Partnership Accounts
Meaning -:
A partnership is formed by an agreement. This agreement may be
written or oral. Though the law does not expressly require
that there should be an agreement in writing but the absence
of a written agreement may be a source of trouble in
managing the affairs of the partnership firm.
Definition -:
The Indian partnership act defines partnership
as “The relationship between persons who have agreed to share the profit of
a business carried on by all or any of them acting for all.”
Essential features of partnership -:
1. Two or more
persons : To form a partnership, there must be at least two persons.
There is, however, a limit on the maximum number of persons who constitute a partnership firm. It should not exceed 10
if the firm is carrying on a banking business and 20
if it is engaged in any other business.
2. Agreement
between the partners : A partnership is created by an
agreement. It is neither created by operation of law as in
the case of Hindu Undivided Family nor by status. The
agreement forms the basis of economic relationship amongst
the partners. The agreement can be written or oral.
3. Business : The agreement
should be for carrying on some legal business. A joint
ownership of some property by itself does not constitute partnership. However, the joint ownership of the property may be used for
forming the partnership in order to pursue the business
objectives for which the partnership is formed.
4. Sharing of
profits : The agreement should be to share the profits of the business.
If some persons join hands to carry on some charitable activity, it
will not be termed as partnership. the ratio in which the Partners will share the profits is determined by the agreement or in the absence of the agreement; it is shared equally amongst the
partners.
5. Business
carried on by all or any of them acting for all.
The person who enter into such an agreement are called PARTNERS and the business is called a FIRM.
Contents of
partnership deed -:
1. Name of the
firm.
2. Names and
addresses of all partners.
3. Nature and
place of the business.
4. Date of
commencement of partnership.
5. Duration of
partnership, if any.
6. Amount of
capital contributed or to be contributed by each partner.
7. Rules regarding
operation of bank accounts.
8. Ratio in which
profits are to be shared.
9. Interest, if
any, on partners' capital and drawings.
10. Interest on
loan by the partners(s) to the firm.
11. Salaries,
commissions, etc. if payable to any partner(s).
12. The safe
custody of the books of accounts and other documents of
the firm.
13. Mode of
auditor's appointment, if any.
14. Rules to be
followed in case of admission, retirement, death, of a partner.
15. Settlement of
accounts on dissolution of the firm.
16. Mode of
settlement of disputes among the partners.
Accounts –:
·
Fluctuating capital.
·
Fixed capital
·
Profit and Loss appropriation
Interest on capital -:
1. Normally,
interest on the opening balance at the beginning of the year is allowed
for the whole accounting year.
2. If additional
capital is invested during the year, interest for the relevant period
is calculated.
3. If part of the
capital is withdrawn during the year, interest on the part of the
capital that was invested for the whole year, interest is calculated for the whole year and it is added with the amount of interest that
is calculated on the remaining capital that was invested for the relevant period.
example, Kamal
has Rs. 50,000 as balance in his capital account at the beginning
of the year. In the middle of the year he withdrew Rs.20,000 from his capital. He is entitled
for interest @ 10% p.a. In this case, interest will be calculated in the
following manner:
(30,000 × 10/100) + (20,000 × 10/100 × 1/2) = Rs. 4,000
- Interest on capital is to be provide out of profit only.
Alternatively, we can
calculate interest on capital with respect to the
amount remained
invested for the relevant period. In the above example, the interest may also
be calculated as follows:
(50,000 × 10/100 × 1/2) + (30,000 × 10/100
× 1/2) = Rs. 4,000.
Interest on Drawings -:
Sometimes
interest is not only allowed on the capital, but is also charged on
drawings. In such a case interest will be charged according to the time that
elapses between the taking out of the money and the end of the year.
1). Amount, rate of interest and date of withdrawal is given:
Suppose,
Pragya is a partner who withdrew Rs. 40,000 on October 1,
2015.
Interest on drawings is charged @ 10% per annum. The calculation
of
interest will be as follows:
(40000 x 10/100
x 3/12) = 1000 rs.
2). Amount and rate of interest are given but date of withdrawal is not
specified:
Suppose, Gourav
is a partner who withdraws Rs. 40,000 and interest on drawings is charged @ 10% per annum. The
calculation of interest will be as follows:
(40000 x
10/100 x 6/12) = 2000 rs.
Here, it is
noted that in the absence of any particular date of withdrawal, it is assumed
that withdrawals are made evenly throughout the year. Hence, interest is
charged for the average of the period of the year, i.e., six months.
4. Fixed amount is
withdrawn every month:
In this case,
there may be three possibilities and accordingly the interest for
that period will be charged:
a) If amount is
withdrawn during the month (implicitly assumed to be in the
middle of month), interest is calculated for six months;
b) If the
withdrawal is made in the beginning of the month, interest is calculated
for 6½ months (six and a half months),
c) If withdrawal
is made at the end of the month, interest is calculated for
5 ½ months (five and a half months).
5. If amount is
withdrawn at each quarter:
1. If amount is
withdrawn in the beginning of each quarter, in this case the interest is
calculated on total drawings for a period of seven and a half months, and
2. If amount is
withdrawn at the end of each quarter, the amount of interest is calculated on total drawings for a period of four
and a half months.
6. Different
amounts are withdrawn at different intervals:
In this case, the sum of the
product of amount withdrawn and the time
is calculated and then the rate of interest is applied for
a period of one month.
Note -: If the fixed amount is withdrawn on the first day of every month,
the average period will be calculated with the help of
following formula :
Average
period = (Total period in months + 1)/2
If the fixed
amount is withdrawn on the last day of every month, the average period will be
calculated by the following formula :
Average
period = (Total period in months – 1)/2
Guarantee of Profit to Partners -:
7. Guarantee is an
assurance that a partner will not get as his share of profit less than the guaranteed
amount. There may be two situations :
(a) Guarantee to
one partner by (others) the firm,
(b) Guarantee to a
partner by another partner individually.
(a) Guarantee to one partner by (others) the firm -:
Sometimes, a partner is guaranteed a minimum amount by way of his
share in the profits of the firm. Such a guarantee may be given to
an
existing partner or to a new partner at the time of admission. Such
guaranteed amount shall be paid to partner when his share of
profit, as calculated, according to his profit sharing ratio is less than
the guaranteed amount. The deficiency of such guaranteed amount will be borne by the other partner's in their profit sharing or agreed ratio as the case may be.
(b) Guarantee to a partner by another partner individually -:
The guarantee to an existing or incoming partner may be given by
all the old partners or any of them in their new profit
sharing ratio or an agreed
basis.
2. Fixed capital -:
Under
the fixed capital method, the capitals of the partners shall remain fixed
unless some additional capital is introduced or some amount of capital is
withdrawn by an agreement among the partners. Hence, all items like interest on
capital, drawings, interest on drawings, salary, commission, and share of
profit or loss are not to be shown in the capital accounts. For all these
transactions, a separate account called 'Partner's Current Account' is opened.
Thus, under fixed capital method, two accounts are maintained for each partner
(i) Capital Account, and (ii) Current Account. It may be noted that the capital
account will continue to show the same balance from year to year unless some
amount of capital is introduced or withdrawn, while the balance of current
account will fluctuate from year to year.
3. Profit
and Loss appropriation -: The net profit as shown by the
profit and loss account of a partnership firm needs certain adjustments with
regard to interest on capitals, interest on drawings, salary, commission to the
partners, if provided, under the agreement. For this purpose, 'Profit and Loss
Appropriation Account' may be prepared. This is merely an extension of the
profit and loss account and is prepared to show how net profit is to be
distributed among the partners.
For preparing
the profit and loss appropriation account, the following journal entries have
to be recorded for various items:
1. For Interest on Capital
·
For Crediting Interest on Capital to Capital/Current Account :
Interest on
Capital a/c Dr.
To
Partners' Capital/Current a/c
·
For transferring Interest on Capital to Profit and Loss
Appropriation A/c
Profit and
Loss Appropriation a/c Dr.
To Interest
on Capital a/c
2. For Interest on
Drawings
·
Interest on Drawings is a gain to the firm and is charged to
Partner's Capital/Current a/c
Partners
Capital/Current a/c Dr.
To Interest on Drawings a/c
·
For transferring Interest on Drawings to Profit and Loss Appropriation Account, the following
entry is to be recorded:
Interest
on Drawings a/c Dr.
To Profit
and Loss Appropriation a/c
3. Partner's
Salary
(i) Salary allowed to a
partner is a gain of the individual partner and charge against the profits of
the firm as per partnership agreement. For this following entry is recorded:
Salary to
Partner a/c Dr.
To Partner
Capital/Current a/c
(ii) For charging salary
allowed to a partner:
Profit and
Loss Appropriation a/c Dr.
To
Salary to partner a/c
4. Partner's Commission
(i) Commission
is an expense for the firm and a gain to the partner. For t this, following entry is made:
Commission
to partner a/c Dr.
To Partner's capital/current a/c
(ii) Commission paid to a partner is charged to Profit and Loss
Appropriation account by recording the following entry:
Profit
and Loss Appropriation a/c Dr.
To Commission to partners a/c
5. For Transfer to Reserve:
Profit
and Loss Appropriation a/c Dr.
To Reserve A/c
6. For share of Profit or Loss on Appropriation
·
If Profit:
Profit
and Loss Appropriation a/c Dr.
To Partner's
Capital/Current a/c
·
If Loss:
Partner's
Capital/Current a/c Dr.
To Profit
and Loss Appropriation a/c
