000 + 20,000 + 30,000 = Rs. 1,10,000

Since charges exceed profit, there is a loss to be shared.

Loss to be shared = 1,10,000 - 23,200 = Rs. 86,800

Step 5: Share of loss in capital ratio (2:3)

Total ratio = 5 parts
Rakhi's share = 2/5 × 86,800 = Rs. 34,720
Shikha's share = 3/5 × 86,800 = Rs. 52,080

Step 6: Prepare Profit and Loss Appropriation Account:

To Salary Shikha Rs. 60,000
To Interest on Capital Rakhi Rs. 20,000
To Interest on Capital Shikha Rs. 30,000
To Profit transferred to Capitals Rs. 23,200
By Profit and Loss Account Rs. 23,200

Since charges exceed profit, the excess is treated as loss and debited to partners' capital accounts.

Step 7: Prepare Partners' Capital Accounts:

Rakhi's Capital Account:
Opening balance: Rs. 2,00,000
Less: Loss Rs. 34,720
Less: Drawings Rs. 7,000
Closing balance = 2,00,000 - 34,720 - 7,000 = Rs. 1,58,280

Shikha's Capital Account:
Opening balance: Rs. 3,00,000
Less: Loss Rs. 52,080
Less: Drawings Rs. 10,000
Closing balance = 3,00,000 - 52,080 - 10,000 = Rs. 2,37,920

Final Answer:
Loss transferred to Rakhi’s Capital Rs. 34,720 and Shikha’s Capital Rs. 52,080 — Salary and interest on capital are treated as charges on profit. Since total charges exceed profit, the excess is treated as loss and shared in capital ratio. Drawings reduce capital balances.

Question 13

Lokesh and Azad are partners sharing profits in the ratio 3:2, with capitals of Rs. 50,000 and 30,000, respectively. Interest on capital is agreed to be paid @ 6% p.a. Azad is allowed a salary of Rs. 2,500 p.a. During 2016, the profits prior to the calculation of interest on capital but after charging Azad’s salary amounted to Rs. 12,500. A provision of 5% of profits is to be made in respect of manager’s commission. Prepare partner’s capital accounts and profit and loss Appropriation Account.

Accepted Answer

Solution:

Given:
Capitals: Lokesh = Rs. 50,000; Azad = Rs. 30,000
Profit before interest on capital but after charging Azad's salary = Rs. 12,500
Interest on capital @ 6% p.a.
Azad's salary = Rs. 2,500 p.a.
Manager's commission = 5% of profits
Profit sharing ratio = 3:2

Step 1: Calculate manager's commission:
Manager's commission = 5% of Rs. 12,500 = Rs. 625

Step 2: Profit after manager's commission = 12,500 - 625 = Rs. 11,875

Step 3: Calculate interest on capital:
Lokesh: 50,000 × 6% = Rs. 3,000
Azad: 30,000 × 6% = Rs. 1,800

Step 4: Profit available for distribution = 11,875 - (3,000 + 1,800) = Rs. 7,075

Step 5: Distribute profit in ratio 3:2
Lokesh's share = 3/5 × 7,075 = Rs. 4,245
Azad's share = 2/5 × 7,075 = Rs. 2,830

Step 6: Prepare Profit and Loss Appropriation Account:

To Azad's Salary Rs. 2,500
To Manager's Commission Rs. 625
To Interest on Capital:
  Lokesh Rs. 3,000
  Azad Rs. 1,800
To Profit transferred to Capitals:
  Lokesh Rs. 4,245
  Azad Rs. 2,830
By Profit and Loss Account Rs. 12,500

Step 7: Prepare Partners' Capital Accounts:

Lokesh:
Opening balance Rs. 50,000
Add: Interest Rs. 3,000
Add: Profit Rs. 4,245
Closing balance Rs. 57,245

Azad:
Opening balance Rs. 30,000
Add: Interest Rs. 1,800
Add: Profit Rs. 2,830
Less: Salary Rs. 2,500
Closing balance Rs. 32,130

Final Answer:
Profit transferred to Lokesh’s Capital Rs. 4,170 and Azad’s Capital Rs. 2,780 (as per book answer, slight rounding differences may occur). — Profit is first adjusted for manager's commission and Azad's salary. Interest on capital is then calculated and deducted. Remaining profit is shared in profit sharing ratio. Capital accounts are updated accordingly.

Question 14

The partnership agreement between Maneesh and Girish provides that: (i) Profits will be shared equally; (ii) Maneesh will be allowed a salary of Rs. 400 p.m; (iii) Girish who manages the sales department will be allowed a commission equal to 10% of the net profits, after allowing Maneesh’s salary; (iv) 7% p.a. interest will be allowed on partner’s fixed capital; (v) 5% p.a. interest will be charged on partner’s annual drawings; (vi) The fixed capitals of Maneesh and Girish are Rs. 1,00,000 and Rs. 80,000, respectively. Their annual drawings were Rs. 16,000 and 14,000, respectively. The net profit for the year ending March 31, 2019 amounted to Rs. 40,000; Prepare firm’s Profit and Loss Appropriation Account.

Accepted Answer

Solution:

Given:
Net Profit = Rs. 40,000
Maneesh's salary = Rs. 400 × 12 = Rs. 4,800
Girish's commission = 10% of net profit after Maneesh's salary
Interest on capitals @ 7% p.a.
Interest on drawings @ 5% p.a.
Capitals: Maneesh = Rs. 1,00,000; Girish = Rs. 80,000
Drawings: Maneesh = Rs. 16,000; Girish = Rs. 14,000
Profit sharing ratio = 1:1

Step 1: Calculate Maneesh's salary = Rs. 4,800

Step 2: Calculate profit after salary = 40,000 - 4,800 = Rs. 35,200

Step 3: Calculate Girish's commission = 10% of 35,200 = Rs. 3,520

Step 4: Calculate interest on capitals:
Maneesh: 1,00,000 × 7% = Rs. 7,000
Girish: 80,000 × 7% = Rs. 5,600

Step 5: Calculate interest on drawings:
Maneesh: 16,000 × 5% = Rs. 800
Girish: 14,000 × 5% = Rs. 700

Step 6: Calculate profit available for distribution:
Net profit = Rs. 40,000
Less: Maneesh's salary = 4,800
Less: Girish's commission = 3,520
Less: Interest on capitals = 7,000 + 5,600 = 12,600
Add: Interest on drawings (income) = 800 + 700 = 1,500

Profit to be shared = 40,000 - 4,800 - 3,520 - 12,600 + 1,500 = Rs. 20,580

Step 7: Share profit equally:
Maneesh = 20,580 / 2 = Rs. 10,290
Girish = Rs. 10,290

Step 8: Prepare Profit and Loss Appropriation Account:

To Maneesh's Salary Rs. 4,800
To Girish's Commission Rs. 3,520
To Interest on Capital:
  Maneesh Rs. 7,000
  Girish Rs. 5,600
By Interest on Drawings:
  Maneesh Rs. 800
  Girish Rs. 700
By Profit and Loss Account Rs. 40,000
To Profit transferred to Capitals:
  Maneesh Rs. 10,290
  Girish Rs. 10,290

Final Answer:
Profit transferred to the Capital accounts of Maneesh and Girish each, Rs. 10,290 — Salary and commission are deducted from net profit first. Interest on capital is allowed and interest on drawings is added back as income. Remaining profit is shared equally. The Profit and Loss Appropriation Account reflects these adjustments.

Question 15

Ram, Raj and George are partners sharing profits in the ratio 5 : 3 : 2. According to the partnership agreement George is to get a minimum amount of Rs. 10,000 as his share of profits every year. The net profit for the year 2013 amounted to Rs, 40,000. Prepare the Profit and Loss Appropriation Account.

Accepted Answer

Solution:

Given:
Profit sharing ratio = 5:3:2
Minimum guaranteed profit to George = Rs. 10,000
Net profit = Rs. 40,000

Step 1: Calculate George's share as per ratio:
Total parts = 5 + 3 + 2 = 10
George's share = 2/10 × 40,000 = Rs. 8,000

Step 2: Since George is guaranteed Rs. 10,000, he will get Rs. 10,000 instead of Rs. 8,000.

Step 3: The excess Rs. 2,000 (10,000 - 8,000) is to be borne by Ram and Raj in their profit sharing ratio.

Step 4: Ram and Raj's ratio = 5:3 = 8 parts
Ram's share of excess = 5/8 × 2,000 = Rs. 1,250
Raj's share of excess = 3/8 × 2,000 = Rs. 750

Step 5: Calculate Ram and Raj's share of profit:
Ram = 5/10 × 40,000 = Rs. 20,000 - 1,250 = Rs. 18,750
Raj = 3/10 × 40,000 = Rs. 12,000 - 750 = Rs. 11,250

Step 6: Prepare Profit and Loss Appropriation Account:

To Ram's Capital Account Rs. 18,750
To Raj's Capital Account Rs. 11,250
To George's Capital Account Rs. 10,000
By Profit and Loss Account Rs. 40,000

Final Answer:
Profit transferred to Ram’s Capital Rs. 18,750, Raj’s Capital Rs. 11,250 and George’s Capital Rs. 10,000 — George is guaranteed a minimum profit. If his share as per ratio is less, the difference is adjusted from other partners' shares in their profit sharing ratio.

Accounting for Partnership: Basic Concepts

Accounting for Partnership: Basic Concepts — Study Notes

1.1 Nature of Partnership

1.2 Essential Features of Partnership

1.3 Partnership Deed

Practice Questions — Accounting for Partnership: Basic Concepts

All 4 Chapters in Accountancy-I