Accounting For Partnership Firms - Fundamentals

CHAPTER 2
Accounting for Partnership Firms - Fundamentals

LEARNING OBJECTIVES
The study of this Chapter would enable you to understand:
 Meaning and Definition of Partnership 2.1
 Essential Features or Characteristics of Partnership 2.2
 Rights of Partners 2.2
 Partnership Deed: Meaning, Clauses and Importance 2.3
 Provisions Affecting Accounting Treatment in the Absence of Partnership Deed
2.4
 Interest on Loan by the Partner to the firm and by the firm to the Partner 2.6
 Distribution of Profit among Partners: Profit and Loss Appropriation Account
2.10
 Special Aspects of Partnership Accounts: 2.21
 Partners' Capital Accounts under Fixed and Fluctuating Methods
 Salary or Commission to Partners © Interest on Partners'Capitals
 Interest on Partners'Drawings
 Adjustments for Incorrect Appropriations of Profits in the Past (Past Adjustments)
 Guarantee of Profit
MEANING AND DEFINITION OF PARTNERSHIP
Partnership is defined by Indian Partnership Act, 1932, Section 4, as follows:
"Partnership is the relation between persons who have agreed to share the profits of a
business carried on by all or any of them acting for all."
A partnership, thus, is a business relationship among two or more persons to share profits
and losses of the business, carried on by all or any of them acting for all.
Partners, Firm and Firm Name: The persons who have entered into a partnership with one
another individually are called partners and collectively a firm. The name under which the
business is carried is called firm name.
Nature of Partnership
Partnership, from the legal viewpoint, is not a separate legal entity from its partners. It
means, firm's debts can be paid from private assets of the partners, if the firm is not able to
pay its liabilities.
Partnership is a separate business entity from the accounting viewpoint.
2.2 Double Entry Book Keeping—CBSE XII
ESSENTIAL FEATURES OR CHARACTERISTICS OF PARTNERSHIP
The essential characteristics of partnership are:
1. Two or More Persons: There must be at least two persons to form a partnership and
all such persons must be competent to contract. According to Indian Contract Act, 1872,
every person except the following are competent to contract:
(a) Minor,
(b) Persons of unsound mind, and
(c) Persons disqualified by any law.
Maximum Number of Partners: The Companies Act, 2013 (Section 464) empowers the
Central Government to prescribe number of partners in a firm subject to maximum of 100
partners. The Central Government has prescribed maximum number of partners in a firm to
be 50 vide Rule 10 of the Companies (Miscellaneous) Rules, 2014. Thus, in effect, a
partnership firm cannot have more than 50 partners.
2. Agreement: Partnership comes into existence by an agreement, either written
or oral. It is the basis of relationship among partners, which may be for a particular venture,
for a period or at will. The written agreement among the partners is known as Partnership
Deed.
3. Lawful Business: A partnership is established for a lawful business.
4. Profit-sharing: The agreement between/among the partners must be to share profits
and losses of the business. It is not essential that all the partners must share losses.
5. Business can be carried on by All or Any of the Partners Acting for All: Business of
the partnership can be carried on by all the partners or by any of them acting for all the
partners. In other words, partners are agents as well as the principals.
As an agent, he represents other partners and thereby; binds them through his acts.
As a principal, he is bound by the act of other partners.
RIGHTS OF PARTNERS
1. Every partner has the right to participate in the management of the business.
2. Every partner has the right to be consulted about the affairs of the business.
3. Every partner has the right to inspect the books of account and have a copy of it.
4. Every partner has the right to share profits or losses with others in the agreed ratio.
5. If a partner has advanced loan, he has the right to receive interest thereon at an
agreed rate of interest. In case the rate of interest is not agreed, interest is paid at the rate
provided in the Indian Partnership Act, 1932, i.e., © 6% p.a.
6. In case of an emergency, a partner has the right to act according to his best
judgment and be indemnified for the expenses incurred by him.
7. A partner has the right not to allow the admission of a new partner.
8. After giving proper notice, a partner has the right to retire from the firm.
9. If a partner incurs expenses on the business or he pays amount on behalf of the firm,
that partner gets indemnified for the payments made by him from the firm.
Chapter 2- Accounting for Partnership Firms—Fundamentals 2.3
PARTNERSHIP DEED
Partnership comes into existence by an oral or written agreement. It is better to have written
agreement to avoid any dispute. This written document known as Partnership Deed details
the terms and conditions of partnership. It is a legal document signed by all the partners and
has clauses on the following:
(i) Description of the Partners: Names, description and addresses of the partners.
(ii) Description of the Firm: Name and address of the firm.
(iii) Principal Place of Business: Address of the principal place of business.
(iv) Nature of Business: Nature of business that the firm shall carry on.
(v) Commencement of Partnership: Date of commencement of partnership.
(vi) Capital Contribution: The amount of capital to be contributed by each partner,
whether the Capital Accounts shall be fixed or fluctuating.
(vii) Interest on Capital: Rate of interest, if allowed, on capital.
(viii) Interest on Drawings: Rate of interest, if to be charged, on drawings.
(ix) Profit-sharing Ratio: Ratio in which profits or losses are to be shared by the partners.
(x) Interest on Loan: Rate of interest on loan by a partner to the firm.
(xi) Remuneration to Partners: Amount of salary, commission, etc., if agreed, to be paid.
(xii) Valuation of Goodwill: Method by which goodwill of the firm will be valued at the time
of admission or retirement of a partner or at the time of death of a partner.
(xiii) Valuation of Assets: The manner in which assets of the firm shall be valued in the
case of its reconstitution.
(xiv) Settlement of Account: The manner in which accounts of partner(s) shall be settled
in case of his (their) retirement or death or at the time of dissolution of the firm.
(xv) Accounting Period: The date on which accounts shall be closed every year.
Normally accounts are closed on 31st March every year because every entity must submit
the return of income on 31st March every year.
(xvi) Rights and Duties of Partners: The rights and duties of partners are defined.
(xvii) Duration of Partnership: The period of partnership, i.e., whether it is for a specified
period or for a venture or at will.
(xviii) Bank Account Operation: How shall the Bank Account be operated? Whether it shall
be operated by any of the partners or jointly.
(xix) Death of a- Partner: Whether the firm will continue or dissolve.
(xx) Settlement of Disputes: Disputes, if any, among the partners—how they shall be
settled.
importance of Partnership Deed
Partnership Deed is an important legal document which defines relationship among the
partners. It is important to have written Partnership Deed to avoid and settle possible
disputes. It is useful because:
1. It governs the rights, duties and liabilities of each partner.
2. Disputes arising, if any, among the partners are settled on the basis of Partnership Deed,
it being a written contract.
Is it essential to have a Partnership Deed?
It is not essential but desirable to have a Partnership Deed. In case Partnership Deed does
not exist, provisions of the Indian Partnership, Act, 1932 will apply.
Provisions Affecting Accounting Treatment in the Absence of Partnership Deed
In the absence of a Partnership Deed or where it is silent, i.e., it does not have a clause in
respect of the following matters, the provisions of the Indian Partnership Act, 1932 apply:
Matters Provisions of the Indian Partnership Act, 1932
1. Sharing of Profits/Losses Profits/Losses are shared equally by the partners.
2. Interest on Capital Interest on capital is not paid (allowed} to partners.
3. Interest on Drawings Interest on drawings is not charged from partners.
4. Interest on Advance/Loan by a Interest on loan by partner is paid (allowed) @ 6%
Partner p.a.
Interest on loan by partner is a charge against profit.
It means interest is paid whether the firm earns profit
or incurs loss.
5. Remuneration to Partners Remuneration (salary, commission, etc.,) is not paid
(allowed) to any partner.
6. Admission of Partner . New partner cannot be admitted unless all the
partners agree to it.
The partners may amend the Partnership Deed to include or change any of the above
clauses.
Liabilities of Partners
Subject to agreement among the partners,
1. If a partner carries on a business that is similar to that of the firm in competition with the
firm and earns profit from it, the profit earned from such business shall be paid to the firm.
2. If a partner earns profit for himself from any transaction of the firm or from the use of
firm's property or business connection, the profit so earned shall be paid to the firm. For
example, a partner gets commission from the buyer of goods on goods sold by the firm, the
commission so earned shall be paid to the firm.
Some other Important Provisions of the Indian Partnership Act, 1932
(i) If all the partners agree, a minor may be admitted for the benefit of partnership.
[Sec. 30]
(ii) A person may be admitted as a partner either with the consent of all the existing
partners or in accordance with an agreement among the partners.
[Sec. 31]
(iii) A partner may retire from the firm either with the consent of all the other partners or
in accordance with an agreement among the partners.
[Sec. 32]
(iv) Registration of
the firm is optional and not compulsory.
[Sec. 69]
(v) Unless otherwise agreed by the partners in the Partnership Deed, a firm is dissolved
on the death of a partner.
[Sec. 35]
Note: It should be noted that above provisions of the Indian Partnership Act, 1932 are
applied when Partnership Deed does not exist or where it exists but it does not have a
clause to this effect.
Illustration 1 (Provisions of the Indian Partnership Act, 1932).
Ambrish, Lalit and Charu are partners in a firm without a Partnership Deed.
(i) Ambrish, has contributed more capital than other partners and demands interest on
capital at 10% p.a. But Lalit and Charu do not agree with him.
(ii) Lalit devotes full time in the business and demands a salary of Rs. 5,000 p.m. But
Ambrish and Charu do not agree with him.
(iii) Charu demands interest on the loan of T 50,000 given by her at the market rate of
interest, i.e., @ 12% p.a.
(iv) Ambrish has withdrawn Rs. 10,000 from the firm for his personal use. Lalit and Charu
demand that interest on drawings should be charged @ 10% per annum.
(v) Profit before taking into account any of the above claims was Rs. 50,000 at the end
of the first year of the business. Ambrish demands share of profit in the capital ratio.
(vi) Lalit wants to introduce his son Inder as partner. Charu objects to .his proposal.
How will be the matters resolved?
Solution:
The partners do not have a Partnership Deed. Therefore, provisions of the Indian
Partnership
Act, 1932 will apply to resolve the matters:
(i) Interest on capital is not payable to partner. Therefore, Ambrish will not get interest
on the capital.
(ii) Remuneration is not payable to partner. Therefore, Lalit will not get salary.
(iii) Interest on Loan by Partner is payable @ 6% p.a. Therefore, Charu will get interest
Rs. 3,000 (i.e., Rs. 50,000 x 6/100).
(iv) Interest on Ambrish's Drawings will not be charged.
(v) Profit after Interest on Loan by Charu, i.e., Rs. 47,000 is to be distributed equally.
(vi) A person cannot be introduced as partner without the consent of all the partners.
Therefore, Inder cannot be admitted into partnership because Charu objects to it.
Illustration 2 (Oral Agreement).
Harry and Garry are partners in a firm. They have not entered into Partnership Deed but had
agreed on following:
(i) Salary will be paid to Harry @ Rs. 10,000 per month.
(ii) Garry will get commission @ 10% of Net Profit.
(iii) Interest will be allowed on capitals @ 10% p.a.
(iv) Interest will be charged on drawings @ 10% p.a.
(v) Partner cannot be admitted without the consent of both the partners.
How will be the following disputes resolved?
1. Garry demands to be paid salary as Harry is being paid because his commission is
lower.
2. Harry demands that his son Sherry be admitted as partner for 25% share to be given
out of his share of profits to which Garry disagrees.
Solution:
Partnership agreement may be written or oral. Therefore, the terms agreed orally between
Harry and Garry is a valid agreement.
1. The demand of Garry to be paid salary as is paid to Harry is not valid in view of
agreement of payment of commission.
2. Harry's demand to admit Sherry into partnership is also not valid as both the partners
had agreed to admit a new partner with the consent of both the partners.
Charge against Profit and Appropriation of Profit
Payment made or due to a partner may be a charge against profit or an appropriation of
profit. Charge against Profit means that it is an expense for the firm and is paid whether the
firm earns profit or incurs loss. On the other hand, appropriation of profit means that they are
allowed, if the firm earns profit during the year.
Interest on Loan by Partner, Rent Payable to a partner and Manager's Commission, etc., are
charge against profit and are payable whether the firm earns profit or incurs loss.
On the other hand, Salary/Commission to partners, interest on capitals and transfer of profit
to Reserves are appropriations.
Difference between Charge Against Profit and Appropriation of Profit
Basis Charge Against Profit Appropriation of Profit
1. Nature It means distribution of net profit for
It is an expense hence deducted from
the year among partners under
revenue to determine net profit or loss
different heads as per the Partnership
for the year.
Deed.
2. Recording It is debited to Profit and Loss It is debited to Profit and Loss
Account. Appropriation Account.
3. Priority It is allowed before Appropriation of It is appropriated after accounting of all
Profit. charges.
4. Examples Rent paid to a partner, interest on Salary to partners, interest on capital,
loan by partner, etc. transfer of profit to General Reserve,
etc.
INTERESRT ON LOAN BY THE PARTNER AND BT THE FIRM TO THE PARTNER

interest on Loan by the Partner to the Firm
If any partner has given loan to the firm, he shall get interest at the agreed rate as written in
the Partnership Deed or as agreed otherwise. In the absence of an agreement, the Indian
Partnership Act, 1932 will, apply and the lending partner will get interest @ 6% p.a. on loan
amount.
Nature of interest on Loan by Partner
Interest on loan by partner is a. charge against profit. It means that a partner will get interest
on loan whether the firm earns profit or incurs loss.
Accounting Treatment
Interest on loan by partner is credited to his Loan Account and not to his Capital Account.
Journal entries passed are:
(i) To provide Interest on Loan by Partner:
Interest on Loan by Partner A/c ...Dr.
To Loan by Partner A/c
(ii) To close the Interest on Loan by Partner A/c:
Profit and Loss A/c ...Dr.
To Interest on Loan by Partner A/c
It is important to distinguish Loan Account and Capital Account of a partner because:
1. As per the Indian Partnership Act, 1932, loan by a partner is repayable on dissolution
before repayment of capital to partners; and
2. In the absence of any agreement, partners get interest @ 6% p.a. on loan advanced
whereas they are not entitled to interest on capital.
Illustration 3.
Amit, Bimal and Chaman are partners sharing profits and losses equally. Amit and Chaman
gave loans to the firm on 1st October, 2019 of Rs. 1,00,000 and Rs. 1,50,000 respectively. It
is agreed that interest @ 9% p.a. will be paid on loan. Books of account of the firm are
closed on 31st March every year. Interest on loan is yet to be paid as on 31st March, 2020.
Pass Journal, entries in the books of account of Ute firm and prepare Loan Accounts of Ute
two partners.
Solution:
In the Books of Amit, Bimal and Chaman
JOURNAL
Date Particulars L.F. Dr.(Rs.) Cr.(Rs.)
2019 Bank A/c ...Dr. 2,50,000 1,00,00
Oct. 1 To Loan by Amit A/c 0
To Loan by Chaman A/c 1,50,00
(Loan from partners Amit and Chaman) 0
2020 Interest on Loan by Partners A/c ...Dr. 11,250
March To Loan by Amit A/c 4,500
31 To Loan by Chaman A/c 6,750
(Interest on loan by partners provided @ 9% p.a.)
March Profit and Loss A/c ...Dr. 11,250
31 To Interest on Loan by Partners A/c
11,250
(Interest on Loan by Partners Account transferred to Profit
and Loss Account)
Dr. LOAN BY AMIT ACCOUNT Cr.
Date Particulars Rs. Date Particulars Rs.
2020 To Balance c/d 1,04,500 2019 By Bank A/c 1,00,000
March Oct. 1 By Interest on Loan by
31 2020 Partners A/c 4,500
1,04,500 March
31 1,04,500
2020
April 1 By Balance b/d 1,04,500
LOAN BY CHAMAN ACCOUNT
Date Particulars Rs. Date Particulars
2020 To Balance c/d 2019 By Bank A/c 1,50,000
March Oct. 1
1,56,750
31 2020 By Interest on Loan by
March Partners A/c 6,750
1,56,750 31 1,56,750
2020
April 1
By Balance b/d 1,56,750
Illustration 4.
Akhil and Bharat are partners sharing profits and losses in ratio of 2 : 3 with capitals of Rs.
2,00,000 and Rs. 1,00,000 respectively. On 1st October, 2019, Akhil and Bharat gave loans
of Rs. 4,00,000 and Rs. 2,00,000 respectively to the firm. There is no agreement as to
payment of interest on the loan by partner. Determine the amount of profit or loss for the
year ended 31st March, 2020 in each of the following cases to be distributed between the
partners:
Case 1. If the Profit before interest for the year amounted to Rs. 25,000.
Case 2. If the Profit before interest for the year amounted to Rs. 15,000.
Case 3. If the Loss before interest for the year amounted to Rs. 25,000.
Solution:
When there is no agreement for payment of interest on loan by partner, as per the Indian
Partnership Act, 1932, interest @ 6% p.a. is allowed on loan by a partner.
Case 1. Distributable Profit/Loss = Profit before Interest - Interest on Loan by Partners
= Rs. 25,000-Rs. 18,000* = Rs. 7,000.
“Interest on Loan by Akhil (Rs. 4,00,000 x 6/100 x 6/12) Rs. 12,000
Interest on Loan by Bharat (Rs. 2,00,000 x 6/100 x 6/12) Rs. 6,000
Total Rs. 18,000
Case 2. Distributable Profit/Loss = Profit before Interest - Interest on Loan by Partners
= Rs. 15,000 - Rs. 18,000 = Rs. 3,000 (Loss).
Interest on loan by partner being a charge against profit is paid or credited to Loan by
Partners Account even if profit is less than the amount of interest on loan. The resulting loss
is distributed between partners in the profit-sharing ratio.
Case 3. Distributable Profit/Loss = Loss before Interest + Interest on Loan by Partners
= Rs. 25,000 + Rs. 18,000 = Rs. 43,000 (Loss).
Interest on Loan by the Firm to Partner
A firm may give loan to a partner. It will charge interest on the loan given at the rate agreed
among the partners. If the Partnership Deed does not provide for charging interest on loan
given or agreement to charge interest does not exist, interest is not charged on the loan
given. If interest is charged on loan by the firm to a partner, interest is transferred to the
credit of Profit and Loss Account and debit of Partner's Capital Account (if Capital Accounts
are maintained following Fluctuating Capital Accounts Method) or Partner's Current Account
(if Capital Accounts are maintained following Fixed Capital Accounts Method).
The Journal entries are:
(i) For Charging Interest on Loan to Partner:
Partner's Capital/Current A/c ...Dr.
To Interest on Loan to Partner A/c (Given)
(ii) For Transfer of Interest on Loan to Partner Account:
Interest on Loan to Partner A/c ...Dr.
To Profit and Loss A/c
Rent Paid or Payabte to a Partner
Rent paid or payable to a partner, is also a charge against profit and not an appropriation of
profit. It is a charge on profit because rent is payable to a partner for letting the firm use his
personal property for business. Rent may be paid (either in cash or by cheque) during the
year to the partner or it may have become due but is not yet paid, i.e., is still payable. When
it is paid or payable, it is debited to Rent Account and credited to Cash/Bank Account or
Rent Payable Account. At the end of the year. Rent Account is transferred or debited to
Profit and Loss Account (not to the Profit and Loss Appropriation Account).
Journal entries in this case will be as follows:
(i) When rent is paid in cash or by cheque:
Rent A/c ...Dr.
To Cash/Bank A/c
(Rent paid in cash/cheque for...)
(ii) When rent is payable:
Rent A/c . ...Dr.
To Rent Payable A/c
(Rent payable for...)
(iii) When Rent Account is transferred to Profit and Loss Account:
Profit and Loss A/c ...Dr.
To Rent A/c
(Rent Account transferred to Profit and Loss Account)
Illustration 5 (Rent paid and Rent Payable).
Amrit and Bimal are partners sharing profits equally. Bimal has given his property on rent to
the firm on 1st April, 2019 at a monthly rent ofRs.5,000. The firm paid him rent from April,
2019 to February, 2020 by issuing a cheque on 1st March, 2020. Rent for the month of
March was still payble.
Pass the Journal entries for the above transactions.
Solution:
JOURNAL
Date Particulars L.F. Dr. Cr.
2020 Rent A/c

March To Bank A/c
...Dr. 55,000 55,000
1 (Cheque issued for rent for the months April, 2019
to February,2020)
Rent A/c ...Dr. 5,000
To Rent Payable A/c 5,000
(Rent payable for the month of March, 2020)
2021 Profit and Loss A/c ...Dr. 60,000
March To Rent A/c 60,000
31 (Rent Account transferred to Profit and Loss
Account)
Manager’s Commission
Manager is an employee of the firm. Therefore, the amount due to him as commission is
payable whether the firm earns profit or incurs loss. Stating differently, Manager's
Commission is a charge against profit and transferred to the debit of Profit and Loss
Account.
DISTRIBUTION OF PROFIT AMONG PARTNERS:

PROFIT AND LOSS APPROPRIATION ACCOUNT
A partnership firm, like a proprietorship firm, prepares Trading Account, Profit and Loss
Account and Balance Sheet. In addition, a partnership firm prepares Profit and Loss
Appropriation Account to which net profit or net loss as per the Profit and Loss Account is
transferred to appropriate it as per the agreement among partners. This account, is an
extension of the Profit and Loss Account, and is credited with the amount of Net Profit or
debited with the amount of Net Loss (transferred from. Profit and Loss Account). It is
credited with the amount of interest on drawings of the partners (which is loss to the partners
but an income for the firm) and debited with interest on the capitals of the partners, partners'
salaries and commissions, etc., (which are losses for the firm, and incomes for the partners).
If the partners decide, an amount is transferred to Reserve and the balance profit (Divisible
Profit) is distributed between/among the partners in their profit-sharing ratio.
It should be noted that profit is appropriated up to the amount available for distribution, i.e.,
Divisible Profit, Thus, if after transfer of net loss and credit of interest charged on drawings to
Profit and Loss Appropriation Account, the balance is loss, appropriation is not made. The
loss is distributed among the partners in their profit-sharing ratio. But if it results in profit,
appropriation is made up to the amount of profit.
Net Profit is the profit earned by an enterprise from its operating and non-operating activities,
it is the net effect of operating and non-operating revenues and expenses that are charge
against profit, it is determined by preparing Profit and Loss Account.
Divisible or Distributable Profit is the profit that is available for distribution among partners
after allowing remuneration (Salary, Commission, etc.) to partners, interest on capitals,
transfer to reserve and charging interest on drawings. It is determined by preparing Profit
and loss Appropriation Account.
Profit and Loss Appropriation Account is an extension of the Profit and Loss Account. Net
profit or loss as per Profit and Loss Account is transferred to Profit and Loss Appropriation
Account.
Following are considered as appropriation of profit and therefore are transferred (posted) to
the debit of Profit and Loss Appropriation Account:
(i) Salary/Commission to Partners;
(ii) Interest on Capitals of Partners; and
(iii) Transfer to Reserves.
Interest on Drawings is transferred (posted) to the credit of Profit and Loss Appropriation
Account.
Specimen of the Profit and Loss Appropriation Account
Dr. for the year ended... Cr.
Particulars Particulars
To Profit and Loss A/c By Profit and Loss A/c
(Net Loss+ transferred from (Net Profit*- transferred from
Profit and Loss Account) Profit and Loss Account)
To Interest on Capitals: By Interest on Drawings:
Abhay Abhay
Bhaskar ... Bhaskar __... _
To Partners’Salaries By Loss+ transferred to:
To Partners'Commissions *Abhay's Capital A/c
To Reserve **(or Abhay's Current A/c)
To Profit"5" transferred to: *Bhaskar's Capital A/c
*Abhay's Capital A/c **(or Bhaskar's Current A/c)
**(or Abhay's Current A/c)
*Bhaskar's Capital A/c ...
**(or Bhaskar's Current A/c)
+
Either of the two will exist.
“Under Fluctuating Capital Accounts Method
““Under Fixed Capital Accounts Method
Always remember that amount payable to a partner (except interest on loan and rent) such
as interest on capital (if not specified to be a charge), salary, commission, etc., are
appropriation of profit.
JOURNAL ENTRIES RELATING TO THE PROFIT AND LOSS APPROPRIATION
ACCOUNT
1. Transfer of profit from Profit Profit and Loss A/c ...Dr.
and Loss Account to Profit and To Profit and Loss Appropriation A/c
Loss Appropriation Account (Profit transferred)
2.Transfer of loss from Profit Profit and Loss Appropriation A/c ...Dr.
and Loss Account to Profit and To Profit and Loss A/c
Loss Appropriation Account (Loss transferred)
3. For
Partners'Salaries/Commission (i) Partners'Salaries/Commission A/c ...Dr.
To Partners' Capital/Current** A/cs (Individually)
(Salaries/commission allowed to partners)
(ii) To Close Salaries/Commission Account
Profit and Loss Appropriation A/c ...Dr.
To Partners'Salaries/Commissions A/cs
(Salaries/commission allowed to partners transferred to
Profit and Loss Appropriation Account)
Alternatively, a combined entry may be passed as:
To Partners'Capital/Current** A/cs (Individually)
{Salaries/commission allowed to partners transferred to
4. For Allowing Interest on
Capitals (i) Interest on Capital A/c ...Dr.
(Interest on capitals allowed to partners @ ....% p.a.)
(ii) To Close Interest on Capital Account

To Interest on Capital A/c
(Interest on capital allowed transferred to

(Interest on capitals transferred to Profit and Loss
Appropriation Account)
5. For Charging interest on (i) Partners'Capital/Current** A/cs (Individually) ...Dr.
Drawings To Interest on Drawings A/c
(Interest charged on drawings)
(ii) To Close Interest on Drawings Account
Interest on Drawings A/c ...Dr.
To Profit and Loss Appropriation A/c
(Interest charged on drawings transferred to
Partners'Capital/Current** A/cs (Individually) ...Dr.
(Interest charged on drawings and transferred to
6. For Transfer to Reserve out of Profit and Loss Appropriation A/c ...Dr.
Profit* To Reserve A/c
(Amount transferred to Reserve)
7. For Transfer of Credit Profit and Loss Appropriation A/c ...Dr.
Balance of Profit and Loss To Partners'Capital/Current** A/cs (Individually) (Balance
Appropriation Account (being profit transferred to Capital/Current** Accounts of partners
Divisible/Distributable Profit) in their profit-sharing ratio)
8. For Transfer of Debit Balance Partners'Capital/Current** A/c ...Dr.
of Profit and Loss Appropriation To Profit and Loss Appropriation A/c
Account (Loss) (Loss transferred to Capital/Current** Accounts of partners
in their profit-sharing)
* Reserve is an amount set aside out of profit to strengthen the financial position of the firm
or to meet an unforeseen liability. For example, General Reserve is to strengthen the
financial position while Workmen Compensation Reserve is set aside to meet a claim of
staff, if any.
** Partners' Current Accounts are used when Capital Accounts are maintained following
Fixed Capital Accounts Method.
Features of Profit and Loss Appropriation Account
1. It is an extension of the Profit and Loss Account.
2. It is prepared by the partnership firms.
3. It shows the appropriation of net profit or loss for the accounting period.
4. Entries in this account are passed giving effect to the Partnership Deed.
Difference between Profit and Loss Account and Profit and Loss Appropriation
Account?
Basis Profit and Loss Account Profit and Loss Appropriation
Account
1. Stage of It is prepared after Trading Account. It is prepared after Profit and Loss
Preparation It therefore, starts v/ith Gross Profit Account. It therefore, starts with Net
(in the credit side) or Gross Loss (in Profit (in the credit side) or Net Loss
the debit side) as per the Trading (in the debit side) as per the Profit
Account. and Loss Account.
2. Objective It is prepared to determine net profit It is prepared to show appropriation
earned or net loss incurred during of net profit, i.e., distribution of Net
the accounting year. Profit or Net Loss for the accounting
period among the partners.
3. Nature of Items It is debited with the expenses It is debited with the items of
(charge against profit) and credited appropriation of profit such as
with the income, not being operating salary/commission to partners,
income to determine net profit or interest on capital and transfer to
loss for the accounting period. reserve, etc. It is credited with the
items of income being debited to
Partners'Capital Accounts or
Patners' Current Accounts such as
interest on drawings.
4. Partnership Preparation of this account is not Preparation of this account is
Deed or guided by the Partnership Deed or guided by the Partnership Deed or
Agreement Agreement. Agreement.
5. Matching While preparing this account, While preparing this account,
Principle Matching Principle (i.e., revenue is Matching Principle is not followed
matched against expenses) is being not applicable.
followed.
Let us understand complete set of final accounts of a partnership firm with the help of
following illustration for better understanding of Profit and Loss Appropriation Account.
Illustration 6.
Ayub and Amit are partners in M/s Amrit Papers sharing profits and losses equally. Following
trial balance is prepared from the books of account as at 31st March, 2020:
Particulars. Dr.(Rs.) Particulars Cr.(Rs.)
12,50,00
Opening Stock 45,000 Sales 0
Purchases 7,60,000 Purchases Return 10,000
Sales Return 25,000 Interest on Loan to Ayub 600
Salary and Wages 1,80,000 Sundry Creditors 70,000
Rent 1,10,000 Loan by Amit 20,000
General Expenses 34,400 Capital Accounts:
Interest on Loan by Amit 1,200 Ayub 4,00,000
Sundry Debtors 2,00,000 Amit 3,85,000
Furniture and Fixtures 50,000
Computers 2,20,000
Machinery 3,00,000
Loan to Ayub 10,000
Cash at Bank 75,000
Cash in Hand 15,000
Drawings: Ayub 60,000
Amit 50,000
21,35,60 21,35,60
0 0
Prepare Trading Account, Profit and Loss Account and Profit and Loss Appropriation
Account for the year ended 31st March, 2020 and Balance Sheet as at that date after
accounting the following adjustments:
(i) Stock as at 31st March, 2020 was Rs. 50,000;
(ii) Rent is T 10,000 per month, payable to Ayub;
(iii) Depreciate Furniture and Fixtures and Computers @ 20% p.a., Machinery @ 10%
p.a.;
(iv) Interest on Capitals is allowed @ 6% p.a.;
(v) Manager's Commission is payable @ 1% of net sales; and
(vi) Interest on Loan by Amit was paid on 31st March, 2020.
Solution:
Dr.
M/s Amrit Papers
TRADING ACCOUNT for the year ended 31st March, 2020
Particulars Rs. Particulars Rs.
To Opening Stock By Sales 12,50,000 12,25,00
45,000
To Purchases 7,60,000 Less: Sales Return 25,000 0
Less: Purchases Return 10,000 7,50,000 By Closing Stock 50,000
To Gross Profit
transferred to
Profit and Loss Account 4,80,000
12,75,00 12,75,00
0 0
PROFIT AND LOSS ACCOUNT
Dr. for the year ended 31 st March, 2020 Cr.
1,80,00 By Gross Profit—transferred from 4,80,000
To Salary and Wages 0
Trading Account 600
To Manager's Commission 12,250
(1% of Rs. 12,25,000) By Interest on Loan to Ayub
1,20,00
To Rent 1,10,000 0
Add: Outstanding Rent 10,000 34,400

To General Expenses 1,200
To Interest on Loan by Amit
To Depreciation on:
Furniture and Fixtures 10,000
Computers 44,000 84,000

Machinery 30,000 48,750"
To Net Profit transferred to Profit and
Loss Appropriation Account 4,80,60
0
4,80,600
To Interest on Capital A/cs: By Profit and Loss A/c (Net Profit) 48,750
Ayub 24,000
Amit 23,100 47,100
To Profit transferred to:
Ayub's Capital A/c 825 1,650-

Amit's Capital A/c 825 48,750 48,750
BALANCE SHEET as at 31st March,2020
Liabilities Rs. Assets Rs.
Capital A/cs: Furniture and Fixtures 50,000
Ayub 4,00,000 Less: Depreciation 10,000 40,000
Add: Interest on Capital 24,000 Computers 2,20,000
Share of Profit 825 Less: Depreciation 44,000 1,76,000
4,24,825. Machinery 3;00,000

Less: Drawings 60,000 3,64,825 Less: Depreciation 30,000 2,70,000
Amit 3,85,000 Sundry Debtors 2,00,000
Add: Interest on Capital
23,100 Loan to Ayub 10,000
Share of Profit 825 Closing Stock 50,000
4,08,925 Cash at Bank 75,000
Less: Drawings 50,000 3,58,925 Cash in Hand 15,000
Sundry Creditors 70,000
Loan by Amit 20,000
Manager's Commission Payable 12,250
Rent Outstanding 10,000
8,36,000 8,36,000
Illustration 7.
A and B entered into partnership on 1st April, 2019 without any Partnership Deed. They
introduced capitals of Rs. 5,00,000 and Rs. 3,00,000 respectively. On 31st October, 2019, A
gave Rs. 2,00,000 as loan to the firm without any agreement as to interest.
Profit and Loss Account for the year ended 31st March, 2020 showed a profit of Rs.
4,30,000, but the partners could not agree upon the amount of interest on loan to be
charged and the basis of division of profit.
Pass a Journal entry for distribution of the profit between the partners and prepare Capital
Accounts of both the partners and Loan Account of A. (Al 2011, Dates Modified)
Solution:
JOURNAL
Rs. Rs.
2020 4,25,000
March 2,12,500
To A's Capital A/c
31 2,12,500
To B's Capital A/c
(Profit distributed between A and B equally) (WN 2) .
Dr. PARTNERS'CAPITAL ACCOUNTS
Cr.
Date Particulars A B Date Particulars A B
Rs. Rs. Rs. Rs.
2020 To Balance c/d 7,12,500 5,12,500 2019 5,00,00 3,00,00
By Bank A/c
March April 1 0 0
31 2020
March 31 By Profit and Loss 2,12,50 2,12,50
0 0
Appropriation A/c
(Profit) 7,12,50 5,12,50
7,12,500 5,12,500
0 0
Dr. LOAN BY A ACCOUNT

Cr
Date Particulars Rs. Date Particulars Rs.
2020 To Balance c/d 2019 2,00,00
By Bank A/c
March Oct. 31 0
2,05,000
31 2020 By Interest on Loan by A
March 31 A/c (WN 1) 5,000
2,05,000 2,05,00
0
Working Notes:
5 6
1. Interest on Loan by A = Rs. 2,00,000 x x = Rs. 5,000
12 12
lnterest on Loan is to be paid @ 6% p.a.
Since there is no agreement between partners A and B for interest on loan by partners, the
provision of Indian Partnership Act, 1932 will apply. It prescribes that Interest on Loan by
Partners is payable @ 6% p.a.
2. Net Profit after Interest on Loan by A = Rs. 4,30,000-Rs. 5,000 = Rs. 4,25,000, which
is shared equally because the profit-sharing ratio is not given.
Illustration 8 (Rent Payable to a Partner and Preparation of Profit and Loss Appropriation
Account).
Aman and Boman are partners sharing profits equally. Business is being carried from the
property owned by Aman on a yearly rent of Rs. 24,000. Aman is to get salary of Rs.
1,20,000 p.a. and Boman is to get commission @ 5% of net sales, which during the year
was T 30,00,000. Profit for the year ended 31st March, 2020 before providing for rent was
Rs. 5,00,000.
Prepare Profit and Loss Appropriation Account for the year ended 31st March, 2020.
Solution: PROFIT AND LOSS APPROPRIATION ACCOUNT
for the year ended 31st March, 2020
Dr.
Cr.
To Aman's Capital A/c (Salary) 1,20,000 By Profit and Loss A/c (Net Profit) 4,76,000
To Boman's Capital A/c
(Commission) 1,50,000
Aman's Capital A/c 1,03,000
Boman's Capital A/c 1,03,000 2,06,000
4,76,000 4,76,000
Note: Rs. 24,000 is the rent which is charge against the profit and hence debited to Profit
and Loss Account. Thus, amount of Profit available for appropriation is Rs. 4,76,000 (i.e.,7
5,00,000 - Rs. 24,000).
Illustration 9 (Profit and Loss Appropriation Account).
Aseem and Nihar started business on 1st April, 2019 with capitals of Rs.3,00,000 and
Rs.2,00,000 respectively. According to the Partnership Deed, Nihar is to get salary of
Rs.5,000 per month, Aseem is to get 10% commission on Profit after allowing salary to Nihar
and interest is to be allowed on capitals @ 6% p.a. Profit-sharing ratio between the two
partners is 3 : 2. During the year, the firm earned profit of Rs.2,50,000.
Aseem had given loan of Rs. 1,00,000 to the firm on 1st April, 2019. Interest on loan was
allowed @ 8% p.a. Nihar was given loan of Rs. 2,00,000 on which interest was charged Rs.
11,000. Manager was to be allowed commission of Rs. 3,000.
Pass journal entries for distribution of profit and prepare Profit and Loss Appropriation
Account. The firm closes its books of account on 31st March every year.
Solution: JOURNAL
Date Particulars L.F. Dr.(Rs.) Cr.R)
2020 Profit and Loss A/c
March To Profit and Loss Appropriation A/c 2,50,00
...Dr. 2,50,000
31 (Transfer of net profit to Profit and Loss 0
March Nihar's Salary A/c ..'.Dr. 60,000
31 To Nihar's Capital A/c 60,000
(Salary due to Nihar @ Rs. 5,000 per month)
March Aseem's Commission A/c ...Dr. 19,000
31 To Aseem's Capital A/c (Commission due to Aseem) 19,000
March Profit and Loss Appropriation A/c ...Dr. 79,000 60,000

31 To Nihar's Salary A/c 19,000
To Aseem's Commission A/c
(Salary and commission to Partners transferred to
March Interest on Capital A/c ...Dr. 30,000
31 To Aseem's Capital A/c 18,000
To Nihar's Capital A/c 12,000
(Interest on capitals allowed to partners @ 6% p.a.)
March Profit and Loss Appropriation A/c ...Dr. 30,000
31 To Interest on Capital A/c
30,000
(Interest on capitals transferred to Profit and Loss
March Profit and Loss Appropriation A/c ...Dr. 1,41,000
31 To Aseem's Capital A/c (T 1,41,000 x 3/5) 84,600
To Nihar's Capital A/c (1 1,41,000 x 2/5) (Distribution 56,400
of profit among the partners)
Dr. for the year ended 31st March, 2020 Cr.
To Salary—Nihar's Capital A/c 60,000 By Profit and Loss A/c (Net Profit) 2,50,000
To Commission—Aseem's Capital (Rs. 2,50,000 - Rs. 8,000 + Rs.
A/c 19,000 11,000 - Rs. 3,000)
To Interest on Capital—Aseem's 18,000
Capital A/c 12,000
To Interest on Capital— Nihar's

Capital A/c
Aseem's Capital A/c (3/5) 84,600

Nihar's Capital A/c (2/5) 56,400 1,41,000
2,50,000 2,50,000
Illustration 10 (Profit and Loss Appropriation Account').
X and Y started business on 1st April, 2019 with capitals of Rs. 5,00,000 each. As per the
Partnership Deed, both X and Y are to get monthly salary of 10,000 each and interest on
capitals is Rs. 50,000 each. Interest on Drawings are: X— Rs. 3,000 and Y—Rs. 5,000.
During the year, the firm incurred a loss of Rs. 2,00,000.
Pass Journal entries for the above and prepare Profit and Loss Appropriation Account. The
firm closes its accounts on 31st March, every year.
Solution:
JOURNAL
Date Particulars L.F. Dr.(Rs.) Cr.m
2020
Marc Profit and Loss Appropriation A/c ...Dr. 2,00,00
31 2,00,000
h To Profit and Loss A/c 0
(Transfer of net loss)
Marc 31X's Capital A/c ...Dr. 3,000
h T's Capital A/c ...Dr. 5,000
8,000
To Interest on Drawings A/c
Marc 31Interest on Drawings A/c ...Dr. 8,000
h To Profit and Loss Appropriation A/c
8,000
(Interest on drawings transferred to Profit and Loss
Appropriation A/c)
Marc 31X's Capital A/c ...Dr. 96,000
h Y's Capital A/c ...Dr. 96,000 1,92,00
To Profit and Loss Appropriation A/c 0
(Loss transferred to Partners'Capital Accounts)
for the year ended 31 st March, 2020
Particulars Rs Particulars Rs.R
To Profit and Loss A/c (Net Loss) 2,00,000By Interest on Drawings
A/cs: 3,000
X 5,000 8,000
Y
By Loss transferred to: 96,000
X's Capital A/c 96,000 1,92,000
2,00,000 Y's Capital A/c 2,00,000
Note: Salary to partners and interest on capitals are not allowed because the firm has
incurred loss.
Appropriations are more than Available Profit
It is also a possibility that total amount of appropriation as per the Deed is more than the
amount of profit available for appropriation. In this situation, profit available for distribution
among partners is distributed in the ratio of appropriation to be made. The ratio of
appropriation is determined as follows:
(i) Determine the amount payable as appropriation to each partner as per the Partnership
Deed (ignoring the profit available for distribution among partners). For example, salary
payable, commission payable and interest on capital, etc., payable to each partner is
determined.
(ii) Total the amount of appropriation (as per Step (i) above) for each partner separately.
(iii) Ratio of the Appropriations (as per Step (ii) above) is the ratio in which profit is
appropriated.
It should be kept in mind that no particular item like salary, commission, interest on capital,
etc., has priority over other items of appropriation.
Let us take an example for more clarity. Atul and Amit are partners in a firm. As per the
Partnership Deed the partners are to get salary of Rs. 1,00,000 and Rs. 1,20,000 p.a.
respectively and interest on capital @ 10% p.a. which is Rs. 20,000 and Rs. 40,000
respectively. Net profit for the year Rs. 2,10,000 will be appropriated in the ratio of 3 : 4
calculated as follows:
Atul (Rs.) Amit (Rs.)
Salary 1,00,000 1,20,000
Interest on Capital 20,000 40,000
Total Amount of Appropriation 1,20,000 1,60,000
Therefore, the Ratio of Appropriation is Rs. 1,20,000 Rs. 1,60,000
Or 3 4
Thus, Rs. 90,000 (i.e., 3/7 of Rs. 2,10,000) and Rs. 1,20,000 (Rs..e., 4/7 of Rs. 2,10,000)
being the total of appropriations for Atul and Amit respectively.
Illustration 11 (Appropriations are more than Available Profit).
Ajay and Vijay are partners sharing profits in the ratio of 3 : 2. Ajay is a non-working partner
and contributes Rs. 20,00,000 as his capital. Vijay is a working partner of the firm. The
Partnership Deed provides for interest on capital @ 8% p.a. and salary to every working
partner @ Rs. 8,000 per month. Profit before providing for interest on capital and partner's
salary for the year ended 31st March, 2020 was Rs. 80,000. Show the distribution of profit.
To Ajay's Capital A/c (Interest on 50,000 By Profit and Loss A/c (Net Profit) 80,000
capital) 30,000
To Vijay's Capital A/c (Salary)
80,000 80,000
Note: Interest on Ajay's Capital = Rs. 20,00,000 x 8/100 = Rs. 1,60,000; Salary to Vijay =
Rs. 8,000 x 12 = Rs. 96,000; Thus, Interest on Ajay's Capital + Salary to Vijay = Rs.
1,60,000 + Rs. 96,000 = Rs. 2,56,000.
Since both interest on capital and salary to partners are appropriations and the profit
available for distribution is Rs. 80,000, i.e., less than the amount of appropriations to be
made, the available profit is distributed in the ratio of appropriations to be made to Ajay and
Vijay, i.e.,
Rs. 1,60,000 (interest on capital): Rs. 96,000 (salary), or 5 :3.
Special Aspects of Partnership Accounts
In Partnership Accounts, there are some aspects that require discussion. They are:
1. Partners' Capital Accounts;
2. Remuneration (Salary or Commission) to Partners;
3. Interest on Partners' Capitals;
4. Interest on Partners' Drawings;
5. Adjustments for Incorrect Appropriations of Profits in the Past (Past Adjustments); and
6. Guarantee of Profit.
Let us discuss each of these aspects in detail.
1. PARTNERS’ CAPITAL ACCOUNTS
A partnership firm has more than one owners (partners) and Capital Account is maintained
for each partner separately. It is so because each partner has separate transactions with the
firm. For example, if Atul, Amit and Akhil are three partners in a firm, there shall be three
Capital Accounts, one each for Atul, Amit and Akhil.
The Partners' Capital Accounts may be maintained by following either:
(i) Fixed Capital Accounts Method; or
(ii) Fluctuating Capital Accounts Method.
Fixed Capital Accounts Method
Fixed Capital means capital invested by each partner in the firm remains fixed or unaltered,
unless a partner introduces additional capital or withdraws out of his or her capital. When
Fixed Capital Accounts Method is followed, two accounts, i.e., a Capital Account and a
Current Account for each partner are maintained.
Capital Account: Capital Account of each partner continues to show same balance year after
year and changes only if additional capital is introduced, which is credited to Capital
Account, withdrawal is made out of capital, which is debited to the Capital Account.
Current Account: Current Account is maintained to record transactions other than
transactions of capital such as drawings against profit, interest allowed on capital, interest
charged on drawings, salary or commission payable to a partner, share of profits/losses. As
a result, the balance of Current Account fluctuates with every transaction with the partner.
Current Account of each partner is debited by the amount of:
(i) his drawings against profit;
(ii) interest on drawings;
(iii) share of loss; and
(iv) transfer of amount to Capital Account.
Note: Please note that Drawings against Capital is debited to Partner's Capital Account.
Similarly, Current Account of each partner is credited by the amount of:
(i) interest on Capital;
(ii) remuneration (Salary or commission);
(iii) share of Profit; and
(iv) transfer of amount from Capital Account.
It should be kept in mind that Partner's Current Account may have a credit or debit balance.
The balances of Partners' Capital Accounts are shown in the liabilities side of the Balance
Sheet, as that much amount is due to them. Credit balance in Current Account is shown in
the liabilities side and debit balance in the assets side of the Balance Sheet.
Outline of the two accounts maintained under the Fixed Capital Accounts Method are:
Dr. PARTNERS'CAPITAL ACCOUNTS Cr.
RS.
Particulars x Particulars xro
(Rs.)
To Cash/BankA/c By Balance b/d
(Drawings against By Cash/BankA/c
Capital) (Additional capital)
To Balance c/d
Dr. PARTNERS'CURRENT ACCOUNTS Cr.
Particulars X(Rs.) Particulars X(Rs.) Rm Rs.$)
To Balance b/d By Balance b/d
(In case of debit (In case of credit
opening balance) opening balance)
To Drawings A/c By Interest on Capital
(Drawings against A/c
Profit) By Commission A/c
To interest on By Partner's Salary A/c
Drawings A/c By Profit and Loss App.
To Profit and Loss A/c A/c
(Loss) (Profit)
To Balance c/d*
*The balance may be on the opposite (credit) side if the amount is overdrawn.
Under Fluctuating Capital Accounts Method only one account namely 'Capital Account' is
maintained for each partner.
All transactions of a partner (e.g., capital introduced or withdrawn), salary or commission
allowed, interest allowed on capital, drawings (against profit), interest charged on drawings,
share of profit or loss, etc., are transferred to his Capital Account. As a result, balance in the
Capital Account fluctuates with every transaction.
Capital Accounts having credit balances are shown in the liabilities side while Capital
Accounts having debit balances are shown in the assets side of the Balance Sheet.
Fluctuating Capital Accounts Method is normally followed for maintaining Capital Accounts.
In the absence of any instruction or information, it is assumed that Fluctuating Capital
Accounts Method is followed for maintaining the Partners' Capital Accounts.
Outline of the Capital Account under Fluctuating Capital Accounts Method is as follows:
Dr. PARTNERS'CAPITAL ACCOUNTS Cr.
To Balance b/d (In By Balance b/d (In case
case of debit opening of credit opening
balance) balance)
To Cash/Bank A/c By Cash/Bank A/c
(Drawings (Additional Capital)
against Capital) By Interest on Capital
To Drawings A/c A/c
(Drawings By Commission A/c
against Profit) By Partner's Salary A/c
To Interest on By Profit and Loss App.
Drawings A/c A/c
To Profit and Loss A/c (Profit)
(Loss)
To Balance c/d*
*The balance may be on the opposite (credit) side also.
Pictorial Depiction of Methods of Maintaining
Partners' Capital Accounts with Stems Debited and Credited
Partners' Capital Accounts
I Maintained
deference between Fixed Capital Account and Fluctuating Capital Account

Basis Fixed Capital Account Fluctuating Capital Account
Two accounts are maintained for
1. No. of Accounts One account (i.e., Capital Account) is
each partner, i.e., Fixed Capital
Maintained maintained for each partner.
Account and Current Account.
2. Frequency of Balance in Fixed Capital Account Balance changes with every transaction of the
Change does not change except when partner with the firm.
further capital is introduced or
capital is withdrawn.
3. Transferring the Transactions relating to Capitals All transactions whether for capital, drawings,
Transactions are transferred to Fixed Capital interest on drawings, interest on capital, salary,
Accounts and transactions for commission, share of profit or loss are
drawings, interest on drawings, transferred to Capital Account.
interest on capital, salary,
commission, share of profit or
loss are transferred to Current
Account.
4. Balance Capital Account has credit Fluctuating Capital Account may have credit or
balance. debit balance.
Difference between Capital Account and Current Account
Basis Capital Account Current Account
1. Need Capital Account is maintained in all Current Account is maintained when Fixed
the cases, whether following Fixed Capital Accounts method is followed.
Capital Accounts Method or
Fluctuating Capital Accounts
Method.
2. Balance of Capital Account will always have a Balance of a Current Account may have a
Account credit balance when Fixed Capital credit or debit balance.
Accounts Method is followed. In
Fluctuating Capital Accounts
Method, it may have either credit
or debit balance.
3. Nature In case of fixed capital, Capital Balance of Current Account does not change
Account balance generally remains when capital is introduced or withdrawn by a
unchanged from year to year. It partner.
changes when further capital is
introduced or capital is withdrawn
by a partner.
4. Transactions Capital Account records the Current Account records the transactions such
amount invested by a partner in as drawings, interest on capital, interest on
the firm. drawings, salary, commission, profit or loss,
etc.
Illustration 12
The Partnership Deed provided that Sonu was to be paid a salary of Rs. 20,000 per month
and Raj at a commission of 5% on turnover. It also provided that interest on capital be
allowed @ 8% p.a. Sonu withdrew Rs. 20,000 on 1st December, 2017 and Rajat withdrew
Rs. 5,000 at the end of each month. Interest on drawings was charged @ 6% p.a. The net
profit as per Profit and Loss Account for the year ended 31st March, 2018 was Rs. 4,89,950.
The turnover of the firm for the year ended 31st March, 2018 amounted to Rs. 20,00,000.
Pass necessary Journal entries for the above transactions in the books of Sonu and Rajat.
(CBSE 2019)
Solution: JOURNAL
Date Particulars L.F. Dr.(T) Cr.(Rs.)
(i) Profit and Loss A/c ..Dr. 4,89,950
4,89,950
(Profit transferred from Profit and Loss Account to Profit
and Loss Appropriation Account)
(ii) Partner's Salary A/c ..Dr. 2,40,000
To Sonu's Capital A/c 2,40,000
(Salary credited to Sonu's Capital Account)
(iii) Profit and Loss Appropriation A/c ..Dr. 2,40,000
To Partner's Salary A/c 2,40,000
(Salary transferred to Profit and Loss Appropriation
Account)
(iv) Partner's Commission A/c ..Dr. 1,00,000
To Rajat's Capital A/c 1,00,000
(Commission credited to Rajat's Capital Account)
(v) Profit and Loss Appropriation A/c ..Dr. 1,00,000
To Partner's Commission A/c
1,00,000
(Commission transferred to Profit and Loss Appropriation
Account)
(vi) Interest on Capital A/c ..Dr. 1,12,000
To Sonu’s Capital A/c 64,000
To Rajat's Capital A/c 48,000
(Interest on capital credited to Partners'Capital Accounts)
(vii) Profit and Loss Appropriation A/c ..Dr. 1,12,000
1,12,000
(Interest on Capital transferred to Profit and Loss
Appropriation Account
(viii) Sonu's Capital A/c ..Dr. 400
Rajat's Capital A/c ..Dr. 1,650
2,050
To Interest on Drawings A/c (Interest on drawings charged)
(Note 1)
(ix) Interest on Drawings A/c ...Dr. 2,050
2,050
(Interest on drawings transferred to Profit and Loss Appropriation
Account)
(x) Profit and Loss Appropriation A/c ..Dr. 40,000
To Sonu's Capital A/c 24,000
To Rajat's Capital A/c 16,000
(Profit credited to Partners'Capital Accounts) (Note 2)
Notes:
1. Calculation of Interest on Drawings:
Interest on Sonu's Drawings = Rs. 20,000 x 6/100 x 4/12 = T400
Total Drawings of Rajat = Rs. 5,000 x 12 = Rs. 60,000
Interest on Rajat's Drawings = Rs. 60,000 x 6/100 x 5.5/12 = Rs. 1,650.
2. Calculation of Distributable Profit from Profit and Loss Appropriation Account:
= Rs. 4,89,950 + Rs. 2,050 - Rs. 2,40,000 - Rs. 1,00,000 - Rs. 1,12,000 = Rs. 40,000.
Illustration 13 (When Capitals are Fixed and Fluctuating).
A and B are partners with capitals of Rs. 60,000 and Rs. 20,000 respectively on 1st April,
2019. Net profit (before giving effect to the Partnership Deed) for the year ended 31st March,
2020 was Rs. 24,000. The Partnership Deed provides for the following:
(a) B is to get salary of Rs. 6,000 p.a.
(b) Interest on capitals is to be allowed @ 6% p.a.
(c) Interest on drawings is to be charged @ 5% p.a.
Drawings of the partners A and B were Rs 6,000 and Rs. 4,000 respectively and interest on
drawings for A being Rs. 200 and for B Rs. 100.
Show how profit will be distributed between A and B and also prepare the Capital Accounts
of the partners along with their Drawings Accounts:
(i) if they are fixed, and (ii) if they are fluctuating.
A (6% on Rs. 60,000) 3,600 By interest on Drawings A/cs: 300
B (6% on Rs. 20,000) 1,200 A 200
To B's Salary A/c B 100
(Equal share of profit)* 4,800
As Capital/Current** A/c 6,750 6,000
B'sCapital/Current** A/c 6,750 13,500
24,300 4,300
*Profit is to be shared equally because profit-sharing ratio is not given. **ln case of fixed
capitals.
(i) Fixed Capitals
Dr. AS CAPITAL ACCOUNT Cr.
Date Particulars Date Particulars
2020 To Balance c/d 60,000 2019 By Balance b/d 60,000
March April 1
31
Dr. B'S CAPITAL ACCOUNT Cr.
2020 To Balance c/d 20,000 2019 By Balance b/d 20,000
March April 1
31
Dr. A'S CURRENT ACCOUNT Cr.
2020 To As Drawings A/c 6,000 2020 By Interest on Capital A/c 3,600
March To Interest on Drawings 200 March By Profit and Loss App. A/c 6,750
31 A/c 4,150 31 —Profit (1/2)
March To Balance c/d March
31 31
March
31
10,350. 10,350
Dr. B'S CURRENT ACCOUNT Cr.
2020 To B's Drawings A/c 4,000 2020 By Interest on Capital A/c 1,200
March To Interest on Drawings 100 March By B's Salary A/c 6,000
31 A/c 9,850 31 By Profit and Loss App. A/c 6,750
March To Balance c/d March —Profit (1/2)
31 31
March March
31 31
13,950 13,950
Dr. A'S DRAWINGS ACCOUNT Cr.
Date Particulars Date Particulars Rs
2020 2020
March March
31 To Cash/Bank A/c 6,000 31 By As Current A/c 6,000
Dr. B'S DRAWINGS ACCOUNT Cr.
Date Particulars | Date Particulars
2020 | 2020
March March
31 To Cash/Bank A/c 4,000 31 By B's Current A/c 4,000
(ii) Fluctuating Capitals
Dr. AS CAPITAL ACCOUNT
Cr.
2020 To A's Drawings A/c 6,000 2019 By Balance b/d 60,000
March To Interest on Drawings 200 April 1 By Interest on Capital A/c 3,600
31 A/c 64,150 2020 By Profit and Loss App. A/c 6,750
March To Balance c/d 70,350 March —Profit (1/2) 70,350
31 31
March March
31 31
Dr. B'S CAPITAL ACCOUNT
Date Particulars DateParticulars
2020 2019
March
31 To B's Drawings A/c 4,000 April 1By Balance b/d 20,000
March To Interest on Drawings 100 2020
31 A/c
March March
31 To Balance c/d 29,850 31By Interest on Capital A/c 1,200
March
31By B's Salary A/c 6,000
March
31By Profit and Loss App. A/c 6,750
—Profit (1/2)
33,950 33,950
Dr. AS DRAWINGS ACCOUNT Cr.

Date Particulars | Date Particulars
2020 2020
March To Cash/Bank A/c 6,000 March By As Capital A/c . 6,000
31 31
Dr. B'S DRAWINGS ACCOUNT Cr.
Date Particulars DateParticulars
2020 2020
March To Cash/Bank A/c 4,000 March By B's Capital A/c 4,000
31 31
REMUNERATION (SALARY OR COMMISSION) TO PARTNERS
Remuneration (Salary or Commission) is allowed to the partners for looking after the
business of the firm. It is allowed only if the Partnership Deed provides to allow it. Stating
differently if the Partnership Deed does not exist or if it exists but does not provide for
allowing salary and commission, it is not allowed.
Nature
Salary or commission to partners is allowed only if the Partnership Deed allows it and also if
the firm earns profit during the year. Salary or commission to a partner is an appropriation of
profit, and not a charge against profit.
Salary payable to each partner is normally stated as an amount. But, Commission payable to
a partner is stated as percentage of profit, which may be allowed to the partners either:
(i) as a percentage of net profit or distributable profit before charging commission; or
(ii) as a percentage of net profit or distributable profit after charging commission.
Commission, under the two methods, is computed as follows:
(i) Percentage of Net Profit or Distributable Profit before charging Commission:
Rate of Commission
Net Profit or Distributable Profit (before Commission) x
100
(ii) Percentage of Net Profit or Distributable Profit after charging Commission:
Rate of commision
Net Profit or Distributable Profit (before Commission) x
100+ Rate of Commission
Accounting Treatment
Remuneration (Salary or Commission) to partners, being an appropriation of profit, is
transferred to Profit and Loss Appropriation Account. Journal entries passed are:
(i) On Allowing Remuneration (Salaries or Commission) to Partners:
Partners' Salaries/Commission A/c .. .Dr.
To Partners' Current A/cs [When Capitals are fixed]
To Partners' Capital A/cs [When Capitals are fluctuating]
(ii) On Closure of Remuneration (Salaries or Commission) A/cs:
To Partners' Salaries/Commission A/c
Illustration 14 (Commission to Partners and Distribution of Profit).
X and Y are partners in a firm. X is to get commission of 10% of net profit before charging
any commission. Y is to get a commission of 10% on net profit after charging all
commissions. Net Profit for the year ended 31st March, 2020 was Rs. 55,000.
Find the commission of X and Y. Also, show the distribution of profit.
Chapter 2- Accounting for Partnership Firms—Fundamentals 2.29
Particulars Rs.Particulars Rs.
To X’s Commission A/c (Rs. 55,000 By Profit and Loss Account (Net 55,000
x 10/100) Profit)
To T's Commission A/c (Note)
[(Rs. 55,000 -Rs. 5,500) x 10/110]
To Profit transferred to Capital
A/cs: 5,500
X 22,500 4,500
Y 22,500 45,000
55,000 55,000
Note: The above stated amount of V's Commission can be verified. After charging all
commissions, net profit comes to Rs. 45,000 ]/.e., Rs. 55,000 - (Rs. 5,500 + Rs.
4,500)].Thereafter, calculate Y's Commission @ 10% ofRs. 45,000.
3. INTEREST OF PARTNERS’ CAPITAL
Interest on Capital is allowed to compensate a partner for contributing capital to the firm in
excess of the profit-sharing ratio. Like interest on drawings, it is also calculated at the agreed
rate with reference to the time capital has been used in the business. Thus, interest on
capital is allowed on the opening balance of the partner's capital.
Additional Capital: If additional capital is introduced during the year, interest is allowed on it
from the date additional capital is introduced till the end of the accounting year.
Withdrawal of Capital: If capital is withdrawn by a partner during the year and interest is
allowed on capital, interest is not allowed on the amount withdrawn from the date of
withdrawal of capital till the end of the accounting year.
Example
Alok, a partner had capital of Rs. 5,00,000 as on 1st April, 2019. He introduced additional
capital of T 2,00,000 on 1st October, 2019 and withdrew Rs. 1,00,000 on 1st January, 2020.
If interest on capital is allowed @ 10% p.a., interest on capital will be Rs. 57,500, calculated
as follows:
Interest on Rs. 5,00,000 @ 10% p.a. for 6 months (1st April, 2019 to
30th September, 2019)
25,000
Interest on Rs. 7,00,000 @ 10% p.a. for 3 months (Rs. 5,00,000 + Rs. 2,00,000)
(1st October, 2019 to 31st December, 2019)
17,500
Interest on Rs. 6,00,000 @ 10% p.a. for 3 months (Rs. 7,00,000 - Rs. 1,00,000)
(1st January, 2020 to 31st March, 2020)
15,000
Total Interest
57,500
Reasons or justification for allowing interest on capital are:
(i) When Capitals of partners are different but profit share is equal. If a partner invests
more capital as compared to other partners and profit share is equal, interest paid on capital
compensates him or her for more investment. In case interest on capital is not paid, share in
profit of a partner investing more capital will be equal to share of profit of partners investing
less capital.
(ii) When Capitals of partners are not same and profit share is also not equal. In this case,
partners investing less capital may get more share of profit and partners investing more
capital may get less share of profit.
(iii) Capital increases the earning capacity of the firm. Capital is the most important
component of business. Capital helps in efficient conduct of business activities and therefore
earning more profits. It is because of this reason that interest on capital is allowed.
At the same time, where profit is shared by the partners in the proportion of their capitals,
interest on capital should not be allowed because partner investing more capital gets more
share of profit. The provisions relating to interest on capital are given below:
PROVISION RELATING TO INTEREST ON CAPITAL
Case Provision
1. When the Partnership Deed does not 1. Interest on capital is not allowed.
exist or Partnership Deed does not provide
for interest on capital.
2. When the Partnership Deed provides for 2. Interest on capital is accounted as

interest on capital but is silent on whether appropriation of profit. Interest on capital is
interest is a charge or appropriation. allowed only if there is profit.
There are three possible situations as follows:
(i) Situation 1: Loss — Interest on capital
is incurred is not allowed.
(ii) Situation 2: Profit — Interest on
capital is
before interest is allowed at the
agreed
equal to or more rate.
than the interest.
(iii) Situation 3: Profit — Interest is
allowed only
before interest is to the extent of profit
less than the in the ratio of
interest on
interest. capital of each
partner.
3. When the Partnership Deed provides for 3. Interest on capital is allowed whether the
interest on capital as a charge (/.e., to be firm has earned profit or has incurred loss.
allowed whether there are profits or losses).
Journal entries to record interest on capital are:
If Partners' Capital Accounts are fixed. If Partners' Capital Accounts are
fluctuating’:
(i) Interest on Capital A/c ..Dr.(i) Interest on Capital A/c ...Dr.
To Partners'Current A/cs (Interest To Partners' Capital A/cs
on capital allowed to partners) (Interest allowed on partners'capitals)
(ii) Profit and Loss Appropriation A/c ...Dr.(ii) Profit and Loss Appropriation A/c ...Dr.
To Interest on CapitaRs. A/cs To Interest on Capital A/cs
(Interest on capital transferred to (Interest on capital transferred to
Profit and Loss Appropriation Profit and
Account) Loss Appropriation Account)
Illustration 15.
X and Y are partners sharing profits and losses in the ratio of 2 : 3 with capitals of Rs.
2,00,000 and Rs. 1,00,000 respectively. Pass the necessary Journal entry or entries for
distribution of profit/loss for the year ended 31st March, 2020 in each of the alternative
cases:
Case 1. If Partnership Deed does not provide for interest on capital and the profit for the year
is Rs. 20,000.
Case 2. If Partnership Deed provides for interest on capital @ 6% p.a. and loss for the year
is Rs. 15,000.
Case 3. If Partnership Deed provides for interest on capital @ 6% p.a. and the profit for the
year is Rs. 21,000.
Case 4. If Partnership Deed provides for interest on capital @ 6% p.a. as a charge on profit
and the profit for the year is 20,000.
and the profit for the year is Rs. 2,000.
and the profit for the year is Rs. 18,000.
Solution: JOURNAL
Date Particulars L.F. Dr. (T) Cr.(T)
2020 Case 1
March Profit and Loss A/c
31 To Profit and Loss Appropriation A/c ...Dr. 20,000 20,000
(Net profit transferred to Profit and Loss
Profit and Loss Appropriation A/c ...Dr. 20,000
To X's Capital A/c
8,000
To K's Capital A/c
12,000
(Profit distributed between X and Y in the ratio of
2:3)
Case 2 ...Dr. 6,000
X's Capital A/c ...Dr. 9,000
Y's Capital A/c
To Profit and Loss A/c 15,000
(Loss distributed between X and Y in the ratio of
2:3) Note: Due to loss, interest on capital is not
allowed.
Case 3
Profit and Loss A/c
To Profit and Loss Appropriation A/c ...Dr. 21,000 21,000
Interest on Capital A/c ...Dr. 18,000
To X's Capital A/c 12,000
To K's Capital A/c 6,000
(Interest on capital allowed to Partners @ 6% p.a.)
Profit and Loss Appropriation A/c To Interest on ...Dr. 18,000
Capital A/c 18,000
(Interest on capital transferred)
Profit and Loss Appropriation A/c ...Dr. 3,000 1,200
To Y's Capital A/c'
2:3)
Case 4 ...Dr. 18,000
Interest on Capital A/c
12,000
To X's Capital A/c
6,000
To Y's Capital A/c
(Interest on capital allowed @ 6% p.a.)
Profit and Loss A/c ...Dr. 18,000
18,000
(Interest on capital transferred to Profit and Loss
Account)
2,000
Profit and Loss Appropriation A/c ...Dr. 2,000
To X's Capital A/c
800
To V"s Capital A/c
1,200
2:3)
Case 5 ...Dr. 18,000
12,000
To X's Capital A/c
6,000
To Y's Capital A/c
(Interest on capital allowed @ 6% p.a.)
18,000
Account being a charge)
X's Capital A/c ...Dr. 6,400
Y's Capital A/c ...Dr. 9,600
To Profit and Loss A/c (T18,000 - Rs. 2,000) 16,000
(Net loss transferred to Capital Accounts of X and
Y in their profit-sharing ratio)
Case 6 ...Dr. 18,000
To Y’s Capital A/c 6,000
(Interest on capital allowed as a charge on profit @
6% p.a.) (Note)
18,000
Account)
Note: Case 6: Profit and Loss Appropriation Account will not be prepared because interest
on capital is a charge against profit and hence is debited to Profit and Loss Account. After
allowing interest on capital, it results in neither profit nor loss.
Interest on Capital when Profit Available for Appropriation is Inadequate
Profit of the firm may be less than the amount of interest on capitals allowable to the
partners and interest on capital is an appropriation. In this situation, interest on capitals of
the partners is calculated and the profit is distributed among the partners in the ratio of
interest on capital.
In case, along with interest on capital, appropriation is to be made for salary, commission,
etc., to partners, total amount of appropriations for each partner is determined and amount of
profit is distributed among the partners in the ratio of the appropriations to be made to each
partner. Following illustration will bring more clarity.
Illustration 16 (Interest on Capital when Profit is Inadequate).
A and B have capitals of Rs. 4,00,000 and Rs. 2,00,000 respectively and interest on capital
is to be allowed @ 6% p.a. Their profit-sharing ratio is 2 : 3 and profit (before interest) for the
year is Rs. 30,000. Prepare Profit and Loss Appropriation Account to distribute the profit.
Solution:
Dr. PROFIT AND LOSS APPROPRIATION ACCOUNT for the year ended...
Cr.
A 20,000
B 10,000 30,000
30,000 30,000
Working Note: The interest on A's Capital and B's Capital is Rs. 24,000 and Rs. 12,000
respectively. Thus, total interest on capital is Rs. 36,000. Profit before interest is Rs.
30,000.The interest on capital will be allowed as follows:
Rs .30,000 x Rs . 24,000 Rs .30,000 x Rs . 12,000

A= = Rs. 20,000; B = = Rs. 10,000.
Rs . 36,000 Rs . 36,000
Remember: Interest on capital is allowed to the extent of available profit only, since interest
on capital is an appropriation of profit.
In case, interest on capital is a charge, i.e., it is to be allowed whether the firm earns profit or
incurs loss. Net profit is determined after allowing interest on capital, which is transferred to
Profit and Loss Appropriation Account to be distributed among partners in their profit-sharing
ratio. Following illustration explains it further.
Illustration 17.
Atul and Bhaskar are partners sharing profits in the ratio of 2 : 3. Their capitals are Rs.
4,00,000 and Rs. 2,00,000 respectively. Interest is to be allowed on capitals @ 6% p.a.
Profit before allowing interest on capitals is Rs. 30,000.
Prepare Profit and Loss Appropriation Account to distribute profit or loss, if interest on
capitals is a charge.
Solution:
Dr. PROFIT AND LOSS ACCOUNT for the year ended...
Cr.
To Interest on Capital A/cs: By Profit (Before Interest) 30,000

Atul 24,000 36,000 By Net Loss transferred to 6,000
Bhaskar 12,000 Profit and Loss Appropriation A/c
36,000 36,000
Dr. PROFIT AND LOSS APPROPRIATION ACCOUNT for the year
ended... Cr.
Particulars Particulars T
To Profit and Loss A/c 6,000By Loss transferred to Capital A/cs:
Atul 2,400
Bhaskar 3,600 6,000
6,000 6,000
Alternatively:
Dr. for the year ended...
Cr.
Particulars Particulars Rs
To Net Loss transferred from Profit By Loss transferred to Capital A/cs:
and Loss A/c (Rs. 3,000 - 6,000 Atul 2,400
Rs.24,000 – Rs.12,000) Bhaskar 3,600
6,000 6,000
Note: The syllabus prescribes preparation of Profit and Loss Appropriation Account and not
Profit and Loss Account. Also the question prescribed to prepare Profit and Loss
Appropriation Account. Net Profit may be determined by preparing a Working Note or may
be determined as above.
Opening Capital: Interest on capital is allowed on Opening Capital of the partner. If a
partner has neither introduced additional capital nor withdrawn it during the year, closing
balance of the Capital Account of the previous year is the opening balance in the Capital
Account of the Current Year. In case opening capital is not given, it needs to be determined
to calculate interest on capital. It is determined by adding the items which have already been
deducted (e.g., Share of Loss, Drawings, Interest on Drawings) and by deducting the items
which have already been added to the capital (e.g., Additional Capital, Interest on Capital,
Profit already credited). It is calculated as follows:
(a) When Capitals are fixed:
CALCULATION OF OPENING CAPITAL
Rs.
Capital at the end of the year Add: Withdrawal of Capital
Less: Additional Capital introduced during the year
Capital in the beginning of the year
(b) When Capitals are fluctuating:
Rs.
Capital at the end of the year
Add: Drawings Against Capital (Withdrawal of Capital)
Drawings Against Profit
Interest on Drawings
Share of Loss for the year*
Less: Additional Capital introduced during the year
Partner's Salary/Remuneration
Alternatively, Opening Capital can be calculated as Balancing Figure by preparing Capital
Account of each partner as follows:
Dr. PARTNER'S CAPITAL ACCOUNT
Cr.
To Cash/BankA/c By Balance b/d
(Drawings Against Capital) (Balancing Figure)
To Drawings A/c By Cash/BankA/c
(Drawings Against Profit) (Capital Introduced)
To Interest on Drawings A/c By Interest on Capital A/c
To Profit and Loss Appropriation By Partner's Salary/Commission A/c
A/c (Loss for the year) By Profit and Loss Appropriation A/c
To Balance c/d (Given) (Share of Profit)
Illustration 18 (Calculation of Opening Capital).
A and B are partners in a business and their capitals at the end of the year were Rs.
7,00,000 and Rs. 6,00,000 respectively. Calculate their opening capitals on the basis of the
following information:
(a) Drawings of A and B for the year were Rs. 75,000 and Rs. 50,000 respectively.
(b) B introduced capital of Rs. 1,00,000 during the year.
(c) Interest on capital credited to the Capital Accounts of A and B were Rs. 15,000 and T
10,000 respectively.
(d) Interest on drawings debited to the Capital Accounts of A and B were Rs. 7,500 and Rs.
5,000 respectively.
(e) Share of profit credited to Capital Accounts was Rs. 1,00,000 each.
Particulars A (Rs.) B(Rs.)
Capitals at the end 7,00,000 6,00,000
Add: Drawings during the year Interest on 75,000 50,000
Drawings 7,500 5,000
Less: Capital Introduced during the year 7,82,500 1,00,000 6,55,000
Interest on Capital 15,000 1,15,000 10,000 2,10,000
Share of Profit for the year 1,00,000 1,00,000
Capitals in the beginning 6,67,500 4,45,000
Alternatively, Capital Account of each partner may be prepared as follows:
PARTNERS' CAPITAL ACCOUNTS
Particulars A(Rs.) B(Rs.) 'Particulars A(Rs.) B(Rs.)
To Drawings A/c 75,000 50,000 By Balance b/d 6,67,500 4,45,000
To Interest on Drawings 7,500 5,000 (Balancing Figure) 15,000 1,00,000
A/c 7,00,000 6,00,000 By Cash/BankA/c 1,00,000 10,000
To Balance c/d (Given) (Addl. Capital Introduced) 1,00,000
By Interest on Capital A/c
7,82,500 6,55,000 By Profit and Loss 7,82,500 6,55,000
Approp. A/c
(Share of Profit)
Illustration 19 (Calculation of Opening Capital).
A and B are partners in a business and their capitals at the end of the year were
Rs.7,00,000 and
Rs.6,00,000 respectively. Calculate their opening capitals from the following information:
(a) Drawings of A and B for the year were Rs.75,000 and Rs.50,000 respectively.
(b) B introduced capital of Rs.1,00,000 during the year.
(c) Interest on capital credited to the Capital Accounts of A and B were Rs.15,000 and
Rs.10,000 respectively.
(d) Interest on drawings debited to the Capital Accounts of A and B were Rs.7,500 and
(e) Share of loss debited to Capital Account of each Partner was Rs.20,000.
Solution:
Particulars A (Rs.) B(Rs.)
Capitals at the end 7,00,000 6,00,000
Add: Drawings during the year 75,000 50,000
Interest on Drawings 7,500 5,000
Share of Loss for the year 20,000 20,000
Less: Capital Introduced during the year 8,02,500 1,00,000 6,75,000
Interest on Capital 15,000 15,000 10,000 1,10,000
Capitals in the beginning 7,87,500 5,65,000
Illustration 20 (Calculation of Interest on Capital).
A and B started business on 1st April, 2019 with capitals of Rs.6,00,000 and Rs.4,00,000
respectively. During the year, A introduced Rs.1,00,000 as additional capital on 1st October,
2019. They withdrew Rs.50,000 per month against profits. Interest on capital is to be allowed
@ 10% per annum. Calculate interest payable to A and B for the year ended 31st March,
2020.
Solution: Interest on A's Capital: Rs.
Interest on Rs.6,00,000 for one year: Rs.6,00,000 x 10/100
60,000
Interest on Rs.1,00,000 for 6 months: Rs.1,00,000 x 6/12 x 10/100
5,000
(from 1st October, 2019 to 31st March, 2020)
65,000
Interest on B's Capital:
Interest on Rs.4,00,000 for one year: Rs.4,00,000 x 10/100 Rs.40,000
Illustration 21.
Ramesh and Naresh are partners in a firm. Their capitals as on 1st April, 2019 were
Rs.2,50,000 and Rs.1,50,000 respectively. They share profits equally. On 1st July, 2019,
they decided that their capitals should be Rs.2,00,000 each. The necessary adjustment in
the capitals were made by introducing or withdrawing capital. Interest on capital is allowed
@ 8% p.a. Compute interest on capital for both the partners for the year ended 31st March,
2020.
Solution: Calculation of interest on capital:
(i) Interest on Ramesh's Capital: Rs.
From 1st April, 2019 to 30th June, 2019 (Rs.2,50,000 x 8/100 x 3/12) 5,000
From 1st July, 2019 to 31st March, 2020 (Rs.2,00,000 x 8/100 x 9/12) 12,000
17,000
(ii) Interest on Naresh's Capital:
From 1st April, 2019 to 30th June, 2019 (Rs.1,50,000 x 8/100 x 3/12) 3,000
From 1st July, 2019 to 31st March, 2020 (Rs.2,00,000 x 8/100 x 9/12) 12,000
15,000
Illustration 22.
From the following Balance Sheet of X and Y, calculate interest on capital @ 5% p.a. for the
year ended 31st March, 2020:
BALANCE SHEET as at 31 st March, 2020
X's Capital A/c F's Capital A/c 90,000 Sundry Assets 2,10,000
General Reserve 80,000
40,000
2,10,000 2,10,000
During the year ended 31st March, 2020, X's drawings were Rs. 10,000 and Y's drawings
were Rs. 30,000. Profit for the year ended 31st March, 2020 was Rs.60,000, out of which
Rs. 40,000 is
transferred to General Reserve.
Solution: Calculation of Interest on X's Capital: Rs.
X's Capital as at 31st March, 2020 90,000
Add: Drawings during the year 10,000
1,00,000
Less: Profit (added or credited) [1/2 (Rs. 60,000 - Rs. 40,000)]
10,000
Capital as at 1st April, 2019 90,000
Interest on capital @ 5% p.a. = T 90,000 x 5/100 = Rs. 4,500.
Calculation of Interest on Y's Capital: Rs.
Y's Capital as at 31st March, 2020 80,000
Add: Drawings during the year 30,000
1,10,000
Less: Profit (added or credited) [1/2 (Rs. 60,000 - Rs. 40,000)] 10,000
Capital as at 1st April, 2019 1,00,000
Interest on Capital @ 5% p.a. = Rs. 1,00,000 x 5/100 = Rs. 5,000.
Notes:
1. Capital in the beginning is calculated by adding drawings and deducting profit distributed.
2. Profit during the year was Rs. 60,000 out of which Rs. 40,000 is transferred to Reserve
and is shown in the Balance Sheet. Thus, in effect, only Rs. 20,000 were distributed which
have been deducted.
3. In the absence of any profit-sharing ratio being given, partners will share profit and loss
equally.
Illustration 23 (Calculation of Interest on Capital, Drawings Against Profits and Drawings
Against Capital). X and Y are partners sharing profits in the ratio of 3 : 2. On 31st March,
2020 after closing the books of account, their capitals are Rs. 10,00,000 and T 12,50,000
respectively. On 1st May, 2019, X had introduced an additional capital of Rs. 2,50,000 and Y
withdrew Rs. 1,25,000 from his capital. On 1st October, 2019, X withdrew Rs.5,00,000 from
his capital and Y introduced Rs.6,25,000. After closing the accounts, it was noticed that
Interest on Capital @ 6% p.a. has been omitted. During the year ended 31st March, 2020,
X's drawings and Y's drawings were Rs. 2,50,000 and Rs. 1,25,000. Profits (before interest
on Capital) during the year were Rs. 5,00,000.
Calculate Interest on Capital if the capitals are (a) fixed and (b) fluctuating.
Solution:
(a) When Capitals are Fixed:
Particulars X Y
Rs. Rs.
10,00,000 12,50,000
Closing Capital 5,00,000 1,25,000
Add: Withdrawal of Capital 15,00,000 13,75,000
Less: Additional Capital Introduced 2,50,000 6,25,000
Opening Capital
12,50,000 7,50,000
CALCULATION OF INTEREST ON CAPITAL
X Rs. Y Rs.
Interest on Opening Capital 75,000Interest on Opening Capital 45,000
(Rs.12,50,000 x 6/100) (Rs. 7,50,000 X 6/100)
Add: Interest on Additional Capital 13,750 Add: Interest on Additional Capital 18,750
(Rs. 2,50,000x6/100x11/12) 6,25,000 X 6/12 x 6/100)
88,750 63,750
Less: Interest on Capital
Withdrawn 15,000Less: Interest on Capital Withdrawn 6,875
(Rs.5,00,000x6/100x6/12) (Rs. 1,25,000 X 11/12x6/100)
73,750 56,875
(b) When Capitals are Fluctuating:

Particulars X Y
Rs. Rs.
Closing Capital 10,00,000 12,50,000
Add: Withdrawal of Capital 5,00,000 1,25,000
Drawings 2,50,000 1,25,000
Less: Additional Capital Introduced 17,50,000 15,00,000
Less: Share of Profit 2,50,000 6,25,000
Opening Capital 15,00,000 8,75,000
3,00,000 2,00,000
12,00,000 6,75,000
CALCULATION OF INTERESTON CAPITAL
X Rs. Y Rs.
Interest on Opening Capital 72,000 Interest on Opening Capital 40,500
R 12,00,000x6/100) 13,750 R 6,75,000x6/100) 18,750
Add: Interest on Additional Capital Add: Interest on Additional Capital
R 2,50,000 x 6/100 X 11/12) 85,750 R 6,25,000x6/100x6/12) 59,250
Less: Interest on Capital 15,000 Less: Interest on Capital Withdrawn 6,875
Withdrawn R 5,00,000x6/100x6/12) 70,750 R 1,25,000x6/100x11/12) 52,375
Illustration 24 (Transfer of Net Profit to General Reserve).
X and Y are partners sharing profits and losses in the ratio of 7 : 3. Their Capital Accounts
as at 1st April, 2019 stood at X—Rs.5,00,000; Y—Rs. 4,00,000. Partners are allowed
interest on capital @ 5% p.a. Drawings of the partners during the year ended 31st March,
2020 were Rs. 72,000 and Rs.50,000 respectively. Profit for the year before allowing interest
on capital and salary to Y @ T 5,000 per month was Rs. 8,00,000. 10% of the net profit is to
be set aside as General Reserve.
Prepare Profit and Loss Appropriation Account for the year ended 31st March, 2020, and
Capital and Current Accounts of the partners.
Solution:
Dr. PROFIT AND LOSS APPROPRIATION ACCOUNT for the year ended 31st March,
2020 Cr.
Particulars Rs. Rs.

Particulars
To Interest on Capital A/cs: By Profit and Loss A/c (Net Profit) 8,00,000
X's Current A/c 25,000 •
Y's Current A/c 20,000
To Y's Salary A/c (Y's Current A/c)
To General Reserve A/c
(10% ofRs. 8,00,000) 45,000
To Profit transferred to: 60,000
X's Current A/c (7/10) 4,30,500 80,000
Y's Current A/c (3/10) 1,84,500 6,15,000
8,00,000 8,00,000
Dr. PARTNERS'CAPITAL ACCOUNTS
Cr.
Date Particulars X Y Date Particulars X Y
Rs. Rs. Rs. Rs.
2020 2019
5,00,00 4,00,00 5,00,00 4,00,00
March To Balance c/d April 1 By Balance b/d
0 0 0 0
31
Dr. PARTNERS' CURRENT ACCOUNTS
Cr.
Date Particulars Y Date Particulars
X Rs. Rs. X Rs. Y Rs.
2020 To Drawings A/c 2020
March To Balance c/d March
By Interest on
31 72,000 50,000 31
Capital A/c
March 3,83,50 2,14,50 March 20,000
By Y's Salary A/c
31 0 0 31 25,000 60,000
By Profit and Loss
March 4,30,50 1,84,50
Appropriation A/c
31 0 0
(Profit)
4,55,50 2,64,50 4,55,50 2,64,50
0 0 0 0
Illustration 25 (Transfer of Divisible Profit to General Reserve).
X and Y are partners sharing profits and losses in the ratio of 7 : 3. Their Capital Accounts
as at 1st April, 2019 stood at X—Rs.5,00,000; Y—Rs.4,00,000. Partners are allowed interest
on capital @ 5% p.a. Drawings of X and Y during the year ended 31st March, 2020 were Rs.
72,000 and Rs. 50,000 respectively. Profit for the year before allowing interest, on capital
and salary to Y @ L 5,000 per month was Rs. 8,00,000. 10% of the divisible profit is to be
set aside as General Reserve.
Prepare Profit and Loss Appropriation Account.
Solution: PROFIT AND LOSS APPROPRIATION ACCOONT
Dr. for the year ended 31st March, 2020
C.r.
Particulars Particulars Rs.
X
25,000
Y
20,000
To Y's Salary A/c (Y's Current
A/c)
To General Reserve A/c*
X's Current A/c
4,37,850 45,000
Y's Current A/c 60,000
69,500
1,87,650 6,25,500
8,00,000 8,00,000
*Amount transferred to General Reserve = 10% of Divisible Profit
= 10% of T 6,95,000 (/.e.,^ 8,00,000 - Rs. 25,000 - Rs. 20,000 - Rs. 60,000)
= Rs. 69,500.
4. INTEREST ON PARTNERS’ DRAWINGS
Drawings mean the amount withdrawn, in cash or in kind, by partners for their personal use.
Drawings may be out of capital or against profit. Both are discussed below:
Drawings against Capital
Drawings against capital is withdrawal of amount out of his or her capital in the firm.
Drawings against capital is debited to his or her Capital Account. It means that the capital is
reduced by the amount withdrawn.
Interest on capital is allowed on capital for the period it is used in business. As a result of
drawings against capital, interest on capital is not allowed to a partner on withdrawn amount.
For example, Anmol (partner) has capital of Rs.5,00,000 on 1st April, 2019. He withdraws
Rs. 1,00,000 on 1st October, 2019 out of his capital. If the Partnership Deed allows interest
on capital @ 10% p.a., Anmol will get interest of Rs. 45,000 on capital for the year ended
31st March, 2020, calculated as follows:
On Rs. 5,00,000 @ 10 p.a. for 6 months (1st April, 2019 to 30th September, 2019) Rs.
25,000
On 4,00,000 (i.e., Rs. 5,00,000 - T 1,00,000) @ 10% p.a. for 6 months
(1st October, 2019 to 31st March, 2020)
Rs.20,000
Total Interest
Rs.45,000
Drawings against Profit
Drawings against profit means drawings by a partner against his dr her expected share of
profit for the year. Drawings against profit is debited to Drawings Account and not to the
Capital Account of the partner. Actual share of profit of a partner is known at the end of the
year and is the date when it becomes due to the partner. Since, withdrawal is earlier than it
is due, the firm charges interest for the period amount is withdrawn by the partner.
Difference between Drawings Against CapitaRs. and Drawings Against Profit
Basis Drawings Against CapitaRs. Drawings Against Profit
1. Where Debited It is debited to Capital Account. It is debited to Drawings Account.
2. Part It is against capital. It is against expected profit.
3. Effect It reduces capital. It does not reduce capital.
4. Interest on It is not considered for calculating It is considered for calculating
Drawings interest on drawings. interest on drawings.
5. Interest on It is considered for calculating It is not considered for calculating
Capital interest on capital. interest on capital.
Interest is charged on drawings against expected profit if the Partnership Deed provides for
charging interest on drawings. Interest charged on drawings is transferred to Profit and Loss
Appropriation Account and debited to Partners' Capital Accounts (in case of Fluctuating
Capital Accounts Method) or Partners' Current Accounts (in case of Fixed Capital Accounts
Method). Journal entries passed for interest on drawings are:
Partner's Capital/Current A/c ...Dr.
To Interest on Drawings A/c
Interest on Drawings A/c ...Dr.
(Interest on Drawings transferred)
Illustration 26.
Chhavi and Neha were partners in a firm sharing profits and losses equally. Chhavi withdrew
a fixed amount at the beginning of each quarter. Interest on drawings is charged @ 6% p.a.
At the end of the year, interest on Chhavi's drawings amounted to 900.
Pass necessary Journal entry for charging interest on drawings. (CBSE 2019)
JOURNAL
Chhavi's Capital/Current* A/c ...Dr. 900
To Interest on Drawings A/c 900
(Interest on drawings charged)
In case of Fixed Capitals.
Interest on amount of drawings is charged on the amount of drawings from the date of
withdrawal (drawing) till the end of the financial year.
Calculation of Interest on Drawings
Drawings by a partner may be broadly divided into:
(i) Irregular Drawings: It means drawings of same amount or different amounts at
irregular intervals; and
(ii) Regular Drawings: It means drawings of same amount at regular intervals.
Interest on Drawings when drawings are made at irregular period or of different amounts,
Product Method of calculating interest is followed. And when drawings are made of same
amount at regular intervals, interest on drawings is calculated using Average Period Method.
The two methods of calculating interest on drawings are:
I. Product Method; and
II. Average Period Method.
Both the methods are discussed below:
I. Product Method: When unequal amount is withdrawn at different dates or when there
is irregular drawings, interest on drawings is calculated with the help of Simple Method or
Product Method.
Simple Method: Under this method, interest on drawings is calculated for the period the
amount is drawn. The interest is calculated with reference to each drawing.
Product Method: Under this method, the amount of drawings is multiplied with the number of
months or number of days (as the case is) it is drawn. The product so obtained is totalled
and interest is calculated thereon for one month, if the period taken is in months and for one
day, if the period taken is in days.
Rate of Interest 1 1
Formula: Interest on Drawings = Total of Product x x or
100 12 365
Illustration 27 (Calculation of Interest on Drawings by Simple Method and Product Method).
In a partnership, partners are charged interest on drawings @ 15% p.a. During the year
ended 31st March, 2020, a partner withdrew as follows:
1st May, 1st August, 30th September, 31st January, 31st March,
Date 2019 2019 2019 2020 2020
Amount 2,000 5,000 2,000 6,000 2,000
(Rs.)
What is the interest chargeable from the partner?
Solution:
(i) Simple Method
No. of Months up to 31 st March, Interest @ 15%
Date Amount (Rs.) 2020 (Rs.)
1st May, 2019 2,000 11 275*
1st August, 2019 5,000 8 500
30th September, 2,000 6 150
2019
31st January, 2020 6,000 2 150
31st March, 2020 2,000 0 0
17,000 1,075
interest = Rs. 2,000 x 15/100 x 11/12 = Rs. 275.
(ii) Product Method
When drawings are made in unequal amounts at different dates, interest on drawings is
calculated by Product Method as follows:
C
A B D =BxC
No. of Months up to 31 st
Date Amount R) Product(Rs.)
March, 2020
1st May, 2019 2,000 11 22,000
1st August, 2019 5,000 8 40,000
30th September, 2019 2,000 6 12,000
31st January, 2020 6,000 2 12,000
31st March, 2020 2,000 0 0
17,000 86,000
Rs .86,000 x 15 x 1
Interest on Rs. 86,000 @ 15% p.a. for one month is = Rs. 1,075.
100 x 12
II. Average Period Method: This method is used when there is regular drawings or when:
(a) the amount of drawings is uniform; and
(b) the time interval between the two drawings is also uniform.
The formula for calculating interest on drawings under this method is:
Rate of Interest Average Period*
Interest on Drawings = Total Drawings x rate of intrest ×Average period*
100 12
* Average Period = Months Left after First Drawing + Months Left after Last Drawing
2
Let us take Different situations for calculating interest on drawings under this method.
Situation 1. If a partner withdraws fixed amount in the beginning of every month, interest is
charged on the whole amount for 61/2 months*.
Interest on Drawings = Total Drawings x Rate of Interest 61/2 x 61/2
100 12
This is the average of months = (12 + 11 + 10 + ... + 1) + 12 = 78 + 12 = 672 Months.
Or
Average Period = 12 Months +1 Month 61/2Months.

2
Situation 2. If a partner withdraws fixed amount at the end of every month, interest is
charged for 5% months (i.e., average period) on the total amount.
Interest on Drawings = Total Drawings x Rate of Interest x 51/2
100 12
Average Period = 11 Months + 0 Month = 5% Months.
2
Situation 3. If a partner withdraws fixed amount in the middle of every month, interest is
charged for 6 months on the total amount.
Interest on Drawings = Total Drawings x Rate of Interest x 6
100 12
Average Period = 111/2 Months + 1/2 Month = 6 Months.

2
Illustration 28 (Interest on Drawings).
A partner draws Rs. 10,000 per month. Under the Partnership Deed, interest on drawings is
to be charged @ 15% p.a. Calculate interest if the drawings are made regularly:
(i) in the beginning of the month,
(ii) in the middle of the month, or
(iii) at the end of the month.
Solution:
Interest in the three situations will be:
(i) Total Drawings in the year = 1,20,000, Rate of Interest = 15% p.a.
Interest on Drawings = Rs.1,20,000 x 15 x 61/2 = Rs. 9,750.
100 12
.
Average Period = 12 Months +1 Month = 6* Months.
2
(ii) Total Drawings in the year = 1,20,000, Rate of Interest = 15% p.a.
Interest on Drawings = Rs.1,20,000 x 15 x 6* — = Rs.9,000.
100 12
"Average Period = 11 /2 Months + 1/2 Month = 6 Months.
1
2
(iii) Total Drawings in the year = Rs. 1,20,000, Rate of Interest = 15% p.a.
Interest on Drawings = Rs. 1,20,000 x 15 x 51/2= Rs. 8,250.
100 12
"Average Period = 11 Months + 0 Month = 51/2 Months.

2
Situation 4. If fixed amount is withdrawn in the beginning of each quarter during the year,
interest is charged on the whole amount for a period of 7% months*.
Total Drawings x Rate of Interest 7 1/2

Interest on Drawings = x
100 12
12 Months+3 Months 15 Months

"Average Period = = = 71/2 Months.
2 2
Situation 5. If fixed amount is withdrawn in the middle of each quarter during the year,
interest is charged on the whole amount for a period of 6 months*.
Total Drawings x Rate of Interest 6
100 12
10.5 Months+ 1.5 Months 12 Months

"Average Period = = = 6 Months.
2 2
Situation 6. If fixed amount is withdrawn at the end of each quarter during the year, interest
is charged on the whole amount for a period of 41/2 months*.
Total Drawings x Rate of Interest 4 1/2
100 12
9 Months+0 Month 9 Months
"Average Period = = = 41/2 Months.
2 2
Illustration 29 (When there is regular Drawings at Quarterly Intervals).
Calculate interest on drawings of Siddhant @ 10% p.a. for the year ended 31st March, 2020
in each of the following alternative cases:
Case 1. If he withdrew Rs. 60,000 in the beginning of each quarter.
Case 2. If he withdrew Rs. 60,000 at the end of each quarter.
Case 3. If he withdrew Rs. 90,000 in the middle of each quarter.
Solution:
Total Drawings in Cases 1 and 2 = Rs. 60,000 * 4 = Rs. 2,40,000;
Total Drawings in Case 3 = Rs. 90,000 x 4 = Rs. 3,60,000.
Case 1 Case 2 Case 3
(12+3)Months (9+ 0)Months
= 7.5 = = 4.5
2 2 (10.5+1.5) Months
Average = = 6
Months Months 2
7.5 4.5 Months
Period = Rs. 2,40,000 x x = Rs. 2,40,000 x x
12 12 6 10
Interest on = 13,60,000 x x
Drawings
10 10 12 100
100 100 = Rs. 18,000
= Rs. 15,000 = Rs.9,000
Situation 7. If fixed amount is withdrawn during 6 months:
(i) In the beginning of each month:
Rate 31 /2
Interest on Drawings = Total Drawings x x
100 10
(ii) In the middle of each month:
Rate 3
100 10
(iii) At the end of each month:
Rate 21/2
100 10
Illustration 30 (When drawings are made only for last 6 months).
A, B and C started a firm on 1st October, 2019 sharing profits equally. A drew regularly Rs.
4,000 in the beginning of every month for the six months ended 31st March, 2020. B drew
regularly Rs. 4,000 at the end of every month for the six months ended 31st March, 2020. C
drew regularly Rs. 4,000 in the middle of every month for the six months ended 31st March,
2020.
Calculate interest on drawings @ 5% p.a. for the period ended 31st March, 2020.
Solution: Total Drawings of each partner = Rs. 4,000 * 6 = Rs. 24,000.
Case 1 Case 2 Case3
(6+ 1) Months (5+0) Months (5.5+ 0.5) Months
= = 3.5 = = 2.5 = = 3.5
Average 2 2 2
Period Months Months Months
Interest on 5 3 ,5 5 2.5 5 3
= Rs. 24,000 x x = Rs. 24,000 x x = Rs. 24,000 x x =
Drawings 100 12 100 12 100 12
= Rs.350 = Rs.250 Rs.300
Situation 8. If the date of withdrawal is not given, interest on total drawings for the year is
calculated for six months on the average basis.
Illustration 31.
Calculate interest on drawings of Rakesh @ 10% p.a. for the year ended 31st March, 2020
in each of the following alternative cases:
Case 1. If his drawings during the year were Rs. 30,000.
Case 2. If he withdraws Rs. 2,500 per month during the year.
Solution:
Case 1. Assuming that drawings were made evenly throughout the year, interest on
drawings has been calculated for an average period of 6 months.
Interest on Drawings = Rs. 30,000 x 10/100 x 6/12 = Rs. 1,500.
Case 2. Total Drawings = Rs. 2,500 x 12 = Rs. 30,000
Interest on Drawings = Rs. 30,000 x 10/100 x 6/12 = Rs. 1,500.
Important Note: If the date of drawings is not given and Accounting period is less than 6
months, then the interest on Total Drawings is calculated for half of the accounting period.
Situation 9. When the rate of interest is given without the word ‘per annum' (p.a.), interest is
charged without considering the time factor.
Illustration 32.
Calculate interest on A's drawings @ 10% if he withdrew Rs. 2,50,000 during the year.
Solution: Interest on drawings = Rs.2,50,000 x 10/100 = Rs. 25,000.
Normally, interest is calculated on the basis of time amount is used.
Remember: Interest on drawings is an income for the firm and hence is credited to Profit
and Loss Appropriation Account. On the other hand, interest on drawings is a loss to the
partner and is debited to his Capital Account (in case of Fluctuating Capitals) or Current
Account (in case of Fixed Capitals).
The Journal entries to record interest on drawings are:
If Partners Capital Accounts are fixed. If Partners Capital Accounts are

fluctuating.
(i) Partners'Current A/cs ...Dr. (i) Partners'Capital A/cs ...Dr.
To Interest on Drawings A/c To Interest on Drawings A/c
(Interest charged on partners'drawings) (Interest charged on partners'drawings)
(ii) Interest on Drawings A/c ...Dr., (ii) Interest on Drawings A/c ...Dr.
To Profit and Loss Appropriation A/c To Profit and Loss Appropriation A/c
(Interest on drawings transferred to Profit (Interest on drawings transferred to Profit
and Loss Appropriation A/c) and Loss Appropriation A/c)
Alternatively: In place of above two Alternatively: In place of above two
entries, only single entry may be passed entries, only single entry may be passed
as follows: as follows:
Partners' Current A/cs ...Dr. Partners'Capital A/cs ...Dr.
To Profit and Loss Appropriation A/c To Profit and Loss Appropriation A/c
(Interest charged on drawings of (Interest charged on drawings of
partners) partners)
Illustration 33.
Arun and Arora were partners in a firm sharing profits in the ratio of 5 : 3. Their fixed capitals
on 1st April, 2010 were: Arun T 60,000 and Arora Rs. 80,000. They agreed to allow interest
on capital @ 12% p.a. and to charge on drawings @ 15% p.a. Profit of the firm for the year
ended 31st March, 2011 before all above adjustments was Rs. 12,600. Drawings made by
Arun were 2,000 and by Arora Rs. 4,000 during the year. Prepare Profit and Loss
Appropriation Account of Arun and Arora. Show your calculations clearly. The interest on
capital will be allowed even if the firm incurs a loss.
(CBSE2012)
S elution: PROFIT AND LOSS APPROPRIATION ACCOUNT
Cr.
Particulars Particulars T
To Profit and Loss A/c (Net Loss) 4,200 By Interest on Drawings A/c: 150
(WN 1) Arun's Current A/c Arora's 300 450
Current A/c - 2,344
By Net Loss transferred to: 1,406 3,750
4,200 Arun's Current A/c Arora's 4,200
Current A/c
Working Notes:
1. Interest on Capitals: Arun Arora
Opening Capital Rs. 60,000 Rs. 80,000
Rate of Interest 12% p.a. 12% p.a.
Interest on Capital Rs. 7,200 Rs. 9,600
Total Interest on Capital = Rs. 16,800.
Interest on Capital is a charge against profit and is debited to Profit and Loss Account. Thus,
the loss of Rs. 4,200 (/.e., Rs. 16,800 - Rs. 12,600) is transferred to Profit and Loss
Appropriation Account.
2. Interest on Drawings: Arun Arora
Amount of Drawings Rs. 2,000 Rs. 4,000
Rate of Interest 15% p.a. 15% p.a.
Interest on Drawings (for 6 Months) Rs. 150 ^300
Since the dates of drawings are not given, interest will be charged for average period of 6
months.
Illustration 34.
A, B, and C are partners in a firm. According to the Partnership Deed, the partners are
entitled to draw up to Rs. 7,000 per month. On the first day of every month A, B and C drew
Rs. 7,000; Rs. 6,000 and Rs. 5,000 respectively. Interest on capitals and interest on
drawings are fixed @ 8% p.a. and 10% p.a. respectively. Profit for the year ended 31st
March, 2020 was Rs. 7,55,000 out of which Rs. 2,00,000 are to be transferred to General
Reserve. B and C are to get salary of Rs. 30,000 and Rs. 45,000 p.a. respectively and A is
to receive commission @ 10% on distributable profits after charging such commission. On
1st April, 2019, balances of their Capital Accounts were Rs. 5,00,000, Rs. 4,00,000 and Rs.
3,50,000 respectively.
Prepare Profit and Loss Appropriation Account for the year ended 31st March, 2020 and
Capital Accounts of Partners in the books of the firm.
Cr.
By Profit and Loss A/c (Net Profit)
To General Reserve A/c By Interest on Drawings A/cs (WN
to Interest on Capital A/cs: 1):
A p 5,00,000 x 8/100) 40,000 A p 84,000x10/100x13/24) 4,550
BP 4,00,000x8/100) 32,000 2,00,000 Bp 72,000x10/100x13/24) 3,900 7,55,000
CP 3,50,000x8/100) 28,000 1,00,000 C p 60,000 x 10/100 x 13/24) 3,250 11,700
To Partners'Salaries A/cs:
B 30,000
C 45,000 75,000
To A's Commission A/c (WN 2)

To Profit transferred to: 35,609
3,56,091
A's Capital A/c 1,18,697
B's Capital A/c 1,18,697
C's Capital A/c 1,18,697
7,66,700 7,66,700
PARTNERS' CAPITAL ACCOUNTS
Particulars A(Rs.) B(Rs.) C(Rs.) Particulars A(Rs.) B(Rs.) C(Rs.)
To Drawings 84,000 72,000 60,000 By Balance b/d
A/c 4,550 3,900 3,250 By Interest on 5,00,000 4,00,000 3,50,000
To Interest on 6,05,756 5,04,797 4,78,447 Capital A/c 40,000 32,000 28,000
Drawings A/c By 35,609 30,000 45,000
To Balance c/d Partners'Salaries 1,18,697 1,18,697 1,18,697
6,94,306 5,80,697 5,41,697 A/c 6,94,306 5,80,697 5,41,697
By A's
Commission A/c
By Profit and Loss
Appropriation A/c
Working Notes:
1. When partners withdraw uniform amount in the beginning of every month, interest is
charged on the total amount of drawings at an agreed rate for 6% months.
2. A's Commission = 10/110 x (Rs.,55,000 + Rs. 11,700 - Rs. 2,00,000 - Rs. 1,00,000 - Rs.
75,000) = Rs. 35,609.
3. Unless otherwise stated in the Deed, profit of the year is divided equally among partners.
Illustration 35.
On 1st April, 2019, Precious, Noble and Perfect entered into partnership with capitals of Rs.
60,000, Rs. 50,000 and Rs. 30,000 respectively.
Perfect advanced T 10,000 as loan to the partnership firm on 1st October, 2019. The
Partnership Deed has the following clauses:
(i) Interest on capital is to be allowed @ 6% p.a.
(ii) Interest on drawings is to be charged @ 6% p.a. Each partner withdrew Rs. 4,000 at
the end of each quarter commencing from 30th June, 2019.
(iii) Working partners Precious and Noble to get salary of Rs. 200 and T 300 per month
respectively.
(iv) Interest on loan was allowed to Perfect @ 6% p.a.
(v) Noble is to get rent of Rs. 2,000 per month for use of his building by the firm. It is paid
to him by cheque at the end of every month.
(vi) Profits are shared in the ratio of 4 : 2 :1 up to Rs. 70,000 and above Rs. 70,000
equally.
Profit of the firm for the year ended 31st March, 2020 (before the above adjustments) was
Rs. 1,35,000. Prepare Profit and Loss Appropriation Account and Capital Accounts of
Partners if capitals are fixed.
Solution:
Precious 3,600 [Rs.1,35,000-Rs.24,000(rent)- Rs. 0
Noble 3,000 8,400 300 (Interest on Loan)]
By Interest on Drawings A/cs
Perfect 1,800 (Note):
To Partner's Salaries A/c: Precious 360
Precious 2,400 Noble 360
Noble 3,600 6,000 Perfect 360 1,080
To Profit* transferred to Current A/cs:
Precious 49,127
Noble 29,127
Perfect 19,126 97,380
1,11,78 1,11,78
0 0
Appropriation of Divisible Profit:
Precious (Rs.) Noble (Rs.) Perfect (Rs.)
Profit of Rs. 70,000 in the ratio of
4:2:1 40,000 20,000 10,000
Balance Profit Rs. 27,380 in the ratio
of 1 :1 :1 9,127 9,127 9,126
49,127 29,127 19,126
Dr. PARTNERS' CAPITAL ACCOUNTS
Cr.
Particulars Precious Noble Perfect Particulars Precious Noble Perfect
Rs. Rs. Rs. Rs. Rs. Rs.
To Balance c/d 60,000 50,000 30,000 By Bank A/c 60,000 50,000 30,000
Dr. PARTNERS'CURRENT ACCOUNTS
Cr.
Particulars Precious Noble Perfect Particulars Precious Noble Perfect
By Interest on
To Drawings A/c Capital A/c By
3,600 3,000 1,800
To Interest on Partner's
2,400 3,600 -
Drawings A/c 16,000 16,000 16,000 Salaries A/c By
49,127 29,127 19,126
(Note) 360 360 360 P & L App. A/c
To Balance c/d 38,767 19,367 4,566 (Profit)
55,127 35,727 20,926 55,127 35,727 20,926
Notes:
1. When fixed amount is withdrawn at the end of each quarter during the year, interest will
be charged on the whole amount for average period of 4 1/2 months. Thus, interest on
drawings to be charged from each partner will be:
Total Drawing x Rate of Interest 4 1/2
x = Rs.16,000 x 9/2 x1/12 x 6/100 =Rs.360
100 12
2. Interest on Loan from Perfect and rent payable to Noble are charges against profit.
At the time of calculating interest on drawings, remember the following:
1. When a partner withdraws fixed amount in the beginning of every month, interest is
charged on the total amount of drawings for 614 months at an agreed rate per annum.
2. When a partner withdraws fixed sum in the middle of every month, interest is charged
on the total amount of drawings for 6 months at an agreed rate per annum.
3. When a partner withdraws fixed sum at the end of every month, interest is charged on
the total amount of drawings for 5’/a months at an agreed rate per annum.
4. When a partner withdraws fixed sum in the beginning of each quarter, interest is
charged on the total amount of drawings for a period of 714 months at an agreed rate per
annum.
5. When a partner withdraws fixed sum in the middle of each quarter, interest is charged
on the total amount of drawings for a period of 6 months at an agreed rate per annum.
6. When a partner withdraws fixed sum at the end of each quarter, interest is charged on
the total amount of drawings for a period of 4/2 months at an agreed rate per annum.
7. When a partner withdraws unequal amount on different dates, interest is calculated
using Simple Method or Product Method.
8. When dates of drawings are given and the interest is to be charged at an agreed rate
per annum, interest is calculated on the basis of time.
9. If date of withdrawal is not given, the interest on total drawings for the year is
calculated for six months on the average basis.
10. When rate of interest is given without the word 'per annum', interest is charged
without considering the time factor.
5. PAST ADJUSTMENTS (ADJUSTMENTS FOR INCORRECT APPROPRIATIONS
OF PROFITS IN PAST) AFTER CLOSING THE BOOK
Sometimes after closing the accounts of a partnership firm, i.e., preparing the financial
statements, some errors or omissions in the accounts of the earlier years are noticed. For
example, interest on capital or drawings is omitted, allowed or charged at higher or lower
rate, profits or losses are distributed among the partners in a wrong ratio and so on. These
errors and omissions are rectified by adjusting the Capital Accounts of the affected partners
by passing
(a) an adjustment entry, or (b) adjustment entries.
(A) When an Adjustment Entry (Single Adjustment Entry) is passed: In this case, net effect
of the errors is determined and an adjustment entry is passed by debiting and crediting the
Partners' Capital/Current Accounts.
Let us take an example to understand it better. Following is the Profit and Loss Appropriation
Account of a firm in which A, B and C are equal partners:
for the year ended 31 st March, 2020
Dr.
Cr.
To Profit transferred By Profit and Loss A/c—Net 3,00,000
to: Profit
As Capital A/c B's 1,00,000
Capital A/c C's 1,00,000 3,00,00
Capital A/c 1,00,000 0
3,00,00 3,00,000
0
After preparing the financial statements, it was noticed that interest on capital was not
allowed to A—Rs. 12,000, B —Rs. 9,600 and C—Rs. 10,500 and also interest was not
charged on drawings of A and B amounting to Rs. 1,200 and T 900 respectively.
Correct Profit and Loss Appropriation Account giving effect to the above omissions would
have been as follows:
Dr. for the year ended 31 st March, 2020
Cr.
To Interest on Capital A/cs: By Profit and Loss A/c—Net Profit
A 12,000 By Interest on Drawings A/cs: 3,00,00
B 9,600 A 1,200 0
C 10,500 32,100 B 900 2,100
A's Capital A/c 90,000
B's Capital A/c 90,000 2,70,00
C's Capital A/c 90,000 0
3,02,10 3,02,10
0 0
From the corrected Profit and Loss Appropriation Account, following is observed:
A's Capital A/c B's Capital A/c C's Capital A/c
1. Credited Short for Interest on Capitals Rs. 12,000 Rs. 9,600 Rs. 10,500
II. Debited Short for Interest on
(Rs. 1,200) (Rs.900) —
Drawings
III. Credited Excess as Share of Profit (Rs. 10,000) (Rs. 10,000) (Rs. 10,000)
[Rs. 32,100 (Interest on Capital) - Rs.
2,100 (Interest on Drawings) Equally]
Net Effect Rs.800 (Rs. 1,300) Rs.500
Short Credited Excess Credited Short Credited
An adjustment entry rectifying the above errors can be passed as follows:
Rs.
2020 B's Capital A/c ...Dr. 1,300
March To A's Capital A/c
800
31 To C's Capital A/c
500
(Interest on capital not allowed and Interest on drawings not
charged, now adjusted)
Alternatively, a table can be prepared by following the below specified procedure for
determining the net effect of the past adjustments and passing the adjustment entry:
Step 1: Prepare an analytical table with one column for particulars, one for each partner
separately and one for the firm. The columns for the partners and the firm are divided into
two parts—debit and credit. An outlay of the Analytical Table is as follows:
Particulars A's B's C's Firm (Profit and
Capital/Current* Capital/Current* Capital/Current* Loss Adjustment
A/c A/c A/c Account)
Dr.(Rs.) Cr.(Rs.) Dr. (Rs.) Cr.(Rs.) Dr.(Rs.) Cr.(Rs.) Dr.(Rs.) Cr(Rs.)
Interest on
Capital Interest
on Drawings
*In case of fixed capitals.
Step 2: Calculate interest on capital earlier omitted. Place interest due to individual Partners
in their respective credit columns and total interest so omitted in the debit column of the firm
(as it is an expense for the firm).
Step 3: Calculate interest on drawings earlier omitted to be considered. Place interest due
from individual partners in their respective debit columns and total interest so omitted in the
credit column of the firm (as it is an income for the firm).
Step 4: Repeat the process for any other expense or income omitted.
Step 5: Find out balance of the columns designed for the firm. This will disclose net profit or
net loss.
Step 6: Divide profit or loss (as per Step 5 above) among the partners in their profit-sharing
ratio.
Step 7: Find the balance of each partner separately. In case one partner has debit balance,
the other partner must have credit balance of the same amount.
Step 8: Pass Adjustment Journal entry with the amounts determined as per Step 7.
Note: If adjustments are to be made for more than one year, then ascertain the consolidated
position and then pass the required Journal entry.
Illustration 36.
P and Q were partners in a firm sharing profits equally. Their fixed capitals were Rs.
1,00,000 and Rs. 50,000 respectively. The Partnership Deed provided for Interest on Capital
at the rate of 10% per annum. For the year ended 31st March, 2016, the profits of the firm
were distributed without providing Interest on Capital.
Pass necessary adjustment entry to rectify the error. (Delhi
2017)
Solution: ADJUSTMENT ENTRY
2016
Q's Current A/c ...Dr.
March 2,500 2,500
To P's Current A/c
31
(Adjustment of omission of Interest on Capital)
Working Notes:
1.Calculation of Interest on Capital:
P = Rs. 1,00,000 X 10/100 = Rs. 10,000; Q = Rs. 50,000 X 10/100 = Rs. 5,000.
Total Interest on Capital = Rs. 10,000 + Rs. 5,000 = Rs. 15,000.
The above interest on capital has not been credited to the partners. It is to be credited to the
Partners'Current Accounts resulting in a loss of Rs. 15,000 to the firm, which is to be debited
to the partners in their profit-sharing ratio, i.e., equally.
2. Statement Showing the Adjustment for Interest on Capital and its effect:
Particulars P's Current A/c Q's Current A/c Firm
Dr.ra Cr.R) Dr.(Rs.) Cr.m Dr.(Rs.) Cr.(Rs)
I. Interest on Capital (WN 10,000 5,000 15,000
1)
II. For Sharing the above
loss (Equally) 7,500 7,500 15,000
7,500 10,000 7,500 5,000 15,000 j 15,000
Balance to be adjusted
2,500 (Cr.) 2,500 (Dr.) Nil
(Net effect)
Illustration 37.
A and B are partners in a firm sharing profits and losses in the ratio of 3 : 2. Following was
the Balance Sheet of the firm as at 31st March, 2020:
Capital A/cs: 60,000 Sundry Assets 80,000
A 20,000
B 80,000 80,000
Profit Rs. 30,000 for the year ended 31st March, 2020 was divided between the partners
without allowing interest on capitals @ 12% p.a. and salary to A @ Rs. 1,000 per month.
During the year, A withdrew Rs. 10,000 and B Rs. 20,000.
Pass necessary adjustment Journal entry and show your working clearly. (Delhi 2011,
Modified)
Date Particulars L.F. Dr.p) Cr.(D
2020 B's Capital A/c ...Dr.
March To A's Capital A/c
5,280 5,280
31 (Interest on capitals and salary to A not allowed, now
adjusted) (WN)
Working Notes:
1. Calculation of Opening Capital:
Particulars A(Rs.) B(Rs.)
Closing Capital 60,000 20,000
Less: Profit already credited (3:2) 18,000 12,000
42,000 8,000
Add: Drawings already debited 10,000 20,000
Capital in the beginning 52,000 28,000
2. TABLE SHOWING ADJUSTMENTTO BE MADE
Particulars A's Capital A/c B's Capital A/c Firm
Dr.(Rs.) Cr. (Rs.) Dr. (Rs.) Cr. (Rs.) Dr. (Rs.) Cr. (Rs.)
I. Interest on Capital 6,240 3,360 9,600
II. Salary to A 12,960 12,000 8,640 12,000 21,600
III.Loss to be Debited (3:2) 12,960 18,240 8,640 3,360 21,600 21,600
Net Balance (Effect) 5,280{Cr.) 5,280 (Dr.) Nil
Illustration 38 (Profits Apportioned without Providing for Interest on Capital and Interest on
Drawings). Mannu and Shristhi are partners in a firm sharing profits in the ratio of 3 : 2.
Following is the Balance Sheet of the firm as on 31st March, 2020:
BALANCE SHEET as at 31 st March, 2020
Liabilities Assets
Mannu's Capital 30,000 Drawings:
Shristhi's Capital 10,000 40,000 Mannu 4,000 6,000
Shristhi 2,000 34,000
40,000 Other Assets 40,000
Profit for the year ended 31st March, 2020 was Rs. 5,000 which was divided in the agreed
ratio, but interest @ 5% p.a. on capital and 6% p.a. on drawings was inadvertently omitted.
Adjust interest on drawings on an. average basis for 6 months. Give the adjustment entry.
(NCERT, Modified Years)
2020 Shristhi's Capital A/c ...Dr. 288
March To Mannu's Capital A/c
288
31 (Adjustment entry passed for omission of interest on capital
and drawings)
Working Notes:
1. For the calculation of Interest on Capital, opening capital is calculated.
CALCULATION OF OPENING CAPITAL AND INTEREST THEREON
Particulars Mannu Shristhi .
Rs. Rs.
Closing Capital 30,000 10,000
Add: Drawings already debited*
30,000 10,000
Less: Profit of Rs. 5,000 already credited in 3 :2
3,000 2,000
Opening Capital
27,000 8,000
Interest on Capital @ 5% per annum
Rs. 27,000x5/100 = Rs. 8,000x5/100 =
Rs. 1,350 Rs. 400
*For calculating opening capital, drawings are added. However, drawings of Mannu and
Shristhi appear in the Balance Sheet. It means that their Capital Accounts have not been
adjusted for their drawings. Therefore, their drawings have not been added back.
2. Calculation of Interest on Drawings: Dates of drawings are not given. Therefore,
interest on drawings will be charged for the average period,/.e., 6 months.
Interest on Drawings:
Mannu =Rs. 4,000 x 6/12 x 6/100 = Rs. 120; Shristhi = Rs. 2,000x6/12x6/100 = Rs. 60.
3. ADJUSTMENTTABLE
Particulars Mannu's Capital Shristhi's Capital
A/c A/c Firm
Dr. (Rs.) Cr. (Rs.) Dr. (Rs.) Cr. (Rs.) . Dr. Cr.(Rs.)
(Rs.)
1. Interest on Capital not yet credited 1,350 400 1,750
IL Interest on Drawings not yet 2,058 1,372 3,430
debited
III. Profit after interest on Capital 120 60 180
and Interest on 3,000 2,000 5,000
Drawings Rs. 3,430 (i.e., Rs. 5,000 - 3,120 3,408 2,060 1,772 5,180 5,180
Rs. 1,750 + Rs. 180) to be credited in
the ratio of 3:2
IV. Profit of Rs. 5,000 already 288 (Cr.) . 288 (Dr.) Nil
distributed now taken back (debited)
Net Effect
Illustration 39.
On 31st March, 2014, balances in the Capital Accounts of Eleen, Monu and Ahmad after
making adjustments for profits and drawings were Rs. 1,60,000, Rs. 1,20,000 and Rs.
80,000 respectively. Subsequently, it was discovered that the interest on capital and
drawings had been omitted.
(i) Profit for the year ended 31st March, 2014 was Rs. 40,000.
(ii) During the year, Eleen and Monu each withdrew a total sum of Rs.24,000 in equal
instalments in the beginning of each month and Ahmad withdrew a total sum of T 48,000 in
equal instalments at the end of each month.
(iii) The interest on drawings was to be charged @ 5% p.a. and interest on capital was to
be allowed @ 10% p.a.
(iv) The profit-sharing ratio among the partners was 2:1:1.
Showing your working notes clearly, pass the necessary rectifying entry. (Delhi 2015 C)
Solution: RECTIFYING ENTRY
Date Particulars L.F. Dr. (T) Cr.(Rs.)
2014 Eleen's Capital A/c ...Dr. 3,850
March To Monu's Capital A/c 2,950
31 To Ahmad's Capital A/c 900
(Rectifying entry passed for correct profits)
Working Notes:
1. Calculation of Opening Capital and Interest thereon:
Particulars Eleen (Rs.) Monu (Rs.) Ahmad (Rs.)
A. Closing Capital 1,60,000 1,20,000 80,000
B. Add: Drawings already Debited 24,000 24,000 48,000
1,84,000 1,44,000 1,28,000
C. Less: Profit already Credited 20,000 10,000 10,000
D. Opening Capital 1,64,000 1,34,000 1,18,000
E. Interest on Capital Rs. Rs. Rs.
1,64,000x10/100 1,34,000x10/100 1,18,000x10/100
= Rs. 16,400 = Rs. 13,400 = Rs. 11,800
Total Interest on Capital = Rs. 16,400 + Rs. 13,400 + Rs. 11,800 = Rs. 41,600.
2. Interest on Drawings (For Eleen and Monu 6.5 Months and for Ahmad 5.5 Months):
5 13
Eleen = Rs. 24,000 x x = Rs.650
100 24
5 13
Monu = Rs. 24,000 x x = Rs.650
100 24
5 11
Ahmad = Rs. 48,000 x x = Rs. 1,100
100 24
Total Interest on Drawings = Rs. 2,400
3. STATEMENT SHOWING ADJUSTMENT™ BE MADE
Particulars Eleen's Capital Monu's Capital Ahmad's Capital
A/c A/c A/c Firm
Dr.(Rs.) Cr.(Rs.) Dr. Cr. Dr.(Rs.) Cr.(Rs.) Dr. Cr.(Rs.)
(Rs.) (Rs.) (Rs.)
I. For Interest on Capital 16,400 13,400 11,800 41,600 -
II. For Interest on
Drawings 650 650 1,100 2,400
III. For Profit to be
SharedRs. 800
(/.e.,Rs. 40,000-Rs.
41,600 +
Rs. 2,400) in the ratio of
2:1:1 400 200 200 800
IV. Profit of Rs. 40,000
already
distributed in the ratio of
2:1 :1,now reversed 20,000 10,000 10,000 40,000
20,650 16,800 10,650 13,600 11,100 12,000 42,400 42,400
Net Effect 3,850 (Dr.) 2,950 (Cr.) 900 (Cr.)
Illustration 40 (Omission of Interest on Capital when Fixed Capitals are given).
X, Y and RS. are partners. They have omitted interest on capital @ 10% p.a. for three years
ended 31st March, 2020. Their fixed capitals on which interest was to be calculated
throughout were: X—Rs. 10,000; Y—< 8,000 and RS.—Rs. 7,000. Their profit-sharing ratios
for the years ended 31st March, were: 2018 — 1 : 2 : 2; 2019—5 : 3 : 2; 2020—4 : 5 :1. The
firm earned profit of Rs. 2,500 in each year. Pass necessary adjustment Journal entry.
Date Particulars L.F. Dr.ro Cr.ro
2020 Y's Current A/c ...Dr. 600
March To X's Current A/c 250
31 To RS.'s Current A/c 350
(Interest on capital omitted to be provided, now adjusted)
Working Notes:
1. Interest on capital @ 10% p.a:X—7 1,000; Y— T800 andRS.—Rs. 700.
The above interest on capital Rs. 2,500 (/.e., Rs. 1,000 + Rs. 800 + Rs. 700) has not been
credited to the partners. Now, it is to be credited to the Partners' Current Accounts resulting
in a loss of Rs. 2,500 to the firm which is to be debited to the partners in their profit-sharing
ratio.
2. STATEMENT SHOWING THE ADJUSTMENT TO BE MADE
Particulars X Y RS.
Rs. Rs. Rs.
I. Amount already credited as Share of Profit:
for the year ended 31 st March, 2018 500 1,000 1,000
for the year ended 31st March, 2019 1,250 750 500
for the year ended 31st March, 2020 1,000 1,250 250
...Dr. 2,750 3,000 1,750
II. Amount which should have been credited as Interest on
Capital:
for the year ended 31 st March, 2018 1,000 800 700
for the year ended 31 st March, 2019 1,000 800 700
for the year ended 31st March, 2020 1,000 800 700
...Cr. 3,000 2,400 2,100
111. Difference (1 - II) 250 (Cr.) 600 (Dr.) 350 (Cr.)
Note: Since capitals of the partners are fixed, adjustment entry will be passed through
Partners' Current Accounts.
illustration 41 (Interest on Capital Provided at a Higher Rate).
X, Y and RS. are partners in a firm sharing profits and losses in the ratio of 5 : 3 : 2. Their
fixed capitals were Rs. 3,00,000; Rs. 2,00,000 and 1,00,000 respectively. For the year
ended 31st March, 2020, interest on capital was credited to them © 10% p.a. instead of 8%
p.a.
Showing your working notes clearly, pass necessary adjustment Journal entry.
Date Particulars L.F. Dr.(Rs.) Cr.(Rs.
2020 Y's Current A/c ...Dr. 400
April 1 To RS.'s Current A/c
400
(Interest on capital excessive charged, now
rectified)
Working Note:
TABLE SHOWING THE ADJUSTMENT TO BE MADE
Particulars X's Current A/c Y's Current A/c RS.'s Current A/c Firm
Dr. Cr.(Rs.) Dr.(Rs.) Cr.(Rs.) Dr. (Rs.) cr. (Rs.) Dr. Cr.
(Rs.) (Rs.) (Rs.)
1. Interest on Capital 30,000 20,000 10,000 60,000
wrongly credited @
10% p.a., now reversed
It Interest on Capital 24,000 16,000 8,000 48,000
credited @ 8% p.a.
III. Profit* credited to 6,000 3,600 2,400 12,000

partners in 5:3:2
Total 30,000 30,000 20,000 19,600 10,000 10,400 60,000 60,000
Net Balance (Effect) 400 Dr. 400 Cr.

*Low rate of interest on capital will increase the profit of the firm by T 12,000 (i.e., T 60,000 -
T 48,000) which is divisible among partners.
Illustration 42 (Rectification of Interest on Capital less Allowed).
A, B and C are partners in a firm sharing profits in the ratio of 2 : 2 : 1. Their capitals (fixed)
are Rs. 1,00,000; Rs. 80,000 and Rs. 70,000 respectively. For the year ended 31st March,
2020, interest on capital was credited to them @ 9% p.a. instead of 12%. Give the
adjustment Journal entry.
Date Particulars L.F. Dr.ro Cr.(Rs.)
2020
B's Current A/c ...Dr.
April 1 600 600
To C's Current A/c
(Interest less charged on capital, now rectified)
Working Note:
Interest on capital has been credited @ 9% instead of 12%. So, interest @ 3% should be
credited to partners and the total of this should be debited to partners in their profit-sharing
ratio because firm's profit is reduced up to that extent.
TABLE SHOWING ADJUSTMENT TO BE MADE
Amount that should be Amount that should be
Partners Net Effect
credited (Cr.) debited (Dr.)
(Rs. 1,00,000x3/100) = Rs.
A 3,000 (Rs. 7,500x2/5) = Rs. 3,000
B (Rs. 80,000x3/100) = Rs. (Rs. 7,500x2/5) = Rs. 3,000 Rs. 600 Dr.
2,400
C (Rs.70,000 X 3/100) = Rs. (Rs.7,500x1/5) = Rs. 1,500 Rs.600Cr.
2,100
Rs. 7,500 Rs. 7,500
Illustration 43 (Interest on Capital Wrongly Provided in the Accounts).
A, B and C are partners in a firm. Partnership Deed does not provide for interest on capital,
still it was credited to Partners' Capital Accounts @ 5% p.a. for the two years ended 31st
March, 2019 and 31st March, 2020. Their fixed capitals on which interest was calculated
throughout were: A-Rs. 50,000; B- Rs. 40,000 and C- Rs.30,000.
During the two years ended 31st March, they shared profits as follows:
2019-5 : 3 : 2; and 2020 -2 : 2 :1.
You are required to pass an adjustment entry as at 1st April, 2020.
Solution:
ADJUSTMENT ENTRY
2020 C's Current A/c ...Dr. 600
April 1 To A's Current A/c
400
To B's Current A/c
200
(Interest on capital wrongly provided in the accounts for two
years, now adjusted)
Working Note: STATEMENT SHOWING THE ADJUSTMENTTO BE MADE
Partners 31 st March, 2019 31st March, 2020
(a) (b) Profit (c = a + b) (d) (e) (f=d + e)
(c + f) Net
Interest on Rs. Adjustmen Interest Profit Adjustmen
Adjustments
Capital t on Rs. t
Rs.
(Rs.) Rs. Capital Rs.
(Rs.)
+
3,000(5/10)
-2,500 + 1,800 + 500 - 2,500 + 2,400(2/5) -100 + 400(Cr.)
- 2,000 (3/10) + -200 -2,000 + 2,400(2/5) + 400 + 200 (Cr.)
-1,500 1,200 (2/10) -300 -1,500 + 1,200 (1/5) -300 . -600 (Dr.)
- 6,000 6,000 -6,000 6,000
Note: Since interest on capital was allowed, profit decreased by the total amount of interest.
Interest allowed was taken by the partners in their profit-sharing ratio. Therefore, interest on
capital should be written back and profit (/.e., total amount of interest) should be credited to
partners in their profit-sharing ratio.
Illustration 44.
A, B and C were partners in a firm. On 1st April, 2018, their capitals stood at Rs. 4,00,000,
Rs.3,00,000 and Rs.2,00,000 respectively. As per the provisions of the Partnership Deed:
A was entitled to a salary of 5,000 per month.
Partners were entitled to interest on capital @ 10% p.a.
The net profit for the year ended 31st March, 2019, Rs.3,00,000 was divided among the
partners without providing for the above items. Showing your working clearly, pass an
adjustment entry to rectify the above error. (CBSE 2019 C)
Date Particulars L.F. Dr. (Rs.) Cr.( Rs.)
2019
March B's Capital A/c...Dr. 20,000
31
C's Capital A/c...Dr. 30,000
To A's Capital A/c 50,000
(Omission of interest on capital and salary, now rectified)
Working note: TABLE SHOWING THE ADJUSTMENT TO BE MADE

Particulars A's Capital A/c 8's Capital A/c C's Capital A/c Firm
Dr. (t) Cr. (Rs.) Dr. (Rs.) Cr. Dr. (Rs.) Cr. Dr. (Rs.) Cr. (Rs.)
(Rs.) (Rs.)
Profit already distributed, 1,00,00 ... 1,00,00 ... 1,00,00 ... ... 3,00,00
now taken back (1 :1 :1) 0 60,000 0 ... 0 ... 60,000 0
Profit as should be ... 40,000 ... 30,000 ... 20,000 90,000 ...
distributed: ... 50,000 ... 50,000 ... 50,000 1,50;000 ...
-Salary ... ... ... ...
-Interest on Capital 1,00,00 1,50,00 1,00,00 80,000 1,00,00 70,000 3;00,000 3,00,00
-Profit of RS. 1,50,000 0 0 0 0 0
(i.e., 50,000 (Cr.) 20,000 (Dr.) 30,000 (Dr.)
Rs. 3,00,000 - RS.
60,000
- Rs. 90,000) in 1 : 1 : 1
Net Effect (Dr./Cr.)
Illustration 45 (Interest on Capitals and Salary/Commission not Allowed to Partners, Profit
Distributed in Wrong Ratio).
A, B and C were partners. Their capitals were A Rs.30,000; B Rs.20,000 and C Rs.10,000
respectively. According to the Partnership Deed, they were entitled to an interest on capital
at 5% p.a. In addition, B was also entitled to draw a salary of Rs.500 per month. C was
entitled to a commission of 5% on the profits after charging interest on capital, but before
charging salary payable to B. Net profit for the year was Rs.30,000 distributed in the ratio of
capitals without providing for any of the above adjustments. The profits were to be shared in
the ratio of 5 : 2 : 3.
Pass necessary adjustment entry showing the workings clearly. (Delhi
2010)
Date Particulars L.F. Dr. (Rs.) Cr. (Rs.)
A's Current A/c ...Dr. 3,675
To B's Current A/c 930
To C's Current A/c 2,745
(Adjustment entry passed for wrong appropriation)
Working Notes:
1. It is presumed that capitals of the partners are fixed. As a result, interest on capitals
has been calculated on given balances of capitals.
2. Net Profit 30,000
Less: Interest on Capital (Rs.1,500 + Rs.1,000 + Rs.500) 3,000
Profit after Charging Interest on Capital 27,000
C's Commission = 5/100 x Rs.27,000 = Rs.1,350.
3.
TABLE SHOWING ADJUSTMENT TO BE MADE
Particulars A B C
Rs. Rs. Rs.
Profit wrongly credited, now reversed (Dr.) 15,000 10,000 5,000
Amount which should have been credited:
Interest on Capital 1,500 1,000 500
Salary ... 6,000 ...
Commission (WN 2) 1,350
Net Divisible Profit* Distributed (5 :2 :3) 9,825 3,930 5,895
(Cr.) 11,325 10,930 7,745
Net Effect (I - II) 3,675 (Dr.) 930 (Cr.) 2,745 (Cr.)
*Divisible Profit = Rs.30,000 - Rs.3,000 (interest on capitals) - Rs.6,000 (8's Salary) - 1,350
(C's Commission) = Rs.19,650.
illustration 46 (Interest on Capitals Allowed at Lower Rate When the Capitals are
Fluctuating and Distribution of Profit in Wrong Ratio).
The capitals of X,Y and RS. as on 31st March, 2020 amounted to Rs.1,50,000, Rs.5,50,000
and Rs.11,00,000 respectively. Divisible profit amounting to Rs.3,00,000 for the year ended
31st March, 2020 was distributed in the ratio of 4 : 1 : 1 after allowing interest on capital @
10% p.a. During the year, each partner withdrew 50,000 per month in the beginning of each
month. The Partnership Deed was silent as to profit-sharing ratio and interest on drawings
but provided for interest on capital @ 12% p.a.
Showing your workings, pass the necessary adjustment entry to rectify the above error.
27,000
Date Particulars L.F. Dr. (Rs) Cr.(Rs.)
2020
March X's Capital A/c...Dr. 1,10,000
31
To Y's Capital A/c 50,000
To RS.'s Capital A/c 60,000
(Interest on capital allowed at lower rate and profits
distributed in wrong ratio, now rectified)
Working Notes:
1. Calculation of Interest on Capital already provided and Opening Capital:
Particulars X (Rs.) Y(Rs.) RS.(Rs.)
Closing Capital 1,50,000 5,50,000 11,00,000
Add: Drawings already debited 6,00,000 6,00,000 6,00,000
R50,000 x 12)
7,50,000 11,50,000 17,00,000
Less: Profit already credited (4:1 :1) 2,00,000 50,000 50,000
Opening Capital Plus Interest on 5,50,000 11,00,000 16,50,000
Capital
Less: Interest on Capital (D x 50,000 1,00,000 1,50,000
10/110)
Opening Capital (D — E) 5,00,000 10,00,000 15,00,000
2. ADJUSTMENT TABLE
Particulars X's Capital A/c Y's Capital A/c RS.'s Capital A/c Firm
Dr. (t) Cr. (Rs.) Dr. (Rs.) Cr. (Rs.) Dr. (Rs.) Cr.(Rs.) Dr. (Rs.) Cr. (Rs.)
I. Amount already 50,000 ... 1,00,000 ... 1,50,000 .. ... 3,00,00
credited, now 2,00,000 ... 50,000 1,20,00 50,000 ... ... 0
taken back: ... 60,000 ... 0 1,80,00 3,60,000 3,00,00
 Interest on ... 80,000 .. 80,000 0 2,40,000 0
Capital @ 10% 80,000 ...
p.a. ...
 Share of Profit 2,50,000 1,40,00 1,50,000 2,00,00 2,00,000 2,60,00 6,00,000 6,00,00
(4:1 :1) 0 0 0 0
II. Amount which 1,10,000 (Dr.) 50,000 (Cr.) 60,000 (Cr.) Nil
should have
been credited:
 Interest on
Capital @ 12%
p.a.
 Share of Profit*
Credited to
Partners In the
ratio of 1 :1 : 1
Net Effect (Dr.— Cr.)
*Rs. 2,40,000 (i.e., Rs. 3,00,000 + Rs.3,00,000 — Rs.3,60,000).
(B) When Adjustment Journal Entries (in Place of one Adjustment Entry) are passed: In this
situation, analytical table to determine the net effect of all the adjustments is not prepared
instead Journal entries are passed for each error or omission by debiting or crediting Profit
and Loss Adjustment Account. After passing the entries for adjustment of errors and
omissions, Profit and Loss Adjustment Account is closed by debiting or crediting (as the
situation is) with the corresponding credit or debit to the Partners' Current Accounts, if Fixed
Capital Accounts Method is followed or Partners' Capital Accounts, if Fluctuating Capital
Accounts Method is followed.
Accounting Entries
Following Journal entries shall be passed through Profit and Loss Adjustment Account:
(i) Adjustment entries for the items which are to be credited to the Partners' Capital/Current
Accounts:
Profit and Loss Adjustment A/c ...Dr.
To Partners'Capital/Current A/cs
(Adjustment made for previously omitted, now recorded)
(ii) Adjustment entries for the items which are to be debited to the Partners' Capital/ Current
Accounts:
Partners' Capital/Current A/cs ...Dr.
To Profit and Loss Adjustment A/c
(Adjustment made for previously omitted, now recorded)
(iii) For Net Profit/Loss due to above adjustments:
(a) For Profit
Profit and Loss Adjustment A/c ...Dr.
To Partners'Capital/Current A/cs
(Profit on adjustment credited to Partners' Capital/Current Accounts)
(b) For Loss
Partners' Capital/Current A/cs ...Dr.
To Profit and Loss Adjustment A/c
(Loss on adjustment transferred to Partners' Capital/Current Accounts)
Note: If capitals of the partners are fixed, adjustment entries are passed through Partners'
Current Accounts.
Illustration 47.
P, Q and R are partners in a firm. Their Capital Accounts stood at Rs.3,00,000; Rs.1,50,000
and Rs.1,50,000 respectively on 1st April, 2020.
As per the provisions of the Deed: (i) R was to be allowed a remuneration of 36,000 per
annum, (ii) Interest @ 5% p.a. was to be provided on capitals and (iii) Profits were to be
distributed in the ratio of 2 : 2 : 1. Ignoring the above terms, net profit of Rs.1,80,000 for the
year ended 31st March, 2020 was distributed among the three partners equally.
Pass the Journal entries to rectify the above errors.
Solution: JOURNAL
2020
April 1 P's Capital A/c ...Dr. 60,000
Q's Capital A/c ...Dr. 60,000
R's Capital A/c ...Dr. 60,000
To Profit and Loss Adjustment A/c 1,80,000
(Share of profit wrongly credited to partners, now
reversed)
Profit and Loss Adjustment A/c ' ...Dr. 36,000
To R's Capital A/c 36,000
(Remuneration credited to R's Capital Account)
Profit and Loss Adjustment A/c ...Dr. 30,000
To P's Capital A/c 15,000
To Q's Capital A/c 7,500
(Interest on capitals @ 5% p.a. credited to Capital
Accounts of respective partners)
Profit and Loss Adjustment A/c ,,,Dr. 1,14,000
To P's Capital A/c 45,600
To Q's Capital A/c 45,600
(Divisible profit credited to Partners' Capital
Accounts in the ratio of 2:2:1)
6. GUARANTED OF PROFIT
A new partner (or partners) may be admitted in the firm with minimum guaranteed profit from
the business. The profit may be guaranteed to an existing or incoming (new) partner by:
(a) all the remaining partners in an agreed ratio; or
(b) one or more of the existing or old partners.
When the guaranteed partner's or new partner's share of profit is more than the guaranteed
amount, his actual share of profit is given to him instead of the guaranteed amount of profit.
(a) Guarantee of Profit by all the Remaining Partners
When all the remaining partners (i.e., other than the guaranteed partner), guarantee that the
guaranteed partner (or partners) shall be given a minimum amount of profit, following steps
are followed:
Step 1: Share of profit as per profit-sharing ratio is determined, and
Step 2: Minimum guaranteed profit is determined.
The higher of the above two amounts (amounts calculated as per Step 1 and Step 2) is
given to the guaranteed partner. If the share of profit is less than the guaranteed amount, the
difference in the amount of profit, i.e., minimum guaranteed profit minus share of profit of the
guaranteed partner (called 'deficit') is borne by the remaining partners in the agreed ratio
and where the agreed ratio is not given the deficit is borne by them in their profit-sharing
ratio.
Accounting Entries
1. On Distributing the Profit as if there is no Guarantee Agreement:
To All Partners' Capital A/cs
2. On Charging Deficiency to Guaranteeing Partner(s):
Guaranteeing Partners' Capital A/cs ...Dr.
To Guaranteed Partner's Capital A/c
Illustration 48.
Maanika, Bhavi and Komal are partners sharing profits in the ratio of 6 : 4 : 1. Komal is
guaranteed a minimum profit of 2,00,000. The firm incurred a loss of Rs.22,00,000 for the
year ended 31st March, 2018. Pass necessary Journal entry regarding deficiency borne by
Maanika and Bhavi and prepare Profit and Loss Appropriation Account.
(CBSE Sample Paper 2019)
Solution: JOURNAL
Date Particulars L.F Dr.(Rs.) Cr.(Rs.)
2018 Maanika's Capital A/c ...Dr. 2,40,000 4,00,000
March Bhavi's Capital A/c ...Dr. 1,60,000
31 To Komal's Capital A/c
(Deficiency of Kornai met by Maanika and Bhavi) (WN)
Dr.
PROFIT AND LOSS APPROPRIATION ACCOUNT for the year ended 31st March,
2018 Cr.
To Net Loss (Profit and Loss 22,00,000By Loss transferred to:
A/c)
Maanika's Capital A/c 12,00,000
Bhavi's Capital A/c 8,00,000
Komal's Capital A/c 2,00,000
22,00,000 22,00,000
Working Note: Loss of the firm = Rs.22,00,000

Komal's share of loss = Rs. 22,00,000 x 1/11 = Rs.2,00,000
Guaranteed minimum profit = Rs.2,00,000
Therefore, Komal's Capital Account is to be credited by the amount of deficiency 4,00,000
(i.e., Rs.2,00,000: Share of Loss + Rs.2,00,000 : Guaranteed Profit) which will be borne by
Maanika and Bhavi in their profit-sharing ratio, i.e., 6 :4 or 3 :2.
Illustration 49.
A, B and C are partners in a firm sharing profits in the ratio of 4 : 2 : 1. It is provided that
C's share in profit would not be less than 37,500. Profit for the year ended 31st March,
2020 was Rs.1,57,500.
Solution:
To A's Capital A/c 90,000 By Profit and Loss A/c 1,57,500
Less: C's Share of Deficiency 10,000 80,000 —Net Profit
To 13's Capital A/c 45,000 40,000
Less: C's Share of Deficiency 5,000
To Cs Capital A/c 22,500

Add: Deficiency met by:
A 10,000
B 5,000 37,500
1,57,500 1,57,500
Working Notes:
1. DISTRIBUTION OF PROFIT
Particulars A B C
Divide Net Profit oft Rs.1,57,500 x 4/7 = Rs.1,57,500 x 2/7 Rs.1,57,500 x 1/7
1,57,500 in 4:2:1, Rs. 90,000 = Rs. 45,000 = Rs.22,500
However, C's Minimum Guaranteed Profit = Rs.37,500.Thus, deficiency is of Rs.37,500 -
Rs.22,500 = Rs.15,000.
Deficiency met by A Rs. 15,000 x 2/3 =Rs. Rs.15,000 x 1/3 =T ...
and 8 in 4 :2 or 2 :1 10,000 Rs.5,000
Share of Profit Rs. 90,000 - Rs.45,000 - Rs. 5,000 Rs.22,500 +
Rs.10,000 Rs.10,000 (A)
= Rs. 80,000 = Rs. 40,000 +Rs. 5,000 (8) =Rs.
37,500
2. Since no specific ratio is given in which the deficiency is to be met, it means A and C shall
meet the deficiency in their profit-sharing ratio, i.e., 4 : 2 or 2 :1.
Illustration 50.
P and Q were partners in a firm sharing profits in the ratio of 5 : 3. On 1st April, 2014 they
admitted R as a new partner for 1/8th share in the profits with a guaranteed profit of 75,000.
The new profit-sharing ratio between P and Q will remain the same but they agreed to bear
any deficiency on account of guarantee to R in the ratio 3 : 2. The profit of the firm for the
year ended 31st March, 2015 was 4,00,000.
Prepare Profit and Loss Appropriation Account of P, Q and R for the year ended 31st March,
2015. (Delhi 2016)
T Net Profit transferred to: By Profit and Loss A/c (Net Profit) 4,00,000
o
P's Capital A/c 2,18,750
Less: Deficiency in R's 15,000 2,03,75
Share 0
Q's Capital A/c 1,31,250
Less: Deficiency in R's 10,000 1,21,25
Share 0
R's Capital A/c 50,000
Add: Deficiency met by:
P 15,000
Q 10,000 75,000
4,00,00 4,00,000
0
Working Notes:
1. Calculation of New Profit-sharing Ratio of P, Q and R:
Let the total share be 1
Share of incoming partner R=1/8
Remaining Share = 1 — 1/8 = 7/8
P's New Share = 7/8 x 5/8 = 35/64
Q's New Share = 7/8 x 3/8 = 21/64
R's Share = 1/8 or 8/64
Thus, New Profit-sharing Ratio of P, Q and R = 35/64 : 21/64 : 8/64, i.e., 35 : 21 : 8.
2. R's Share of Profit = 1/8 of Rs.4,00,000 = Rs.50,000; whereas, R's guaranteed profit =
Rs.75,000.
Deficiency in R's share (Rs.25,000) is to be met by P and Q in the ratio of 3 : 2. Thus, P and
Q will meet the deficiency of Rs. 15,000 and Rs.10,000 respectively.
Illustration 51.
Moli, Bhola and Raj were partners in a firm sharing profits and losses in the ratio of 3 : 3 4.
Their Partnership Deed provided for the following:
(i) Interest on capitals @ 5% p.a.
(ii) Interest on drawings @ 12% p.a.
(iii) Interest on partners' loan @ 6% p.a.
(iv) Moli was allowed an annual salary of 4,000; Bhola was allowed a commission of 10%
of net profit as shown by Profit and Loss Account and Raj was guaranteed a profit of
Rs. 1,50,000 after making all the adjustments as provided in the partnership
agreement.
Their fixed capitals were Moli: Rs.5,00,000; Bhola: Rs.8,00,000 and Raj: Rs.4,00,000. On
1st April, 2016 Bhola extended a loan of Rs.1,00,000 to the firm. The net profit of the firm for
the year ended 31st March, 2017 before interest on Bhola's loan was Rs.3,06,000.
Prepare Profit and Loss Appropriation Account of Moli, Bhola and Raj for the year ended
31st March, 2017 and their Current Accounts assuming that Bhola withdrew Rs.5,000 at the
end of each month, Moli withdrew 10,000 at the end of each quarter and Raj withdrew
Rs.40,000 at the end of each half year. (Delhi 2018)
ToInterest on Capital A/cs: By Profit and Loss A/c 3 3,06,000
Moli's Current A/c 25,000 (Profit as per Profit and
Loss A/c)
if 5,00,000 x 5/100) Less: Interest on Bhola's 6,000 3,00,000
Loan
Bhola's Current A/c 40,000 By Interest on Drawings:
(WN 1)
(Z 8,00,000 x 5/100) Moli's Current A/c 1,800
Raj's Current A/c 20,000 85,000 Bhola's Current A/c 3,300
g 4,00,000 x 5/100) Raj's Current A/c 2,400 7,500
ToMoli's Current A/c 4,000
(Salary)
ToBhola's Current A/c 30,000
(Commission)
(' 3,00,000 x 10/100)
ToProfit transferred to:
(WN 2)
Moli's Current A/c 56,550
(Z 1,88,500 x 3/10)
Less: Given to Raj 37,300 19,250
Bhola's Current A/c 56,550
g 1,88,500 x 3/100)
Less: Given to Raj 37,300 19,250
Raj's Current A/c 75,400
(Z 1,88,500 x 4/10)
Add: From Moli 37,300
From Bhola 37,300 1,50,000
3,07,500 3,07,500
Dr. PARTNERS' CURRENT ACCOUNTS Cr.

Particulars Moli Bhola Raj Particulars Moli Bhola Raj
To Drawings A/c 40,000 60,000 80,000 By Interest on Capital 25,000 40,000 20,000
A/c
To Interest on By Salary A/c 4,000 ...
Drawings A/c 1,800 3,300 2,400 By Commission A/c ... 30,000
To Balance c/d 6,450 25,950 87,600 By Profit and Loss
Appropriation A/c 19,250 19,250 1,50,00
0
(Profit)
48,250 89,250 1,70,00 48,250 89,250 1,70,00
0 0
1. Calculation of Interest on Drawings:

a) Interest on Moli's Drawings: Rs.40,000 (i.e., Rs.10,000 x 4 Instalments) x 4.5/12
months* x 12/100 = Rs.1,800.
b) Interest on Bhola's Drawings: Rs.60,000 (i.e., Rs.5,000 x 12 months) x 5.5/12
months* x 12/100 = Rs.3,300.
c) Interest on Raj's Drawings: Rs.80,000 (i.e., 40,000 x 2 instalments) x 3/12 months* x
12/100 = Rs.2,400.
Months ¿ First Drawing+ Months ¿ Last Drawing
*Average period = =
2
9+0
(a) Average period in case of Moli = 4.5 Months.
2
11+0
(b) Average period in case of Bhola = = 5.5 Months.
2
6+0
(c) Average period in case of Raj = = 3 Months.
2
We apply average period for the calculation of interest on drawings when a uniform amount
is withdrawn at regular interval.
2. Distribution of Profit:
Profit after adjustments (Rs.3,00,000 + Rs.7,500 — Rs.85,000 — Rs.4,000 — Rs.30,000) =
Rs.1,88,500 will be distributed among Moli, Bhola and Raj in the ratio of 3 :3 :4.
Moli's share of profit = Rs.56,550, Bhola's share of profit = Rs.56,550, and Raj's share of
profit = Rs.75,400.
However, Raj's minimum guaranteed profit is Rs.1,50,000. So there is a deficiency of
Rs.74,600
(i.e., Rs.1,56,000 — Rs.75,400). Deficiency to be borne by Moli and Bhola equally, i.e.,
Rs.37,300 each.
(b) Guarantee of Profit by one or more of the Existing or Old Partners
When one of the existing or old partners (in some cases more than one partner) guarantee
minimum profit, the adjustment is made through the Partners' Capital Accounts. Following
steps are to be followed:
Step 1: Distribute the profit among the partners as per their profit-sharing ratio.
Step 2: If share of profit of the guaranteed partner is less than the minimum guaranteed
profit the difference is deducted from the share of profit of the partner (or partners) who has
guaranteed and it is added to the share of profit of the guaranteed partner.
When two or more partners guarantee, the shortfall (deficiency) is shared by them in the
agreed ratio or in their profit-sharing ratio as the case may be.
Illustration 52.
P, Q and R are partners sharing profits in the ratio of 5 : 4 : 1 respectively. R is guaranteed
that his share of profit in any year will be at least Rs.50,000. Profit for the year ended 31st
March, 2020 is Rs.3,50,000. Amount of shortfall in the profits of R is to be met by P and Q in
the ratio of 3 : 2. Pass necessary Journal entry regarding deficiency met by P and Q.
Solution: In the Books of the Firm
JOURNAL
Date Particulars L.F. Dr. (Rs.) Cr.
( Rs.)
2020
March P's Capital A/c...Dr. 9,000
31
Q's Capital A/c ...Dr. 6,000
(Shortfall in the share of profit of R, met by P and Q in the
ratio of 3 :2)
Working Note:
When the net profit of Rs. 3,50,000 is distributed amongst the partners in the ratio of 5 : 4 :
1, R gets 35,000 (i.e.,Rs. 3,50,000 x 1/10). But his guaranteed profit is Rs.50,000.The
shortfall, Rs.15,000 (i.e.,Rs.50,000 — Rs.35,000) is to be met by P and Q in the ratio of 3 : 2
respectively. In effect, shortfall met by P is Rs.9,000 (i.e.,Rs. 15,000 x 3/5) and shortfall met
by Q is 6,000 (i.e.,Rs. 15,000 x 2/5).
Illustration 53 (Guarantee of Profits by one of the Partners).
X, Y and Z are partners in a firm. Their profit-sharing ratio is 5 : 3 : 2. Z is guaranteed a
minimum profit of 10,000 every year. Any deficiency arising is to be met by Y. Profits for the
two years ended 31st March, 2019 and 2020 were 40,000 and 60,000 respectively.
Prepare Profit and Loss Appropriation Account for the two years.
To Profit transferred By Profit and Loss A/c 40,000
to:
X's Capital A/c (5/10) 20,000 (Net Profit)
Y's Capital A/c (3/10) 12,000
Less: Deficiency in Z's 2,000 10,000
Share
Z's Capital A/c (2/10) 8,000
Add: Deficiency met by Y 2,000 10,000
40,000 40,000
Dr. Cr.
PROFIT AND LOSS APPROPRIATION ACCOUNT for the year ended 31st March, 2020
To Profit transferred to: By Profit and Loss A/c 60,000
X's Capital A/c (5/10) 30,000 (Net Profit)
Y's Capital A/c (3/10) 18,000
Z's Capital A/c (2/10) 12,000
60,000 60,000
Note: Z's share in profits is more than the minimum guaranteed amount, so there is no need
for any adjustment.
Illustration 54,
Anwar, Biswas and Divya are partners in a firm. Their Capital Accounts stood at
Rs.8,00,000; Rs.6,00,000 and Rs.4,00,000 respectively on 1st April, 2013. They shared
profits and losses in the ratio of 3 : 2 : 1 respectively. Partners are entitled to interest on
capital @ 6% per annum and salary to Biswas and Divya @ 4,000 per month and 6,000 per
quarter respectively as per the provisions of Partnership Deed.
Biswas's share of profit including interest on capital but excluding salary is guaranteed at a
minimum of Rs.82,000 p.a. Any deficiency arising on that account shall be met by Divya.
Profit for the year ended 31st March, 2014 amounted to Rs.3,12,000. Prepare Profit and
Loss Appropriation Account for the year ended 31st March, 2014.
(Delhi 2013)
To Interest on Capital A/cs: By Profit and Loss A/c 3,12,000
Anwar 48,000 (Net Profit)
Biswas 36,000
Divya 24,000 1,08,000
To Partners' Salary A/c:
Biswas R 4,000 x 12) 48,000 72,000
Divya g 6,000 x 4) 24,000
Anwar's Capital A/c (Rs.1,32,000 x 66,000
3/6)
Biswas'Capital A/c Rs.1,32,000 x
2/6) 44,000
Add: From Divya (Note) 46,000
2,000
Divya's Capital A/c (Rs. 1,32,000 x
1/6) 22,000
Less: Deficiency borne 20,000
2,000
3,12,000 3,12,000
Note: A. Biswas's Share of Profit Rs.44,000

Add: Interest on Capital Rs.36,000
Rs.80,000
B. Guaranteed Profit = 82,000
C. Deficiency to be borne by Divya (B - A) = 82,000 - 80,000 = 2,000.
Illustration 55 (Guarantee of Profit when partnership starts during the year).
X, Y and Z entered into partnership on 1st July, 2019 to share Profit and Losses in the ratio
of 3 : 2 : 1. X guaranteed that Z's share of profit after charging interest on capitals @ 6% per
annum would not be less than Rs.36,000 p.a. The capital contributed by X---Z Rs.2,00,000;
Y- Rs.1,00,000 and Z- Rs.1,00,000. Profit for the year ended 31st March, 2020 was
Rs.1,38,000. Prepare Profit and Loss Appropriation Account.
T Interest on Capital A/cs By Profit and Loss A/c 1,38,00
o (WN 1): 0
X 9,000 (Net Profit)
Y 4,500
Z 4,500 18,000
T Profit transferred to (WN
o 2):
X's Capital A/c 53,000
Y's Capital A/c 40,000
Z's Capital A/c 27,000 1,20,000
1,38,000 1,38,00
0
Working Notes:
1. Calculation of Interest on Capital on:
X's Capital = Rs.9,000 (i.e., Rs.2,00,000 x 6/100 x 9/12); Y's Capital = Rs.4,500 (i.e.,
Rs.1,00,000 x 6/100 x 9/12);
Z's Capital = Rs.4,500 (i.e., Rs.1,00,000 x 6/100 x 9/12).
2. (i) Profit after interest on Capital = Rs.1,38,000 - Rs.18,000 = Rs.1,20,000
Profit of Rs.1,20,000 will be distributed between X, Y and Z in the ratio 3 :2 :1, i.e.,
X's Share of Profit = Rs.60,000; Y's Share of Profit = Rs.40,000; and Z's Share of Profit =
20,000.
(ii) Z's Share of Profit = 20,000. However, due to guarantee, Z has to get minimum
Rs.27,000* (i.e., Rs.36,000 x 9/12) of profit for 9 months. So, deficiency of Rs.7,000 (i.e.,
Rs.27,000 - Rs.20,000) will be paid by X. After adjusting the deficiency of profit by X, X's
Share of profit will be Rs.53,000 (i.e., Rs.60,000 - Rs.7,000) and Z's Share of Profit = 20,000
+ 7,000 =Rs. 27,000.
* Guaranteed amount is calculated on proportionate basis from the date of admission of
Guaranteed partner to the closing date of accounting year.
Accounting treatment of Guarantee of minimum profit to a partner in case of Loss
It is possible that the firm has incurred loss but minimum guaranteed profit is to be paid to
the partner who has been guaranteed minimum profit. In such. case, adjustment is made
through Partners' Capital Accounts in the following manner:
(i) Distribute loss among the partners in their profit-sharing ratio.
(ii) Capital account of the guaranteed partner is credited with guaranteed minimum profit
plus the amount of loss. This amount is debited to remaining partners in their profit-
sharing ratio or to the debit of the partner who has guaranteed minimum profit.
Illustration 56 (Guarantee of Profit to a Partner in Case of Loss).
A, B and C are partners having capitals of Rs.10,00,000; Rs.8,00,000 and Rs.6,00,000
respectively in a firm and sharing profits and losses equally. C is guaranteed a minimum
profit of Rs.1,00,000 as share of profit every year. The firm incurred a loss of Rs.3,00,000 for
the year ended 31st March, 2020. You are required to show the necessary accounts for
division of loss and giving effect to minimum guaranteed profit to C.
To Profit and Loss A/c (Net Loss) 3,00,00 By Loss transferred to:
0
A's Capital A/c 1,00,00
0
B's Capital A/c 1,00,00
0
C's Capital A/c 1,00,00
0
3,00,00 3,00,00
0 0
Dr. PARTNERS' CAPITAL ACCOUNTS Cr.

Particulars A (Rs.) B (Rs.) C(Rs.) Particulars A (Rs.) B (Rs.) C (Rs.)
To Profit By Balance 10,00,000 8,00,000 6,00,000
and Loss b/d
Appropriation 1,00,000 1,00,000 1,00,000 By A's ... ... 1,00,000
A/c Capital A/c
To C's 1,00,000 1,00,000 ... By B's ... ... 1,00,000
Capital A/c Capital A/c
(Guaranteed
Profit)
To Balance 8,00,000 6,00,000 7,00,000
c/d
10,00,000 8,00,000 8,00,000 10,00,000 8,00,000 8,00,000
By Balance 8,00,000 6,00,000 7,00,000
b/d
Note: Cis guaranteed a profit of Rs.1.00.000 p.a. Loss incurred by the firm is
Rs.3,00.000.0ut of which Rs.1.00.000 is debited to
C's Capital Account. Therefore, C's Capital Account is to be credited by the amount of
deficiency Rs.2,00,000 (Rs.1,00,000 share of loss debited plus Rs.1,00,000 guaranteed
profit) which is met equally by A and B.
Alternative Method:
Particulars Total A (Rs.) B (Rs.) C(R)
(Rs.)
I.Loss for the year as per Profit and Loss Account (3,00,000 (1,50,000 (1,50,000) ...
to be debited to A and B equally as C is ) )
guaranteed minimum profit
II. Guaranteed profit of C to be shared by A and B ... (50,000) (50,000) 1,00,00
equally 0
III. Net Effect (3,00,000 (2,00,000 (2,00,000) 1,00,00
) ) 0
Particulars A(Rs.) B(Rs.) C(Rs.) Particulars A (Rs.) B (Rs.) C (Rs.)
To Profit and 1,50,000 1,50,000 ... By Balance 10,00,00 8,00,000 6,00,00
Loss App. A/c b/d 0 0
To Cs Capital 50,000 50,000 ... By. A's Capital A/c ... ... 50,000
A/c
(Guaranteed By B's Capital ... ... 50,000
Profit) A/c
To Balance 8,00,000 6,00,000 7,00,00
c/d 0
10,00,00 8,00,000 7,00,00 10,00,00 8,00,000 7,00,00
0 0 0 0
Illustration 57 (Guarantee of Profit by the Firm).

A, B and C are partners in a firm sharing profits and losses in the ratio of 12 : 8 : 5. Partner C
is guaranteed a minimum profit of Rs.50,000 p.a. by the firm. The profits and losses for the
years ended 31st March, were: 2018—Profit Rs.2,00,000; 2019—Profit Rs.3,00,000, and
2020—Loss Rs.2,00,000.
Pass necessary Journal entries in the books of the firm.
Solution:
Particulars 31st March, 2018 31st March, 2019 31st March, 2020
(Rs.) (Rs.) (Rs.)
(i) Guaranteed Profit to C 50,000 50,000 50,000
(ii) C's Actual Share of Profit as 40,000 60,000 (40,000) Loss
per profit-sharing ratio 12 :8 :5
(i.e., 72,00,000 x (i.e.,7 3,00,000 x (i.e.,Z 2,00,000 x
5/25) 5/25) 5/25)
(iii) Deficiency [(i) - (ii)] 10,000 ... 90,000
The deficiency in C's share of profit is to be borne by the firm. Thus, out of the profit of the
firm C's Capital Account will be credited with minimum guaranteed profit or his share of
profit, whichever is higher and thereafter, balance will be distributed to A and B in their profit-
sharing ratio.
In case of loss, loss will be debited to Partners' Capital Accounts and thereafter, deficiency
in guaranteed partner's share will be debited to remaining Partners' Capital Accounts.
JOURNAL
2018
March Profit and Loss A/c ...Dr. 2,00,000
31
To Profit and Loss Appropriation A/c 2,00,000
Profit and Loss Appropriation A/c ...Dr. 2,00,000
To A's Capital A/c 90,000
To B's Capital A/c 60,000
To C's Capital A/c 50,000
(Distribution of profit among partners and C
credited with his guaranteed profit)
2019
March Profit and Loss A/c ...Dr. 3,00,000
31
To Profit and Loss Appropriation A/c 3,00,000
(Profit transferred to Profit and Loss
Profit and Loss Appropriation A/c ...Dr. 3,00,000
To A's Capital A/c g 3,00,000 x 12/25) 1,44,000
To B's Capital A/c (73,00,000 x 8/25) 96,000
To C's Capital A/c (73,00,000 x 5/25) 60,000
(Net profit distributed among the partners in the
ratio of 12 :8 :5)
2020
March A's Capital A/c...Dr. 96,000
31
B's Capital A/c...Dr. 64,000
C's Capital A/c...Dr. 40,000
To Profit and Loss A/c 2,00,000
(Distribution of loss as if there is no guarantee)
A's Capital A/c...Dr. 54,000
B's Capital A/c...Dr. 36,000
To C's Capital A/c 90,000
(Deficiency of C, met by A and 8 in the ratio of 3
:2)
Minimum Earnings Guaranteed by a Partner
A partner may guarantee minimum fee or specified amount that the firm shall earn by his
efforts. Shortfall, if any is borne by the partner guaranteeing the fee or amount specfied. For
example, Rohit, a partner guarantees the firm that he shall bring only additional fee of
Rs.1,00,000 in a year but is able to bring only Rs.90,000 as fee. The shortfall of 10,000 will
be debited to his Capital Account (in case of fixed capitals) or Current Account (in case of
fluctuating capitals).
Illustration 58.
Jay, Vijay and Karan were partners of an architect firm sharing profits in the ratio of 2 : 2 : 1.
Their Partnership Deed provided the following:
(i) A monthly salary of 15,000 each to Jay and Vijay.
(ii) Karan was guaranteed a profit of 5,00,000 and jay guaranteed that he will earn an
annual fee of 2,00,000. Any deficiency arising because of guarantee to Karan will be
borne by Jay and Vijay in the ratio of 3 : 2.
During the year ended 31st March, 2018 Jay earned fee of Rs.1,75,000 and the profits of the
firm amounted to Rs.15,00,000.
Showing your workings clearly prepare Profit and Loss Appropriation Account and the
Capital Accounts of Jay, Vijay and Karan for the year ended 31st March, 2018.
(CBSE 2019)
T Partners' Salary: By Profit and Loss A/c (Net Profit) 15,00,000
o
Jay's Capital A/c 1,80,000 By Jay's Capital A/c (' 2,00,000 — 25,000
Z 1,75,000)
Vijay's Capital A/c 1,80,000 3,60,000 (Deficiency in Guaranteed Fees)
T Profit transferred to:
o
Jay's Capital A/c 4,66,000
Less: Guaranteed (Profit 1,60,200 3,05,800
to Karan)
Vijay's Capital A/c 4,66,000
Less: Guaranteed (Profit 1,06,800 3,59,200
to Ka ran)
Karan's Capital A/c 2,33,000
Add: Deficiency met by 2,67,000 5,00,000
Jay and Vijay
15,25,00 15,25,000
0

Particulars Jay Vijay Karan Particulars Jay Vijay Karan
To Profit and Loss 25,000 ... ... By Partners' Salary 1,80,00 1,80,000 5,00,00
Appropriation A/c 4,60,80 5,39,20 5,00,00 A/c 0 3,59,200 0
To Balance c/d 0 0 0 By Profit and Loss 3,05,80
Appro-priation A/c 0
4,85,80 5,39,20 5,00,00 —Profit 4,85,80 5,39,200 5,00,00
0 0 0 0 0
Working Note: Calculation of Deficiency in Karan's share and its recovery:

Profit to be Distributed = Rs.15,00,000 - Rs.3,60,000 + Rs.25,000 Rs.11,65,000.
Division of Profit: Jay's Share of Profit = Rs.11,65,000 x 2/5 = Rs.4,66,000;
Vijay's Share of Profit = Rs.11,65,000 x 2/5 = Rs.4,66,000;
Karan's Share of Profit = Rs.11,65,000 x 1/5 = Rs.2,33,000.
Karan's Deficiency = Guaranteed profit - Karan's Share of Profit
= Rs.5,00,000 - Rs.2,33,000 = Rs.2,67,000, which will be met by Jay
and Vijay in the ratio of 3 : 2
Deficiency borne by: Jay = Rs.2,67,000 x 3/5 = Rs.1,60,200; Vijay = Rs.2,67,000 x 2/5 =
Rs.1,06,800.
Objective Type Questions
1. State whether the following statements are True or False:
(i) If the Partnership Deed does not exist or where it exists, it does not provide for
interest on loan by the partner, partners will get interest @ 6% on the loan given by
them to the firm.
(ii) In the absence of an agreement, profits and losses are distributed among the
partners equally.
(iii) A partner who devotes more time to a business than others is entitled to get salary,
even if the partnership is without Partnership Deed.
(iv) A partner who has invested more capital in the firm will get interest on excess capital.
(v) When a partner draws a fixed amount for his personal use at the end of each month
for 12 months, interest will be charged at an agreed rate per annum on total amount
of drawings for 51/2 months.
(vi) When a partner draws a fixed amount for his personal use in the middle of each
month for 12 months, interest will be charged at an agreed rate per annum on total
amount of drawings for 6 months.
(vii) If the Partnership Deed is silent, interest @ 6% p.a.will be charged on the drawings
made by the partner.
(viii) Interest on loan by a partner to the firm is allowed @ 10% p.a.if the Partnership Deed
does not exist or is silent about the rate of interest.
(ix) Valid partnership can be set up even without a written agreement between the
partners.
(x) Partners are mutual agents of each other so far as the business of the firm is
concerned.
(xi) A partnership should have at least two partners but the number of partners should
not exceed fifty.
(xii) Partnership is a business entity which is not separate from its partners in any
circumstances.
(xiii) The Partnership Deed provides to pay salary/commission to partners @ 2% of Net
Sales. It will be paid even if the firm incurs loss.
(xiv)In the absence of Partnership Deed or agreement, profits and losses are shared equally
by the partners.
(xv) A partner can retire from the partnership with the consent of all the partners, even if the
partnership is at will.
(xvi)Amrish, a partner, has taken loan from the firm without an agreement. The firm shall
charge interest @ 6% p.a.from Amrish.
(xvii) Rent paid to a partner for use of his personal property for business is debited to Profit
and Loss Account.
(xviii) The Partnership Deed allows salary/commission to the partners. The firm incurs loss
during the year but has accumulated profits. Salary/Commission will be paid out of
accumulated profits.
(xix)A firm is started on 1st October, 2019 and the partners draw fixed amount at the end of
each month. Interest will be charged at the agreed rate of interest for 2.5 months.
(xx) Partners draw fixed amount at the end of each month from 1st April, 2019 for six
months. Interest will be charged at the agreed rate of interest for 3.5 months for the
year ended 31st March, 2020.
2. Fill-in-the blanks with appropriate words:
(i) Current Accounts of the Partners should be opened when the capitals are…………
(ii) In the absence of an agreement, interest on loan by partner is allowed @ …………
(iii) If the Partnership Deed does not exist or where it exists does not provide for salary to
partners, partners shall ………… not be allowed salaries, if the firm does not earn
during the year.
(iv) When there is no agreement among the partners, the profit or loss of the firm will be
shared ……………. by the partners.
(v) The extension of Profit and Loss Account is …………..
(vi) Minimum number of persons required to start partnership business is ……………..
(vii) Number of partners which should not exceed for partnership business is
…………….
(viii) Salary or Commission to a partner is an ……………. of profit.
(ix) Interest on Capital is allowed only if the firm earns ……………..during the year.
(x) Having a written Partnership Deed is ………………..
(xi) Remuneration to Partners is an appropriation of profit and therefore it is debited to
………….
(xii) Every partner is bound to attend diligently to his ……………. in the conduct of the
business.
(xiii) Interest on drawings is charged if the Partnership Deed provides for it, whether the
firm earns ………… or incurs …………..
(xiv) Interest on Loan taken by a partner is credited to ……………..
(xv) …………… can override the provisions of, Indian Partnership Act,1932.
(xvi) In case of guarantee of minimum profit to a partner deficiency of guaranteed partner
is met by remaining partners in their …………….
(xvii) Manager's Commission is ………… a against profit.
(xviii) Current Accounts of the Partners are not opened when the Capitals are
……………..
(xix) If a fixed amount is withdrawn by a partner on the last day of every month for a year,
interest on the total amount of drawings is charged for ……………. months.
(xx) In case of partnership, the act of any partner is binding on partners.
3. Match the following:

1. (i) According to Companies Act, 2013 maximum (a) 50
numbers of partners in a firm can be
(b) 100
2. (i) Item which may be debited to Partner's Capital Account (a) Interest on Capital
(ii) Item which may be credited to Partner's Capital Account (b) Interest on Drawings
3. (i) Rent paid to partner (a) Charge against profit
(ii) Salary paid to partner (b) Appropriation of Profit
(c) Both
4. (i) Remuneration to partner (a) Not paid to any partner in absence of
partnership deed
(ii) Interest on Loan by Partner (b) Paid@ 6% p.a.
(c) Not changed for partners
5. (i) When drawings are made at the end of each quarter (a) 6 months
(ii) When drawings are made in middle of each quarter (b) 7.5 months
(c) 4.5 months
6. (i) Guaranteed profit is allowed even in case of (a) Loss
(b) Profit
(c) Both
7. (i) Partners' Current Accounts are opened when their
Capital Accounts are (a) Fixed
(ii) Partners'Capital Accounts are opened when their (b) fluctuating
Capital Accounts are
(c) Both
(d) none
8. (i) Product method is used when (a) amount of drawing and period is uniform
(b) there is irregular drawings
(c) time intervals between the two drawings is
also uniform
Multiple Choice Questions (MCQs)
Select the correct alternative:
1. The written agreement among the partners is called
(a) Partnership Deed. (b) Partnership buy laws.
(c) Partnership Constitution. (d) a contract.
2. The liability of the partners in a partnership firm under Indian Partnership Act, 1932 is
(a) Limited. (b) Unlimited.
(c) No Liability. (d) Depending on the situation..
3. Interest on Capital is allowed on
(a) the opening capital. (b) the capital at the year end.
(c) average capital of the year. (d) the capital in the middle of the year.
4. In the absence of the Partnership Deed, Interest on Capital
(a) is allowed @ 6% per annum. (b) is allowed @ 10% per annum.
(c) is allowed at the borrowing rate. (d) is not allowed.
5. In case of fixed capitals, partners will have
(a) credit balances in their Capital Accounts.
(b) debit balances in their Capital Accounts.
(c) may have credit or debit balances in their Capital Accounts.
(d) credit balance or nil balance in their Capital Accounts.
6. In case of fixed capitals, interest on capital
(a) is credited to Partner's Capital Account.
(b) is credited to Partner's Current Account.
(c) may be credited to Partner's Capital or Current Account.
(d) is debited to Partner's Capital Account.
7. In case of fluctuating capitals, interest on capital
(a) is credited to Partner's Capital Account.
(b) is credited to Partner's Current Account.
(c) may be credited to Partner's Capital or Current Account.
(d) Interest Payable Account.
8. Current Accounts of partners are maintained if
(a) capitals are fixed. (b) capitals are fluctuating.
(c) whether capitals are fixed or fluctuating. (d) as is decided by the Partners.
9. In the absence of Partnership Deed, profit of a firm is divided among the partners
(a) in the ratio of capital.
(b) Equally.
(c) in the ratio of time devoted for the firm's business.
(d) According to the managerial abilities of the partners. (CBSE 2015)
10. Interest on. Capitals of Partners under the Fluctuating Capital Accounts Method is
credited to
(a) Interest Payable Account. (b) Profit and Loss Account.
(c) Partners' Capital Accounts. (d) Partners' Current Accounts.
11. When guarantee is given to partner by some partners, deficiency on such guarantee will
be borne by
(a) All of the other partners. (b) Partnership firm.
(c) Partner who gave the guarantee. (d) None of the partners.
12. In the absence of an agreement to the contrary, the partners are
(a) entitled to 6% interest on their capitals, only when there are profits.
(b) entitled to 9% interest on their capitals, only when there are profits.
(c) entitled to interest on their capitals at the bank rate, only when there are profits.
(d) not entitled to interest on their capitals.
13. Which of the following items will not be shown in Profit and Loss Appropriation Account?
(a) Interest on Capital (b) Commission to a partner
(c) Interest on Drawings (d) Interest on Partner's Loan
14. Which of the following items will not be shown in the debit of Profit and Loss
Appropriation Account?
(a) Interest on Capital (b) Commission to a partner
(c) Interest on Drawings (d) Salary to partners
15. Which of the following is not an essential feature of partnership?
(a) An agreement, oral or written, should exist among the partners.
(b) Agreement should be to carry on lawful business.
(c) All the partners should contribute capital in the firm.
(d) There should be at least two partners.
16. A manager gets 5% commission on net profit after charging such commission, gross
profit Rs.5,80,000 and expenses of indirect nature other than manager's commission
areRs.1,60,000. Commission amount will be
(a) Rs.21,000. (b) Rs.20,000.
(c) Rs.15,000. (d) Rs.22,000.
17. If the Partnership Deed provides for payment of interest on capital of the partners, then
interest can be paid only out of
(a) Accumulated Profits. (b) Past Profits.
(c) Current Profits. (d) Total Profits.
18. As per Indian Partnership Act, 1932 if Partnership Deed does not exist partners are
entitled to
(a) Salary. (b) Interest on Capital.
(c) Equal Profit Share. (d) Commission.
19. Relationship between the partners is of
(a) Close relatives. (b) Agent and principal.
(c) Junior-senior relationship. (d) Senior-subordinate Relationship.
20. There are two partners in a firm P and Q. R is admitted into the firm for 1/3rd share of
profit with the guaranteed profit of Rs.18,000 p.a.The firm's total profit is Rs.42,000.1f P
stood as guarantor of guaranteed profit to R, how much profit would be given to P?
(a) Rs. 20,000 (b) Rs. 15,000
(c) 10,000 (d) 18,000
21. In the absence of Partnership Agreement, interest on drawings of a partner is charged
(a) @ 8% per annum (b) @ 9% per annum
(c) @ 12% per annum (d) No interest is charged (CBSE, Foreign 2015)
22. In the absence of Partnership; interest on loan of a partner is allowed
(a) @ 8% per annum (b) @ 6% per annum
(c) No interest is allowed (d) @ 1 2 % per annum (CBSE, A12015)
Very Short Answer Type Questions
1. Define Partnership.
2. State any two essential features or characteristi6 of partnership other than minimum
number of partners and profit sharing.
3. Does partnership firm has a separate legal entity? Give reason in support of your
answer. (Delhi 2017)
4. What is the maximum number of partners that a partnership firm can have? Name the
Act that provides for the maximum number of partners in a partnership firm.
(Delhi and Foreign 2016)
5. Ritesh and Hitesh are childhood friends. Ritesh is a consultant whereas Hitesh is an
architect. They contributed equal amounts and purchased a building for Rs.2 crores.
After a year, they sold it for Rs.3 crores and shared the profits equally. Are they doing
the business in partnership ? Give reason in support of your answer.
(Delhi 2018)
6. A group of 40 people want to form a partnership firm. They want your advice
regarding the maximum number of persons that can be there in a partnership firm and
name of the Act under whose provision it is given. (Al 2016)
7. Is there any restriction on maximum number of partners? If yes, name the Act under
which it is prescribed.
8. Does a partner has right not to allow admission of a new partner, if the Partnership
Deed does not exist?
9. State any two rights of a partner besides profits of business, participating in business
and right to be consulted about affairs of the business.
10. What is a Partnership Deed? (Foreign 2004, Delhi 2010)
11. Why is it considered better to make a partnership agreement in writing?
(NCERT)
12. Xand Y are partners. Y wants to admit his son K into business. Can K
become the partner of the firm? Give reason. (Delhi
2014 C)
13. Pratibha, partner of a firm, has advanced loan to the firm of Rs.1,00,000.The firm does
not have a Partnership Deed. Will Pratibha get interest on the loan? If yes, at which
rate and why?
14. Neha, a partner, owns a building in which the firm carries its business. The firm pays
her Rs.10,000 as rent of the building. To which account rent will be debited?
15. What is meant by 'Fixed Capital' of a Partner? (Delhi 2016 c)
16. What is meant by 'Fluctuating Capital' of a Partner? (A12016 C)
17. Distinguish between 'Fixed Capital Account' and 'Fluctuating Capital Account'
on the basis of credit balance. (Al 2017, CBSE 2019)
18. A firm maintains a Capital Account and a Current Account for each partner. What is
the term used when this method of maintaining Capital Accounts is followed?
19. Give two items which may appear in the debit side of a Partner's Current Account.
(Delhi 2018 C)
20. State the two methods of maintaining Capital Accounts of partners.
21. State the two situations under which interest on capital is generally provided.
(CBSE 2019)
22. Interest on capital is credited to Partner's Current Account. Name the method of
maintaining Capital Account.
23. Under which Capital Account Method, Current Accounts of partners are maintained?
24. Under which Capital Account Method, Current Accounts of partners are not
maintained?
25. Give four items that may appear in the credit side of the Partner's Current Account.
26. Give three items that may appear in the debit side of the Partner's Current
Account.
27. M/s RSA maintains Partners 'Capital Accounts under Fixed Capital Accounts Method.
Accountant of the firm has credited their salary and interest on capital to their Capital
Accounts. Do you agree with the treatment? Give reasons for your answer.
28. Give two circumstances in which the Fixed Capitals of partners may change
(AI, Delhi and Foreign 2009)
29. List the item that may appear in the debit side of a Partner's Fixed Capital Account.
30. ABC, a partnership firm, does not have a Partnership Deed. The firm wants to pay
remuneration to the partners. How can it do so?
31. If the Partnership Deed does not specify the profit-sharing ratio, in what ratio is the
profit or loss shared by the partners?
32. What share of profit would a sleeping partner who has contributed 75% of the
total capital get in the absence of a deed? (Delhi
2017 C)
33. If the Partnership Deed does not specify the rate of interest payable on loan by a
partner, at what rate will the interest be paid? If not, why?
34. State the provisions of Indian Partnership Act regarding the payment of
remuneration to a partner for the services rendered. (Delhi 2012, A12012 C)
35. If the Partnership Deed does not specify the rate of interest chargeable on drawings,
will the interest still be charged? If yes, at what rate? If not, why?
36. State the provisions of Partnership Act, 1932, in the absence of a Partnership
Deed regarding (i) Interest on Partner's Drawings, and (ii) Interest on Advances other
than capital. (Foreign 2011)
37. Can a partner be exempted from sharing losses in a firm? If yes, under what
circumstances? (Delhi 2009)
38. A and B are partners in a firm without a Partnership Deed. A is an active
partner and claims a salary of Rs.218,000 per month. State with reason whether the
claim is valid or not. (Delhi
2008)
39. Raj and Seema started a partnership firm on 1st July, 2018. They agreed that
Seema was entitled to a commission of 10% of the net profit after charging Raj's salary
of Rs.2,500 per quarter and Seema's commission. The net profit before charging Raj's
salary and Seema's commission for the year ended 31st March, 2019 was
Rs.2,27,500. Calculate Seema's commission. (CBSE 2019 C)
40. State the provisions of Indian Partnership Act,1932 regarding interest on partner's
capital and interest on partner's loan when there is no Partnership Deed.
(A12010 C)
41. What is Profit and Loss Appropriation Account?
42. Under what circumstances Average Method of calculating interest on drawings is
applied?
43. If a fixed amount is withdrawn on 15th day of every month of a calendar year, for what
period will the interest on total amount withdrawn be calculated?
(Foreign 2012)
44. If A draws Rs.15,000 every month at the end of the month, what will be the interest @
5% p.a.?
45. Amit, a partner in a partnership firm, withdrew Rs.7,000 in the beginning of each
quarter. For how many months would interest on drawings be charged?
46. How will you calculate interest on the drawings of equal amount made on the
last day of every month of a calendar year? (Outside Delhi 2009)
47. Explain briefly the meaning of guarantee of minimum profit.
State one difference between Fixed Capital Account and Fluctuating Capital Account of
partners. (Al 2008 C, 2014)
49. Why is it that the Capital Account of a partner does not show a 'Debit
Balance' in spite of regular and consistent losses year after year? (Foreign 2009)
50. A Partnership Deed provides for the payment of interest on capital but there
was a loss instead of profit during the year 2010-11. At what rate will the interest on
capital be allowed? (A12012)
51. What is meant by 'unlimited liability of a partner'? (Delhi 2010)
52. When the partners 'capitals are fixed, where will the drawings made by a partner be
recorded? (Delhi 2013)
53. If the partners' capitals are fixed, where will you record interest charged on drawings?
(A12013)
54. Name the method of calculating Interest on Drawings of the partner if different
amounts are withdrawn on different dates. (Delhi 2012 C)
55. In the absence of provision in the partnership deed, in which ratio is the deficiency
arising out of guarantee of profit to a partner borne by the other partners.
(CBSE 2019)
Short Answer Type Questions
1. Mention the items that may appear in the credit side of the Capital Account of a
Partner when the capitals are fluctuating. (Delhi 1996)
2. Mention the items that may appear in the debit side of the Capital Account of a Partner
when the capitals are fluctuating.
3. List any four items appearing on the Profit and Loss Appropriation Account. (Delhi
2001)
4. State any four features of a Partnership. (Foreign 2005)
5. List any four contents of a Partnership Deed. (Delhi 2004, Al 2009)
6. Discuss the main provisions of the Indian Partnership Act, 1932 that are relevant to
partnership accounts if there is no Partnership Deed. (NCERT)
7. Distinguish between Fixed and Fluctuating Capitals.
(Delhi 1994,1995,2001 C, Al 2005)
8. State the two situations in which interest on Partners' Capital is generally provided.
(Foreign 2017)
EXERCISE
Partnership Deed
1. In the absence of Partnership Deed, how are the following matters resolved:
(a) Salaries of partners, (b) Interest on partners' capitals,
(c) Interest on partner's loan, (d) Division of profit,
(e) Interest on partners' drawings, (f) Interest on loan by partner(s), and0
(g) Interest on Loan to partners?
2. Following differences have arisen among P, Q and R. State who is correct in each case:
(a) P used Rs.20,000 belonging to the firm and earned a profit of Rs.5,000. Q and R want
the, amount to be given to the firm.
(b) Q used Rs.5,000 belonging to the firm and incurred a foss of Rs.1,000. He wants the
firm to bear the loss.
(c) P and Q want to purchase goods from A Ltd., R does not agree.
(d) Q and R want to admit C as partner, P does not agree.
(e) R had given loan of Rs.1,00,000 to the firm and demands interest @ 10% p.a. P and Q
do not want to pay the interest.
3. A, B and C are partners in a firm. They do not have a Partnership Deed. At the end of the
first year of the business, they faced the following problems:
(a) A wants that interest on capital should be allowed to the partners but B and C do not
agree.
(b) B wants that the partners should be allowed to draw salary but A and C do not agree.
(c) A and B want that C should pay interest on loan given to him by the firm but C does
not agree.
(d) A and B having contributed larger amounts of capital, desire that the profits
should be distributed in the ratio of their capital contribution but C does not agree.
State how you will settle these disputes if the partners approach you for the purpose.
4. Bose, Sarkar and Chatterjee are partners in a firm and do not have a Partnership
Deed Bose introduced further capital of Rs.2,00,000 on 1st October, 2019. Whereas
Chatterjee took a loan of Rs.50,000 from the firm on 1st October, 2019. Disputes have
arisen among them on the following issues:
(a) Bose demands interest @ 10% p.a. on Rs. 2,00,000 being his extra capital.
(b) Sarkar desires that his son Deep should be admitted as partner and he will give him
half of his share. Bose and Chatterjee do not agree.
(c) Bose and Sarkar are of the view that Chatterjee should be charged interest on loan
from the firm at the lending rate of the banks, which is 12% p.a.
(d) Sarkar has withdrawn 50,000 from the firm for his personal use. Bose and Chatterjee are
of the view that Sarkar should be charged interest @ 10% p.a.
You are required to give solution to each issue of dispute.
5. Harshad and Dhiman are in partnership since 1st April, 2019. No partnership
agreement was made. They contributed Rs.4,00,000 and Rs.1,00,000 respectively
as capitals. In addition, Harshad had given loan of Rs.1,00,000 to the firm on 1st
October, 2019. Due to long illness, Harshad could not participate in, business activities
from 1st August, 2019 to 30th September, 2019. Profit for the year ended 31st March,
2020 was 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 the ratio of capital;
Dhiman Claims:
(i) Profits should be distributed equally;
(ii) He should be allowed 2,000 p.m. as remuneration for the period he managed the
business in the absence of Hai-shad;
(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. (NCERT, Modified)
6. A and B are partners since 1st April, 2019, without a Partnership Deed and they
introduced capitals of Rs.35,000 and Rs.20,000 respectively. On 1st October, 2019, A
gave loan of Rs.8,000 to the firm without any agreement as to interest. Profit and Loss
Account for the year ended 31st March, 2020 shows a profit of Rs.15,000 but the
partners cannot agree on payment of interest and on the basis of division of profit. You
are required to divide the profits between them giving reasons for your method.
Interest on Partner's Loan to the Firm
7. A and B are partners in a firm sharing profits in the ratio of 3 :2.They had given loan to
the firm of Rs.30,000 in their profit-sharing ratio on 1st October, 2019.The Partnership
Deed is silent on interest on loans from partners. Compute interest payable by the firm
to the partners, assuming the firm closes its books every year on 31st March.
8. X and Y are partners sharing profits and losses in the ratio of 2 : 3 with capitals of
Rs.2,00,000 and Rs.3,00,000 respectively. On 1st October, 2019, X and Y gave loans
of Rs.80,000 and 40,000 respectively to the firm. Show distribution of profits/losses for
the year ended 31st March, 2020 in each of the following alternative cases:
Case 1. If the profits before interest for the year amounted to Rs.21,000.
Case 4. If the loss before interest for the year amounted to Rs.1,400.
9. Bat and Ball are partners sharing the profits in the ratio of 2 : 3 with capitals of Rs.
1,20,000 and Rs.60,000 respectively. On 1st October, 2019, Bat and Ball gave loans
of Rs.2,40,000 and Rs.1,20,000 respectively to the firm. Bat had allowed the firm to
use his property for business for a monthly rent of Rs.5,000. Loss for the year ended
31st March, 2020 before rent and interest amounted to Rs.9,000. Show distribution of
profit/loss.
10. Akhil and Bimal are partners sharing profits in the ratio of 3 : 2. Akhil gave loan to the
firm of Rs.1,00,000 on 1st October, 2019. On the same date, the firm gave loan to
Bimal of Rs.1,00,000. They do not have an agreement as to interest.
Akhil had also given his personal property for firm's godown at a monthly rent of
Rs.5,000.
Firm earns profit of Rs.1,03,000 (before above adjustments) for the year ended 31st
March, 2020. how the distribution of profit for the year.
11. Ankit, Bhanu and Charu are partners in a firm sharing profits and losses equally with
capital of Rs.2,50,000 each. On 1st October, 2019, Ankit and Bhanu gave loans of
Rs.2,50,000 each to the firm whereas Charu took a loan of Rs.1,00,000 from the firm
on the same date. It was agreed among the partners that Charu will be charged
Interest @, 6% p.a. Interest on loan from partners was paid on 10th April, Mane firm
closes its books on 31st March each year.
Pass the Journal entries in the books of the firm for the year ended 31st, March, 2020.
12, Nirmal and Pawan are partners sharing profits in the ratio of 3 : 2. The firm had given
loan to Pawan of Rs.5,00,000 on 1st April, 2019.Interest was to be charged @ 10%
p.a.The firm took loan of Rs.2,00,000 from Nirmal on 1st October, 2019. Before giving
effect to the above, the firm incurred a loss of Rs.10,000 for the year ended 31st
March, 2020.
Determine the Atholiht to be transferred to Profit and Loss Appropriation Account.
Profit and Loss Appropriation Account
13. A and B are partners: A's Capital is Rs. 100,000 and B's Capital is Rs. 60,000. Interest
on capital is payable @6% p.a. B is to get salary of Rs. 3000 per month.Net Profit for
the year is Rs.80,000.
14. X, Y and Z are partners in a firm sharing profits in 2 : 2 : 1 ratio. The fixed capitals of
the partners were: XRs. 5,00,000; /Rs. 5,00,000 and ZRs. 2,50,000 respectively. The
Partnership Deed provides that interest on capital is to be allowed @ 10% p.a. Z is to
be allowed a salary of Rs. 2,000 per month. The profit of the firm for the year ended
31st March, 2018 after debiting Z's salary was Rs. 4,00,000.
15. X and / are partners sharing profits in the ratio of 3 :2 with capitals of Rs. 8,00,000 and
Rs. 6,00,000 respectively. Interest on capital is agreed @ 5% p.a. / is to be allowed an
annual salary of Rs. 60,000 which has not been withdrawn. Profit for the year ended
31st March, 2020 before interest on capital but after charging Y's salary amounted to
Rs. 2,40,000.
A provision of 5% of the profit is to be made in respect of commission to the Manager.
Prepare an account showing the allocation of profits.
16. Prem and Manoj are partners in a firm sharing profits in the ratio of 3 : 2. The
Partnership Deed provided that Prem was to be paid salary of Rs. 2,500 per month
and Manoj was to get a commission of Rs. 10,000 per year. Interest on capital was to
be allowed @ 5% p.a. and interest on drawings was to be charged @ 6% p.a. Interest
on Prem's drawings was Rs. 1,250 and on Manoj's drawings was Rs. 425. Interest on
Capitals of the partners were Rs. 10,000 and Rs. 7,500 respectively. The firm earned a
profit of for the year ended 31 st March, 2020 was Rs. 90,575.
Prepare Profit and Loss Appropriation Account of the firm.
17. Atul and mithun are partners sharing rofits in ratio 3:2
Balance as on 1st April 2019 were as follows ;
Capital Accounts (Fixed Atul Rs. 5,00,000 and Mithun Rs. 6,00,000
Loan Accounts: Atul—Rs. 3,00,000 (Cr.) and Mithun—Rs. 2,00,000 (Dr.)
It was agreed to allow and charge interest @ 8% p.a. Partnership Deed provide to
allow interest on capital
@ 10% p.a. Interest on Drawings was charged Rs. 5,000 each.
Profit before giving effect to above was Rs.28,000 for the year ended 31st March,
2020.
18. Reema and Seema are partners sharing profits equally.The Partnership Deed provides
that both Reema and Seema will get monthly salary of 15,000 each, Interest on Capital
will be allowed @ 5% p.a. and Interest on Drawings will be charged @ 10% p.a.Their
capitals were Rs. 5,00,000 each and drawings during the year were Rs. 60,000 each.
The firm incurred net loss of 1,00,000 during the year ended 31st March, 2020.
19. Bhanu and Partap are partners sharings profits equally. Their fixed capitals as on 1st
April, 2019 are Rs. 8,00,000 and 10,00,000 respectively. Their drawings during the
year were 50,000 and Rs.1,00,000 respectively. Interest on Capital is a charge and is
to be allowed @ 10% p.a. and interest on drawings is to be charged @ 15% p.a. Net
Profit for the year ended 31st March, 2020 was Rs.1,20,000.
Partners' Capital Accounts

Fixed Capital
20. Amar and Bimal entered into partnership on 1st April, 2019 contributing Rs. 1,50,000 and
2,50,000 respectively towards capitals. The Partnership Deed provided for interest on
capitals @ 10% p.a. It also provided that Capital Accounts shall be maintained
following Fixed Capital Accounts Method. The firm earned net profit of Rs. 1,00,000 for
the year ended 31st March, 2020.
Pass the Journal entry for interest on capital.
21. Kamal and Kapil are partners having fixed capitals of Rs. 5,00,000 each as on 31st
March, 2019. Kamal introduced further captial of 1,00,000 on 1st October, 2019
whereas Kapil withdrew Rs. 1,00,000 on 1st October, 2019 out of capital.
Interest on capital is to be allowed @ 10% p.a.
The firm earned net profit of 6,00,000 for the year end 31st March, 2020.ds-2
Pass the Journal entry for interest on capital and prepare Profit and Loss Appropriation
Account.
22. Simran and Reema are partners sharing profits in the ratio of 3 :2. Their capitals as on
31st March, 2019 were Rs.2,00,000 each where Current Accounts had balances of
Rs.50,000 and Rs.25,000 respectively. Interest on capital is to be allowed @ 5% p.a.
The firm earned net profit of Rs.3,00,000 for the year ended 31st March 2020
Pass ne Journal entries for interest on capital and distribution of profit. Also prepare Profit
and Loss appropriation Account for the year.
Fluctuating Capital
23. Anita and Ankita are partners sharing profits equally. Their capitals, maintained following
Fluctuating Capital Accounts Method, as on 31st March, 2019 were Rs.5,00,000 and
Rs.4,00,000 respectively. Partnership Deed provided to allow interest on capital @
10% p.a.The firm earned net profit of Rs.2,00,000 for the year ended 31st March,
2020.
Pass the Journal entry for interest on capital.
24. Ashish and Aakash are partners sharing profits in the ratio of 3 :2.Their Capital
Accounts had credit balances of Rs.5,00,000 and Rs.6,00,000 respectively as on 31st
March, 2020 after debit of drawings during the year of Rs.1,50,000 and Rs.1,00,000
respectively. Net profit for the year ended 31st March, 2020 was Rs. 5,00,000.
Interest on capital.is to be allowed @ 10% p.a.
Pass the Journal entry for interest on capital and prepare Profit and Loss Appropriation
Account.
25. Naresh and Sukesh are partners with capitals of Rs.3,00,000 each as on 31st March,
2020. Naresh had withdrawn 50,000 against capital on 1st October, 2019 and Rs.
1,00,000 drawings against profit. Sukesh also had drawings of Rs.1,00,000.
Interest on capital is to be allowed @ 10% p.a.
Net profit for the year was Rs2,00,000, which is yet to be distributed.
Pass the Journal entries for interest on capital and distribution of profit.
26. On 1st April, 2013, Jay and Vijay entered into partnership for supplying laboratory
equipments to government schools situated in remote and backward areas. They
contributed capitals of Rs.80,000 and Rs.50,000 respectively and agreed to share the
profits in the ratio of 3 :2.The Partnership Deed provided that interest on capital shall
be allowed at 9% per annum. During the year the firm earned a profit of Rs.7,800.
Showing your calculations clearly, prepare 'Profit and Loss Appropriation Account' of
Jay and Vijay for the year ended 31st March, 2014. (Delhi 2015)
Calculation of Interest on Partners' Capitals
27 Following is the extract of the Balance Sheet of Neelkant and Mahadev as on 31st
March, 2020: BALANCE SHEET as at 31st March, 2020
Liabilities Rs.Assets Rs.
Neelkant's Capital 10,00,000Sundry Assets 30,00,000
Mahadev's Capital 10,00,000
Neelkant's Current A/c 1,00,000
Mahadev' Current A/c 1,00,000
Profit and Loss A/c (2019-20) 8,00,000
30,00,000 30,00,000
During the year, Mahadev's drawings were 30,000. Profits during the year ended 31st
March, 2020 is 10,00,000. Calculate interest on capital @ 5% p.a. for the year ending 31st
March, 2020. (NCERT, Modified)
28., From the following Balance Sheet of Long and Short, calculate interest on capital @
8% p.a. for the year
ended 31st March, 2020:
BALANCE SHEET as at 31st March, 2020
Long's Capital A/c 1,20,000Fixed Assets 3,00,00
0
Short's Capital A/c 1,40,000Other Assets 60,000
General Reserve 1,00,000
3,60,000 3,60,00
0
During the year, Long withdrew Rs.40,000 and Short withdrew Rs.50,000. Profit for the year
was Rs.1,50,000 out of which Rs.1,00,000 was transferred to General Reserve.
29. Moli and Bholi contribute Rs20,000 and Rs.10,000 respectively towards capital. They
decide to allow interest on capital @ 6% p.a. Their respective share of profits is 2 : 3
and the net profit for the year is Rs.1,500. Show distribution of profits:
(i) When there is no agreement except for interest on capitals; and
(ii) When there is an agreement that the interest on capital as a charge.
30. Amit and Bramit started business on 1st April,2019 with capitals of Rs.15,00,000 and
Rs.9,00,000 respectively. On 1st October,2019,they decided that their capitals should
be Rs.12,00,000 each. The necessary adjustments in capitals were made by introducing
or withdrawing by cheque. Interest on capital is allowed @ 8% p.a. Compute interest on
capital for the year ended 31st March, 2020.
Salary or Commission to Partners
31. Amar, Bhanu, and Charu are partners in a firm. Amar and Bhanu are to get annual
salary of Rs.1,20,000 p.a. each as they manage the business. Net profit for the year is
Rs.4,80,000. Determine the share of profit to be credited to each partner.
32. A, B and C are partners sharing profits and losses in the ratio of 2 :2 :1.A is entitled to
a commission of 10% on the net profit. Net profit for the year is Rs.1,10,000.
Determine the amount of commission payable to A.
33. X, Y and Z are partners sharing profits and losses equally. As per Partnership Deed, Z
is entitled to a commission of 10% on the net profit after charging such commission.
The net profit before charging commission is Rs.2,20,000.
Determine the amount of commission payable to Z.
34. A, B, C and D are partners in a firm sharing profits in the ratio of 4 :3 :2 :1 it earned net
profit of Rs.1,80,000 for the year ended 31st March, 2020. As per the Partnership
Deed, they are to charge a commission @ 20% of the profit after charging such
commission which they will share as 2 :3 :2 :3.
You are required to show appropriation of profits among the partners.
35. X and Y are partners in a firm. X is entitled to a salary of Rs.10,000 per month and
commission of 10% of the net profit after partners' salaries but' before charging
commission. Y is entitled to a salary of s.25,000 p.a. and commission of 10% of the net
profit after charging all commission and partners' salaries; Net profit before providing
for partners' salaries and commission for the year ended 31st March, 2019 was
Rs.20,000. Show distribution of profit.
Calculation of Interest on Partners' Drawings
36. Ram and Mohan, two partners, drew for their personal use Rs.1,20000 and Rs.80,000.
Interest is chargeable @6%p.a on the drawings. What is the amount of interest
chargeable from each partner?
37. Brij Mohan are partners in a firm. They withdrew Rs.48,000 and Rs.36,800
respectively during the year evenly in the middle of every month. According to the
Partnership Deed, interest on drawings is to be charged @ 1:0% pa.
Calculate interest on drawings of the partners using the appropriate formula.
38. Dev withdrew Rs.10,000 on 15th day of every month. Interest on drawings was to be
charged @12%per annum. Calculate interest on dev’s Drawings.
(CBSE 2019)
39. A and B are partners sharing profits equally. A drew regularly Rs.4000 in the beginning
of every month for six months ended 30th September,2019. Calculate interest on
drawings @5% p.a. for a period of six months
40. One of the partners in a partnership firm has withdrawn Rs.9,000 at the end of each
quarter, throughout the year. Calculate interest on drawings at the rate of 6%per
annum.
41. A and B are partners sharing profits equally. A drew regularly Rs.4000 in the beginning
of every month for six months ended 30th September,2019. Calculate interest on
drawings @5% p.a. for a period of six months
42. Calculate interest on drawings of Ashok @ 10% p.a. for the year ended 31st March,
2020, in each of the following alternative cases:
Case 1. If he withdrew Rs.7,500 in the beginning of each quarter.
Case 2. If he withdrew Rs.7,500 at the end of each quarter.
Case 3. If he withdrew Rs.7,500 during the middle of each quarter.
43. Kanika and Gautam are partners doing a dry cleaning business in Lucknow, sharing
profits in the ratio 2 :1 with capitals Rs.5,00,000 and Rs.4,00,000 respectively. Kanika
withdrew the following amounts during the year to pay the hostel expenses of her son:
1st April Rs.10,000
1st June Rs.9,000
1st November Rs.14,000
1st December Rs.5,000
Gautam withdrew 15,000 on the first day of April, July, October and January to pay
rent for the accommodation of his family. He also paid 20,000 per month as rent for the
office of partnership which was in a nearby shopping complex.
Calculate interest on drawings @ 6% p.a. (CBSE Sample Paper
2015)
Profit and Loss Appropriation Account and Partners' Capital Accounts
44. C and D are partners in a firm; C has contributed Rs.1,00,000 and D Rs.60,000 as
capitals. Interest is payable @ 6% p.a. and D is entitled to salary of Rs.3,000 per
month. In the year ended 31st March, 2020, the profit was 80,000 before interest and
salary.
45. Amit and Vijay started a partnership business on 1st April, 2019. Their capital
contributions were Rs.2,00,000 and Rs.1,50,000 respectively. The Partnership Deed
provided as follows:
(a) Interest on capital be allowed @ 10% p.a.
(b) Amit to get a salary of Rs.2,000 per month and Vijay Rs.3,000 per month.
(c) Profits are to be shared in the ratio of 3 :2.
Net Profit for the year ended 31st March, 2020 was Rs.2,16,000. Interest on drawings
amounted to Rs.2,200 for Amit and Rs.2,500 for Vijay.
46. Prepare Capital Accounts of the Partners Sohan and Mohan from the following
information, if their capitals
are fluctuating: Sohan (Rs.)Mohan (Rs.)
Capitals on 1st April, 2019 4,00,000 3,00,000
Drawings during the year ended 31st March, 2020 50,000 30,000
Interest on Capital 5% p.a. 5% p.a.
Interest on Drawings 1,250 750
Share of Profit for the year ended 31st March, 2020 60,000 50,000
Partner's Salary 36,000
Commission 5,000 3,000
47. A and B are partners sharing profits and losses in the ratio of 3 : 1. On 1st April, 2019,
their capitals were: A Rs. 50,000 and B Rs.30,000. During the year ended 31st March,
2020, the firm earned a net profit of Rs.50,000. The terms of partnership are:
(a) Interest on capital is to be allowed @ 6% p.a.
(b) A will get a commission @ 2% on turnover.
(c) B will get a salary of Z 500 per month.
(d) B will get commission of 5% on profits after deduction of all expenses including
such commission.
Partners' drawings for the year were: A Rs. 8,000 and B Rs.6,000.Turnover for the
year was Rs.3,00,000.
After considering the above facts, you are required to prepare Profit and Loss
Appropriation Account and Partners' Capital Accounts.
48. Sajal and Kajal are partners sharing profits and losses in the ratio of 2 :1.0n 1st April,
2019 their Capitals were: Sajal— Rs.5,00,000 and Kajal— Rs.4,00,000.
Prepare Profit and Loss Appropriation Account and the Partners' Capital Accounts at
the end of the year from the following information:
(a) Interest on Capital is to be allowed @ 5% p.a.
(b) Interest on the loan advanced by Kajal for the whole year, the amount of loan
being Rs.3,00,000.
(c) Interest on partners' drawings @ 6% p.a. Drawings: Sajal Rs.1,00,000 and Kajal
Rs.80,000.
(d) 10% of the divisible profit is to be transferred to General Reserve.
Profit, before giving effect to the above, for the year ended 31st March, 2020 is
Rs.7,02,600.
Note: Net profit means net profit after debit of interest on loan by the partner.
49. Ali and Bahadur are partners in a firm sharing profits and losses as Ali 70% and
Bahadur 30%.Their respective capitals as at 1st April, 2019 stand as Ali Rs.25,000
and Bahadur Rs.20,000.The partners are allowed interest on capitals @ 5% p.a.
Drawings of the partners during the year ended 31st March, 2020 were Rs.3,500 and
Profit for the year, before allowing interest on capital and annual salary of Bahadur @
Rs.3,000, was Rs.40,000, 10% of divisible profit is to be transferred to Reserve.
Prepare Partners' Current Accounts and Capital Accounts recording the above
transactions.
50. A and B are partners sharing profits in the ratio of 3 :2 with capitals of Rs.50,000 and
Rs.30,000 respectively. Interest on capital is agreed @ 6% p.a. 8 is to be allowed an
annual salary of Rs.2,500.A provision of 5% of net profit is to be made in respect of
Manager's Commission and rent of Rs.24,000 is to be accounted being payable to A.
Profit for the year before manager's commission and rent to A was Rs.39,000.
Prepare Profit and Loss Appropriation account and the Partners' Capital Accounts.
51. A, B and C were partners in a firm having capitals of Rs.50,000; Rs.50,000 and
Rs.1,00,000 respectively. Their Current Account balances were A: Rs.10,000; B:
Rs.5,000 and C: Rs.2,000 (Dr.). According to the Partnership Deed the partners were
entitled to an interest on Capital @ 10% p.a. C being the working partner was also
entitled to a salary of Rs.12,000 p.a.The profits were to be divided as:
(a) The first Rs.20,000 in proportion to their capitals.
(b) Next Rs.30,000 in the ratio of 5 :3 :2.
(c) Remaining profits to be shared equally.
The firm earned net profit of Rs.1,72,000 before charging any of the above items.
Prepare Profit and Loss Appropriation Account and pass necessary Journal entry for
the appropriation of profits. (Foreign 2009)
52. A, 8 and C are partners sharing profits and losses in the ratio of A 1/2, B 3/10, C 1/5
after providing for interest @ 5% on their respective capitals, viz., A Rs.50,000; B
Rs.30,000 and C Rs.20,000 and allowing 8 and C salary of Rs.5,000 each per annum.
During the year ended 31st March, 2020, A has drawn Rs.10,000 and B and C in
addition to their salaries have drawn Rs.2,500 and Rs.1,000 respectively. Profit and
Loss Account for the year ended 31st March, 2020 showed net profit of Rs.45,000. On
1st April, 2019, the balances in the Current Accounts of the partners were A (Cr.)
Rs.4,500; B (Cr.) Rs.1,500 and C (Cr.) 1,000.Interest is not charged on Drawings and
allowed on Current Account balances. Show Partners' Capital and Current Accounts
as at 31st March, 2020 after division of profits in accordance with the partnership
agreement.
53. Amit, Binita and Charu are three partners. On 1st April, 2019, their Capitals stood as:
Amite Rs.1,00,000, Binita Rs.2,00,000 and Charu Rs.3,00,000. It was decided that:
(a) they would receive interest on Capitals @ 5% p.a.,
(b) Amit would get a salary of 10,000 per month,
(c) Binita would receive commission @ 5% of net profit after deduction of
commission, and
(d) 10% of the net profit would be transferred to the General Reserve.
Before the above items were taken into account, profit for the year ended 31st March,
2020 was Rs.5,00,000.
Prepare Profit and Loss Appropriation Account and the Capital Accounts of the
Partners.
54. Anshul and Asha are partners sharing profits and losses in the ratio of 3 : 2. Anshul
being a non-working partner contributed Rs.8,00,000 as her. capital. Asha being a
working partner did not contribute capital. The Partnership Deed provides for interest
on capital @ 5% and salary to.every working partner @ Rs.2,000 per month. Net profit
(before providing for interest on capital and partner's salary) for the year ended 31st
March, 2020 was Rs.32,000.
Show distribution of profits.
55. Kabir, Zoravar and Parul are partners sharing profits in the ratio of 5 :3 :2.Their
capitals as on 1st April, 2019 were: Kabir--- Rs.5,20,000, Zoravar—Rs.3,20,000 and
Parul— Rs. 2,00,000.
The Partnership Deed provided as follows:
(i) Kabir and Zoravar each will get salary of Z 24,000 p.a.
(ii) Parul will get commission of 2% of Sales.
(iii) Interest on capital is to be allowed @ 5% p.a.
(iv) Interest on Drawings is to be charged @ 5% p.a.
(v) 10% of Divisible Profit is to be transferred to General Reserve.
Sales for the year ended 31st March, 2020 were Rs.50,00,000. Drawings by each of
the partners during the year was 60,000. Net Profit for the year was Rs.1,55,500.
56. X and Y entered into partnership on 1st April, 2017.Their capitals as on 1st April, 2019
were Rs.2,00,000 and Rs.1,50,000 respectively. On 1st October, 2019, X gave
Rs.50,000 as loan to the firm. As per the provisions of the Partnership Deed:
(i) 20% of Profits before charging Interest on Drawings but after making
appropriations was to be transferred to General Reserve.
(ii) Interest on capital is to be allowed @ 12% p.a. and Interest on Drawings is to be
charged @ 10% p.a.
(iii) X to get monthly salary of? 5,000 and Y to get salary of Z 22,500 per quarter.
(iv) Xis entitled to a commission of 5% on sales. Sales for the year were 3,50,000.
(v) Profit to be shared in the ratio of their capitals up to Rs. 1,75,000 and balance
equally.
Profit for the year ended 31st March,2020, before allowing or charging interest was
Rs.4,61,000.The drawings of X and Y were Rs.1,00,000 and Rs.1,25,000 respectively.
Pass the necessary Journal entries relating to appropriation of profit. Prepare Profit
and Loss Appropriation
Account and the Partners' Capital Accounts.
Adjustments for incorrect Appropriations in the Past (Past Adjustments).
57. Reya, Mona and Nisha shared profits in the ratio of 3 : 2 : 1. Profits for the last three
years were Rs.1,40,000; Rs.84,000 and Rs.1,06,000 respectively. These profits were
by mistake distributed equally. The error is now to be corrected.
Give the necessary rectification Journal entry.
58. P and Q were partners in a firm sharing profits and losses equally. Their fixed capitals
were Rs. 2,00,000 and Rs. 3,00,000 respectively. The Partnership Deed provided for
interest on capital @ 12% per annum. For the year ended 31st March, 2016, profits of
the firm were distributed without providing interest on capital.
Pass necessary adjustment entry to rectify the error. (Outside Delhi 2017)
59. Azad and Benny are equal partners. Their capitals area Rs.40,000 and Rs.80,000
respectively. After the accounts for the year had been prepared, it was noticed that
interest @ 5% p.a. as provided in the Partnership Deed was not credited to their
Capital Accounts before distribution of profits. It is decided to pass an adjustment entry
in the beginning of the next year. Record the necessary Journal entry.
60. Ram, Mohan and Sohan sharing profits and losses equally have capitals of
Rs.1,20,000,Rs. 90,000 and Rs.60,000 respectively. For the year ended 31st March,
2020, interest was credited to them @ 6% p.a. instead of 5% p.a. Give adjustment
Journal entry.
61. Ram, Shyam and Mohan were partners in a firm sharing profits and losses in the ratio
of 2 :1 :2.Their capitals were fixed at Rs. 3,00,000,Rs. 1,00,000,Rs. 2,00,000. For the
year ended 31st March, 2020, interest on capital was credited to them @ 9% instead
of 10% p.a. The profit for the year before charging interest was Rs. 2,50,000. Show
your working notes and pass necessary adjustment entry.
62. Simrat and Bir are partners in a firm sharing profits and losses in the ratio of 3 :2.0n
31st March, 2020 after closing the books of account, their Capital Accounts stood at
4,80,000 and Rs. 6,00,000 respectively. On 1st May, 2019, Simrat introduced an
additional capital of 1,20,000 and Bir withdrew ? 60,000 from his capital. On 1st
October, 2019, Simrat withdrew 2,40,000 from her capital and Bir introduced 3,00,000.
Interest on capital is allowed at 6% p.a. Subsequently, it was noticed that interest on
capital @ 6% p.a. had been omitted. Profit for the year ended 31st March, 2020
amounted to ? 2,40,000 and the partners'drawings had been: Simrat—Rs. 1,20,000
and Bir—Rs. 60,000.
Compute the interest on capital if the capitals are (a) fixed, and (b) fluctuating.
63. Profit earned by a partnership firm for the year ended 31st March,2020 were distributed
equally between the partners—Pankaj and Anu—without charging interest on
Drawings.lnterest due on Drawings was Pankaj—Z 3,000 and Anu—Rs. 1,000.
Pass necessary adjustment entry.
64. Mita and Usha are partners in a firm sharing profits in the ratio of 2 : 3. Their Capital
Accounts as on 1st April, 2015 showed balances of Rs.1,40,000 and Rs.1,20,000
respectively. The drawings of Mita and Usha during the year 2015-16 were Rs.32,000
and Rs.24,000 respectively. Both the amounts were withdrawn on 1st January 2016. It
was subsequently found that the following items had been omitted while preparing the
final accounts for the year ended 31st March, 2016:
(a) Interest on Capital @ 6% p.a.
(b) Interest on Drawings @ 6% p.a.
(c) Mita was entitled to a commission of 8,000 for the whole year.
Showing your working clearly, pass a rectifying entry in the books of the firm.
(A12017 C)
65. A, B and C were partners. Their fixed capitals were Rs. 60,000,Rs. 40,000 and
Rs.20,000 respectively. Their profit-sharing ratio was 2 :2 :1. According to the
Partnership Deed, they were entitled to interest on capital @ 5% p.a. In addition, B
was also entitled to draw a salary of Rs.1,500 per month. C was entitled to a
commission of 5% on the profits after charging the interest on capital, but before
charging the salary payable to B. The net profits for the year, Rs.80,000, were
distributed in the ratio of their capitals without providing for any of the above
adjustments. Showing your workings clearly, pass the necessary adjustment entry.
(CBSE 2019)
66. On 31st March, 2020, after the closing of the accounts, Capital Accounts of P, Q and R
stood in the books of the firm at Rs. 40,000; Rs. 30,000 and Rs. 20,000 respectively.
Subsequently, it was noticed that interest on capital @ 5% had been omitted. Profit for
the year ended 31st March, 2020 was Rs.60,000 and the partners' drawings had been
P-Rs. 10,000, Q-Rs.7,500 and R- Rs.4,500. Profit-sharing ratio of P, Q and R is
3 :2 :1.
Pass necessary adjustment entry.
67. Mohan, Vijay and Anil are partners, the balances of their Capital Accounts being
30,000, Z 25,000 and Rs. 20,000 respectively. In arriving at these amounts profit for
the year ended 31st March, 2020, 24,000 had been credited to partners in their profit-
sharing ratio.Their drawings were Rs. 5,000 (Mohan),.Rs. 4,000 (Vijay) and Rs. 3,000
(Anil) during the year. Subsequently, following omissions were noticed and it was
decided to rectify the errors:
(a) Interest on capital @ 10% p.a.
(b) Interest on drawings: Mohan Rs. 250, Vijay Rs. 200 and Anil Rs.150.
(c) Make necessary corrections through a Journal entry and show your workings
clearly.
68. Piya and Bina are partners in a firm sharing profits and losses in the ratio of 3 :2.
Following was the Balance Sheet of the firm as on 31st March, 2016:
Capitals: Sundry Assets 1,20,000
Piya 80,000
Bina 40,000 1,20,000
1,20,000 1,20,000
The profits Rs.30,000 for the year ended 31st March, 2016 were divided between the
partners without allowing interest on. capital @ 12% p.a. and salary to Piya @ Rs.
1,000 per month. During the year Piya withdrew Rs. 8,000 and Bina withdrew Rs.
4,000. Showing your working notes clearly, pass the necessary rectifying entry.
(Delhi 2017 C)
69. Naveen, Qadir and Rajesh were partners doing an electronic goods business in
Uttarakhand. After the accounts of partnership were drawn up and closed, it was
discovered that interest on capital has been allowed to partners @ 6% p.a.for the
years ending 31st March,2017 and 2018,although there is no provision for interest on
capital in the Partnership Deed. On the other hand, Naveen and Qadir were entitled to
a salary of 3,500 and Rs. 4,000 per quarter respectively, which has not been taken into
consideration. Their fixed capitals were Rs. 4,00,000, Rs.3,60,000 and Rs. 2,40,000
respectively. During the last two years they had shared the profits and losses as
follows:
Year Ended Ratio
31st March, 2017 3:2:1
31st March, 2018 5 :3 :2
Pass necessary adjusting entry for the above adjustments in the books of the firm on
1st April, 2018. Show your workings clearly. (CBSE
2019)
70. Mannu and Shristhi are partners in a firm sharing profits in the ratio of 3 :2. Following
information is of the firm as on 31st March, 2020:
Mannu's Capital 3,00,000 Drawings:
Shristhi's Capital 1,00,000 4,00,000 Man nu 40,000
Shristhi 20,000 60,000
Other Assets 3,40,000
4,00,000 4,00,000
Profit for the year ended 31st March, 2020 was Z 50,000 which was divided in the
agreed ratio, but interest @ 5% p.a. on capital and .@ 6% p.a. on drawings was
inadvertently omitted. Adjust interest on drawings on an average basis for 6 months.
Give the adjustment entry. (NCERT,
Modified)
71. Mudit,Sudhir and Uday are partners in a firm sharing profits in the ratio of
3:1 :1.Theirfixed capital balances are Rs. 4,00,000, Rs. 1,60,000 and 1,20,000
respectively. Net profit for the year ended 31st March, 2018 distributed amongst the
partners was Rs.1,00,000, without taking into account the following adjustments:
(a) Interest on capitals @ 2.5% p.a..
(b) Salary to Mudit Rs. 18,000 p.a. and commission to Uday Rs.12,000.
(c) Mudit was allowed a commission of 6% of divisible profit after charging such
commission.
Pass a rectifying Journal entry in the books of the firm. Show workings clearly.
72. A, B and Care partners in a firm. Net profit of the firm for the year ended 31st March,
2020 is Rs.30,000, which has been duly distributed among the partners in their agreed
ratio of 3 :1 :1. It is noticed on 10th April, 2020 that the under mentioned transactions
were not passed through the books of account of the firm for the year ended 31st
March, 2020.
(a) Interest on Capital @ 6% per annum, the capital of A,B and C being
Rs.50,000;Rs.40,000 and Rs.30,000 respectively.
(b) Interest on drawings: A Rs.350; B Rs.250; CT Rs.150.
(c) Partners' Salaries: A Rs.5,000; B Rs.7,500.
(d) Commission due to A (for some special transaction) Rs.3,000.
You are required to pass a Journal entry, which will not affect Profit and Loss Account
of the firm and rectify the position of partners inter se.
73. On 31st March, 2018 the balance in the Capital Accounts of Abhir, Bobby and Vineet,
after making adjustments for profits and drawings were Rs. 8,00,000, Rs.6,00,000 and
Rs.4,00,000 respectively.
Subsequently, it was discovered that interest on capital and interest on drawings had
been omitted. The partners were entitled to interest on capital @ 10% p.a. and were to
be charged interest on drawings @ 6% p.a. The drawings during the year were: Abhir
— Rs.20,000 drawn at the end of each month, Bobby— Rs.50,000 drawn at the
beginning of every half year and Vineet—Rs.1,00,000 withdrawn on 31st October,
2017. The net profit for the year ended 31st March, 2018 was Rs.1,50,000.The profit-
sharing ratio was 2 :2 :1.
Pass necessary adjusting entry for the above adjustments in the books of the firm.
Also, show your workings clearly.
(CBSE 2019)
74. On 31st March, 2014, the balances in the Capital Accounts of Saroj, Mahinder and
Umar after making adjustments for profits and drawings, etc., were Rs. 80,000,
Rs.60,000 and Rs.40,000 respectively. Subsequently, it was discovered that the
interest on capital and drawings has been omitted.
(a) The profit for the year ended 31st March, 2014 was Rs.80,000.
(b) During the year Saroj and Mahinder each withdrew a sum of Rs.24,000 in equal
installments in the end of each month and Umar withdrew Rs. 36,000.
(c) The interest on drawings was to be charged @ 5% p.a. and interest on capital
was to be allowed @ 10% p.a.
(d) The profit-sharing ratio among partners was 4 :3 :1.
Showing your workings clearly, pass the necessary rectifying entry. (Delhi
2015 C)
75. Capitals of A, B and C as on 31st March, 2019 amounted to Rs.90,000, Rs.3,30,000
and Rs.6,60,000 respectively. Profit of Rs.1,80,000 for the year ended 31st March,
2019 was distributed in the ratio of 4 :1 :1 after allowing Interest, on Capital @ 10%
p.a. During the year, each partner withdrew Rs.3,60,000.The Partnership Deed was
silent as to profit-sharing ratio but provided for interest on capital @ 12%.
Pass the necessary adjustment entry showing the working clearly.
76. Capital Accounts of A and 8 stood at Rs.4,00,000 and Rs.3,00,000 respectively after
necessary adjustments in respect of the drawings and the net profit for the year ended
31st March, 2019. It was subsequently noticed that 5% p.a. interest on capital and also
drawings were not taken into account in arriving at the distributable profit.The drawings
of the partners had been:A— Rs.12,000 drawn at the end of each quarter and B—
Rs.18,000 drawn at the end of each half year.
The profit for the year as adjusted amounted to Rs.2,00,000.The partners share profits in the
ratio of 3 :2. You are required to pass Journal entries and show adjusted Capital
Accounts of the partners.
77. The firm of Harry, Porter and Ali, who have been sharing profits, in the ratio of 2 : 2 : 1,
have existed for some years. Ali wants that he should get equal share in the profits
with Harry and Porter and he further wishes that the change in the profit-sharing ratio
should come into effect retrospectively for the three years. Harry and Porter have
agreed to it. Profits for the last three years ended 31st March, were:
Year ended 31st 2018 2019 2020
March,
Profit (Rs.) 2,20,000 2,40,000 2,90,000
Show adjustment of profits by means of an adjustment Journal entry. (NCERT,
Modified)
Guarantee of Profit to a Partner

78. A and B are partners sharing profits in the ratio of 3 : 2. C was admitted for 1/6th share
of profit with a minimum guaranteed amount of Rs.10,000.At the close of the first
financial year the firm earned a profit of Rs.54,000. Find out the share of profit which
A, B and C will get.
79. A, B and C were in partnership sharing profits and losses in the ratio of 4 : 2 : 1. It was
provided that C's share in profit for a year would not be less than 7 Rs.5,000. Profit for
the year ended 31st March, 2020 amounted to Rs.3,15,000. You are required to show
the appropriation among the partners. The Profit and Loss Appropriation Account is
not required.
80. X, Y and Z entered into partnership on 1st October, 2019 to share profits in the ratio of 4
:3 :3.X, personally guaranteed that Z's share of profit after charging interest on capital
@ 10% p.a. would not be less than Rs.80,000 in a year. Capital contributions were: —
Rs.3,00,000, Y—Rs. 2,00,000 and Z—Rs. 1,50,000.
Profit for the year ended 31st March, 2020 was Rs.,60,000. Prepare Profit and Loss
Appropriation Account.
81. A,B and Care partners in a firm. heir profit-sharing ratio is 2 :2 :1. C is guaranteed a
minimum of Rs.1,00,000 as share of profit every year. Any deficiency arising shall be
met by B. The profits for the two years ended 31st March, 2019 and 2020 were
Rs.4,00,000 and Rs.6,00,000 respectively.
Prepare Profit and Loss Appropriation Account for the two years.
82. A, B and Care partners sharing profits in the ratio of 5 :4 :1. C is given a guarantee that
his minimum share of profit in any given year would be at least Rs.5,000.Deficiency, if
any, would be borne by A and. B equally. Profit for the year ended 31st March, 2020
was Rs.40,000.
Pass necessary Journal entries in the books of the firm.
83. Vikas and Vivek were partners in a firm sharing profits in the ratio of 3 :2. On 1st April,
2019, they admitted Vandana as a new partner for 1/8th share in the profits with a
guaranteed profit of Rs.1,50,000. New profit-sharing ratio between Vikas and Vivek will
remain same but they decided to bear any deficiency on account of guarantee to
Vandana in the ratio 3 :2. Profit of the firm for the year ended'31st March, 2020 was
Rs.9,00,000.
Prepare Profit and Loss Appropriation Account of Vikas, Vivek and Vandana for the
year ended 31st March, 2020. (A12016,
Modified)
84. A, B and C are partners in a firm sharing profits in the ratio of 3 : 2 : 1. They earned
profit of Rs.30,000 during the year ended 31st March, 2020. Distribute profit among A,
B and C if:
(a) C's share of profit is guaranteed to be 6,000 minimum.
(b) Minimum profit payable to C amounting to Z 6,000 is guaranteed by A.
(c) Guaranteed minimum profit of T 6,000 payable to C is guaranteed by B.
(d) Any deficiency after making payment of guaranteed Z 6,000 will be borne by A
and B in the ratio of 3 :1.
85. A and B are in partnership sharing profits and losses in the ratio of 3 : 2.They admit C,
their Manager, as a partner with effect from 1st April, 2020, for 1/4th share of profits.
C, while a Manager, was in receipt of a salary of 27,000 p.a. and a commission of 10%
of net profit after charging such salary and commission.
In terms of the Partnership Deed, any excess amount, which C will be entitled to
receive as a partner over the amount which would have been due to him if he
continued to be the Manager, will be borne by A. Profit for the year ended 31st March,
2020 amounted to Rs.2,25,000.
86. P, Q and R entered into partnership on 1st April, 2015 to share profits and losses in
the ratio of 12 : 8 : 5.1t was provided that in no case R's share in profit be less than
30,000 p.a. The profits and losses for the year ended 31st March, were: 2018 Profit
Rs.1,20,000; 2019 Profit Rs.1,80,000; 2020 Loss Rs.1,20,000.
Pass the necessary Journal entries in the books of the firm.
87. Asgar, Chaman and Dholu are partners in a firm. Their Capital Accounts stood at
Rs.6,00,000; Rs.5,00,000 and Rs.4,00,000 respectively on 1st April, 2019.They shared
Profits and Losses in the proportion of 4 : 2 : 3. Partners are entitled to interest on
capital @ 8% per annum and salary to Chaman and Dholu @ Rs.7,000 per month and
Rs.10,000 per quarter respectively as per the provision of the Partnership Deed.
Dholu's share of profit (excluding interest on capital but including salary) is guaranteed
at a minimum of Rs.1,10,000 p.a. Any deficiency arising on that account shall be met
by Asgar. The profit for the year ended 31st March, 2020 amounted to Rs.4,24,000.
(Delhi 2013, Modified)
88. Ankur, Bhavna and Disha are partners in a firm. On 1st April, 2019, the balances in
their. Capital Accounts stood at Rs.14,00,000, Rs.6,00,000 and Rs.4,00,000
respectively. They shared profits in the proportion of 7 : 3 : 2 respectively. Partners are
entitled to interest on capital @.6% per annum and salary to Bhavna @Rs. 50,000 p.a.
and a commission of Rs.3,000 per month to Disha as per the provisions of the
Partnership Deed. Bhavna's share of profit (excluding interest on capital) is guaranteed
at not less than Rs.1,70,000 p.a. Disha's share of profit (including interest on capital
but excluding commission) is guaranteed at not less than Rs.1,50,000 p.a. Any
deficiency arising on that account shall be met by Ankur. The profit of the firm for the
year ended 31st March, 2020 amounted to Rs.9,50,000.
Prepare 'Profit and Loss Appropriation Account' for the year ended 31st March, 2020.
(A12013, Modified)
89. Ajay, Binay and Chetan were partners sharing profits in the ratio of 3 :3 :2.The
Partnership Deed provided for the following:
(i) Salary of 2,000 per quarter to Ajay and Binay.
(ii) Chetan was entitled to a commission of Rs.8,000.
(iii) Binay was guaranteed a profit of Rs.50,000 p.a.
The profit of the firm for the year ended 31st March,2015 was Rs.1,50,000 which was
distributed among Ajay, Binay and Chetan in the ratio of 2 :2 :1,without taking into
consideration the provisions of Partnership Deed. Pass necessary rectifying entry for
the above adjustments in the books of the firm. Show your workings clearly.
(Delhi 2016 C)
90. The partners of a firm, Alia, Bhanu and Chand distributed the profits for the year ended
31st March, 2017, Rs.80,000 in the ratio of 3 : 3 : 2 without providing for the following
adjustments:
(a) Alia and Chand were entitled to a salary of Rs.1,500 each per month.
(b) Bhanu was entitled for a commission of Rs.4,000.
(c) Bhanu and Chand had guaranteed a minimum profit of Rs.35,000 p.a. to Alia any
deficiency to borne equally by Bhanu and Chand.
Pass the necessary Journal entry for the above adjustments in the books of the firm.
Show workings clearly. (CBSE Sample Paper
2018)
Minimum Earnings Guranteed by a Partner
91. Three Chartered Accountants A, B and C form a partnership, profits being shared in
the ratio of 3 : 2 :1 subject to the following:
(a) C's share of profit guaranteed to be not less than Rs.15,000 p.a.
(b) B gives a guarantee to the effect that gross fee earned by him for the firm shall
be equal to his average gross fee of the preceeding five years when he was
carrying on profession alone, which on an average works out at Rs.25,000.
The profit for the first year of the partnership are Rs.75,000.The gross fee earned by B
for the firm is Rs.16,000. You are required to show Profit and Loss Appropriation
Account after giving effect to the above.
(NCERT, Modified)
EVALUATION QUESTIONS: QUESTIONS WITH MISSING VALUES
1. (Commission to Partners and Distribution of Profit). X and Y are partners in a firm.

X gets a commission of 10% on the net profits before charging any commission and Y
gets a commission of 10% on the net profits after charging all commission.
Compute the missing values (?) from the following Profit and Loss Appropriation
Account for the year ended 31st March, 2020:
Dr. Cr.
PROFIT AND LOSS APPROPRIATION ACCOUNT for the year ended 31st March, 2020.
To X's Commission A/c 1,65,000 By Profit and Loss A/c (Net ?
Profit)
To Y's Commission A/c ?
X's Capital A/c ? ?
Y's Capital A/c ?
? ?
Solution:
Dr. Cr.
To Ks Commission A/c 1,65,000 By Profit and Loss A/c (Net 16,50,000
Profit)
To Y's Commission A/c (WN 2) 1,35,000 . (WN 1)
X's Capital A/c 6,75,000 13,50,000
Y's Capital A/c 6,75,000
16,50,000 16,50,000
Working Notes:
1. Calculation of Profit before Charging any Commission:
X's Commission 10% on the net profit before charging any commission = Rs.1,65,000
Net profit before charging any commission = 1,65,000' x100/10 = Rs.16,50,000.
2. Calculation of Y's Commission:
Net Profit after charging X's Commission = Rs.16,50,000 — Rs.1,65,000 =
Rs.14,85,000
Y's Commission = Rs.14,85,000 x 10/110 = Rs.1,35,000.
2. (Distribution of Profit). X and Y entered into partnership on 1st April, 2019. They do not
have Partnership Deed. They contributed capitals of Rs.10,00,000 and Rs.6,00,000
respectively. On 31st October, 2019, X advanced a loan of Rs.4,00,000 to the firm without
any agreement as to interest. Books are closed on 31st March every year.
Fill the missing information/values (?) in the following Accounts:
Dr. PROFIT AND LOSS ACCOUNT for the year ended 31st March, 2020 Cr.
To ? ? By Net Profit ?
To Net Profit transferred to Profit and 8,50,000
Loss Appropriation A/c
? ?
Dr. Cr.
To X's Capital A/c ? By Profit and Loss A/c (Net Profit)
To Y's Capital A/c ? ?
?

Particulars X (Rs.) Y(Rs.) Particulars X(Rs.) Y(Rs.)
To Balance c/d ? ? By Bank A/c ? ?
By Profit and Loss ? ?
? ? Appropriation A/c ?
Dr. KS LOAN ACCOUNT Cr.

To Balance c/d ? By ? ?
By ? ?
? ?
Solution:
Dr. PROFIT AND LOSS ACCOUNT for the year ended 31st March, 2020 Cr.
Particulars Rs. Particulars. Rs.
To Interest on X's Loan A/c 10,000 By Net Profit 8,60,000
(Rs.4,00,000 x 5/12 x 6/100)
To Net Profit transferred to
Profit and Loss Appropriation A/c 8,50,000
8,60,000 8,60,000
Dr. Cr.
To Ks Capital A/c (Profit ) 8,50,000 By Profit and Loss A/c (Net Profit) 8,50,00
4,25,000 0
To Y's Capital A/c (Profit)
4,25,000
8,50,000 8,50,00
0

Particulars X(Rs.) Y7) Particulars X (Z) YR)
To Balance c/d 14,25,000 10,25,000By Bank A/c (Given) 10,00,000 6,00,000
By Profit and Loss 4,25,000 4,25,000
14,25,000 10,25,000 Appropriation A/c 14,25,000 10,25,000
Dr. X'S LOAN ACCOUNT Cr.

To Balance c/d 4,10,000 By Bank A/c (Given) 4,00,000
By Interest on X's Loan A/c 10,000
4,10,000 4,10,000
GUIDE TO ANSWERS
Objective Type Questions

1. State whether the following statements are True or False:
(i) False; (ii) True; (iii) False; (iv) False; (v) True; (vi) True; (vii) False; (viii) False; (ix)
True; (x) True; (xi) True;
(xii) False; (xiii) False; (xiv) True; (xv) False; (xvi) False; (xvii) True; (xviii) False; (xix)
True; (xx) False.
2. Fill-in-the blanks with appropriate words:
(i) fixed; (ii) 6% p.a. (iii) profit; (iv) equally; (v) Profit and Loss Appropriation Account;
(vi) two; (vii) fifty; (viii) appropriation; (ix) profit; (x) Optional; (xi) Profit and Loss
Appropriation Account; (xii) duty; (xiii) Profit, Loss; (xiv) Profit and Loss Account; (xv)
Partnership Deed; (xvi) agreed ratio; (xvii) charge; (xviii) Fluctuating; (xix) 5.5; (xx) all.
3. Match the following:
1. (i) (a); 2. (i) (b), (ii) (a); 3. (i) (a), (ii) (b); 4. (i) (a), (ii) (b); 5. (i) (c), (ii) (a); 6. (i) (a); 7.
(i) (a), (ii) (c); 8. (i) (b).
Multiple Choice Questions (MCQs)
Select the correct alternative:
1. (a); 2. (b); 3. (a); 4. (d); 5. (d); 6. (b); 7. (a); 8. (a); 9. (b); 10. (c); 11. (c); 12. (d); 13. (d);
14. (c); 15. (c); 16. (b); 17. (c); 18. (c); 19. (b); 20. (c); 21. (d); 22. (b).
Very Short Answer Type Questions
25 [Hints: (i) interest on capital, (ii) salary, (iii) commission, (iv) share of profit.]
26. [Hints: (i) interest on drawings, (ii) drawings, (iii) share of loss.]
37. [Hint: Yes, if partners have agreed that one or more of them shall not be liable for
losses.]
39. [Hint: Seema's Commission = 10/110 of T 2,20,000 7 2,27,500 •-•? 7,500 (Salaries) =
Z 20,000.]
51. [Hint: Unlimited liability means that the liability of a partner is joint and several.The
personal assets of the partner can be utilised for paying a firm's debts.]
55. [Hint: In their old profit-sharing ratio.]
Exercise
1. (a) Notallowed; (b) Not allowed;
(c) 6% p.a.; (d) Equal;
(e) Not charged; (f) Allowed @ 6% p.a.;
(g) Not charged.
2. (a) P must pay—25,000; (b) Q must pay—Rs. 5,000;
(c) Goods may be bought from A Ltd.; (d) C cannot be admitted;
(e) R will get interest @ 6% p.a.
3. (a) A's claim is not accepted, (b) B's claim is not accepted,
(c) A and B's claim is not accepted; C will not pay interest in the absence of agreement, and
(d) Profits or losses should be distributed among the partners equally. The claim made by A
and B is not accepted.
4. In the absence of Partnership Deed, the provisions of Indian Partnership Act, 1932 will
apply:
(a) No interest will be paid on extra capital introduced.
(b) Deep cannot be admitted as Bose and Chatterjee don't agree.
(c) No interest will be charged from Chatterjee as rate of interest was not agreed.
(d) Interest on drawings will not be charged from Sarkar.
5. Harshad and Dhiman each gets Rs.88,500 as profit and Harshad gets Rs.3,000 as
Interest on Loan.
[Hint: Harshad's Claim:
(a) Harshad is not entitled to any interest on capital, but he is entitled to interest on his loan
@ 6% p.a.;
(b) Profits will be distributed equally as per Partnership Act, 1932.
Dhiman's Claim:
(a) His claim is right that profits should be shared equally;
(b) No remuneration will be allowed to Dhiman;
(c) Interest on capital will not be allowed.]
6. A and B each gets Rs.7,380 as profit and A gets Rs.240 as interest on A's loan.
7. Interest Payable to A— Rs.30,000 x 3/5 x 6/100 x 6/12 = Rs.540;
Interest Payable to B— Rs.30,000 x 2/5 x 6/100 x 6/12 = Rs.360.
[Hint: According to the Indian Partnership Act, 1932, interest @ 6% p.a. is payable on the
amount of loan given by partners. In the present case, interest will be payable for 6
months, /.e., from 1st October, 2019 to 31st March, 2020.]
8. Interest on X's Loan 2,400; Interest on Y's Loan Rs.1,200;
Case 1. Profit: X Rs.6,960; Y Rs.10,440;
Case 2. Loss: X Rs.240; Y Rs.360;
Case 3. Profit: X Rs.560; Y Rs.840;
Case 4. Loss: X Rs.2,000; X Rs.3,000.
[Hint: Interest on Partner's Loan is a charge against profit.]
9. Share of Loss: Bat— Rs.31,920; Ball— Rs.47,880.
[Hint: Interest on Partner's Loan and Rent are charges against profit.]
10. Rs.40,000 [(Rs.1,03,000 - Rs.3,000) (interest on Loan by Akhil)— Rs.60,000 (rent)] will
be distributed in the ratio of 3 :2. Akhil— Rs.24,000; Bimal— Rs.16,000.
[Hint: In the absence of agreement, Akhil will get interest @ 6% p.a. on loan given by him.
Interest will not be charged on loan to Bimal by the firm. Also, rent will be paid to Akhil as per
the agreement.]
11. Interest credited to Loan Accounts of Ankit and Bhanu— Rs.7,500 each; Interest debited
to Charu's Capital Account— Rs.3,000.
12. Amount of Profit transferred to Profit and Loss Appropriation A/c— Rs.34,000.
13. Share of Profit: A— Rs.17,200; B— Rs.17,200.
14. Divisible Profit— Rs.2,75,000.

15. Provision for Manager's Commission— Rs.15,000 (/.e., 5% of Rs.3,00,000), Share of
Profit X— Rs.93,000; Y— Rs.62,000.
16. Divisible Profit— Rs.34,750; Share of Profit: Prem— Rs.20,850; Manoj— Rs.13,900.
17. Share of Profit: Atul— Rs.72,000; and Mithun— Rs.48,000.
18. Loss— Rs.94,000; Reema's Share—Rs. 47,000; Seema's Share— Rs.47,000.
19. Loss— Rs.48,750; Dr. Bhanu's Current A/c and Partap's Current Account by Rs.24,375
each.
20. Dr. Profit and Loss Appropriation A/c. by Rs. 40,000;
Cr. Amar's Current A/c by Rs.15,000 and Bimal's Current A/c by Rs.25,000.
21. Dr. Profit and Loss Appropriation A/c by Rs.11,00,000;
Cr. Kamal's Current A/c by Rs.55,000 and Kapil's Current A/c by Rs.45,000;
Share of Profit: Kamal— Rs.2,50,000 and Kapil— Rs.2,50,000.
[Hint: Profit-sharing ratio between Kamal and Kapil is not given. Hence, they will share profit
equally.]
22. (i) Dr. Profit and Loss Appropriation A/c by Rs.20,000;
Cr. Simran's Current A/c by Rs.10,000 and Reema's Current A/c by Rs.10,000;
(ii) Dr. Profit and Loss Appropriation A/c by Rs.2,80,000;
Cr. Simran's Current A/c by 1,68,000 and Reema's Current A/c by 1,12,000.
[Hint: Interest will not be allowed on Current Account balances.]
23. Dr. Profit and Loss Appropriation A/c by Rs.90,000;
Cr. Anita's Capital A/c by Rs.50,000 and Ankita's Capital A/c by Rs.40,000.
24. (I) Dr. Profit and Loss Appropriation A/c by Rs.1,35,000;
Cr. Ashish's Capital A/c by Rs.65,000 and Aakash's Capital A/c by Rs.70,000;
(ii) Share of Profit: Ashish— Rs.2,19,000 and Aakash— Rs.1,46,000.
[Hint: Interest on capital is allowed on opening balances of capital.]
25. For Interest on Capital:
Dr. Profit and Loss Appropriation A/c by Rs.82,500;
Cr. Maresh's Capital A/c by Rs.42,500 and Sukesh's Capital A/c by Rs.40,000;
For Profit distribution:
Dr. Profit and Loss Appropriation A/c by T 1,17,500;
Cr. Naresh's Capital A/c by 58,750 and Sukesh's Capital A/c by 58,750.
26. Interest on Capital: Jay—Rs.4,800;Vijay— Rs.3,000.
[Hint: Since the amount of net profit is less than the total amount of Interest on Capital, i.e.,^
7,200 (Jay) + 4,500 (Vijay) = f 11,700, the net profit has been distributed in the ratio of
interest claims of Jay and Vijay, /.e., T 7,200: T 4,500 or 8:5.]
27. Interest on Capital: Neelkant— Rs.50,000; Mahadev— Rs.50,000.
28. Interest on Long's Capital— Rs.10,800; Interest on Short's Capital— Rs.13,200.
29. (i) Interest on Capital: Moli— Rs.1,000; Bholi— Rs.500; (ii) Loss: Moli— Rs.120;Bholi—
Rs.180.
30. Interest on Capital: Amit— Rs.1,08,000; Bramit— Rs.84,000.
31. Share of Profit— Rs.80,000 each.
32. Commission Payable to A—Rs.11,000.
33. Commission Payable to Z— Rs.20,000.
34. Commission payable to the partners = 20/120 x Rs.1,80,000 = Rs.30,000 which will be
shared as: A— Rs.6,000; B— Rs.9,000; C— Rs.6,000 and D- Rs.9,000. Share of Profits: A
— Rs.60,000; 8— Rs.45,000; C— Rs.30,000 and D— Rs.15,000.
35. X's Commission— Rs.27,500; K's Commission— Rs.22,500; Net Profit—

Rs.2,25,000;Xand Y's Share— Rs.1,12,500 each.
[Hint: K's Commission = 10/110 of Rs.2,47,500 (/.e., Rs.4,20,000 - Rs.1,20,000 (X's Salary) -
Rs.25,000
(K's Salary)- Rs.27,500 (X's Commission)).]
36. Ram— Rs.3,600 and Mohan— Rs.2,400.
[Hint: When the dates of drawings are not given, interest on drawings is calculated on the
total amount of drawings for average period of 6 months.]
37. Interest on Brij's Drawings— Rs.2,400 and Interest on Mohan's Drawings— Rs.1,800.
38. Interest on Drawings— Rs.7,200.
39. Interest on Drawings— Rs.350.
[Hirst: Interest on drawings will be charged for average period of 3.5 months on total
drawings.]
[Hint: Interest on drawings will be charged for average period of 2.5 months on total
drawings.]
42. Case 1— Rs.1,875; Case 2— Rs.1,125; Case 3— Rs.1,500.
43. Interest on Drawings: Kanika—Rs.1,500; Gautam-— Rs.2,250.
44. C will get Rs.23,200 and D— Rs.56,800.
45. Share of Profit: Amit— Rs.75,420; Vijay— Rs.50,280.
46. Sohan's Capital A/c— Rs.4,69,750; Mohan's Capital A/c—Rs. 3,37,250.
47. Commission of B— Rs.1,581;Share of Profit:A— Rs.23,714;8— Rs.7,905; Capital A/cs:

A— Rs.74,714; 6— Rs.41,286.
48. Closing Balances of Capital A/cs: Sajal— Rs.8,09,000; Kajal— Rs.5,31,100; Share of
Profit: Sajal— Rs.3,87,000;
Kajal— Rs.1,93,500; General Reserve— Rs.64,500.
[Hint: Interest on loan by a partner is a charge.]
49. Current Accounts: Ali— Rs.19,642; Bahadur— Rs.10,883; Amount transferred to

Reserve— Rs.3,475.
50. Share of Profit: A— Rs.4,170 and B— Rs.2,780; Balances of Capital A/cs: A—

Rs.57,170 and B—Rs. 37,080.
[Hint: Manager's Commission and rent are charges against profit. Hence, they will be
transferred to Profit and Loss Account to determine Net Profit before appropriations (such as
partner's salary, interest on capital).
Dr. PROFIT AND LOSS ACCOUNT for the year ended... Cr.
To Rent A/c 24,000 By Profit (given) 39,000
To Manager's Commission A/c 750
(5/100 x Rs.15,000) 14,250
To Net Profit trfd. to P & L App. A/c 39,000 39,000
51. Divisible Profit— Rs.1,40,000; A's share— Rs.50,000; 8's share— Rs.44,000; Cs share
— Rs.46,000.
52. Share of Profit: A— Rs.15,000; 8— Rs.9,000; C— Rs.6,000; Balances of Current A/cs: A

(Cr.)—- Rs.12,000; 8 (Cr.)— Rs.9,500; C (Cr.)— Rs.7,000. -
53. Divisible Profit— Rs.2,76,190; Commission (Binita)— Rs.23,810; General Reserve—

Rs.50,000; Share of Profit: Amit— Rs.92,063; Binita— Rs.92,063, Charu— Rs.92,064;
Closing Balances of Capital A/cs: Amit— Rs.3,17,063; Binita— Rs.3,25,873; Charu—
Rs.4,07,064.
54. Interest on Anshul's Capital— Rs.20,000; Salary to Asha— Rs.12,000.
[Hint; Since, both interest on capital and salary to partner are appropriations and net profit is
less than the amount of appropriations to be made, net profit has been distributed in the ratio
of appropriations to be made, /.e., Rs.40,000 (interest on Anshul's capital) Rs.24,000 (Asha's
salary) or 5 :3.]
Chapter 2 • Accounting for Partnership Firms—Fundamentals 2.99
55. Share of Profit: Kabir—Rs. 40,000; Zoravar—Rs. 32,000; Parul—Rs. 88,000..
[Hints: 1. Since, net profit is not adequate to meet the appropriations^ it is distributed in the
ratio of appropriation to be made,/.e.,Rs. 50,000 :Rs. 40,000 :Rs. 1,10,000 or 5 :4:11.
2. In the absence of divisible profit, amount will not be transferred to General

Reserve.]
56. interest on Capital:/—Rs. 24,000; Y—Rs. 18,000; Salary:/—Rs. 60,000; Y— Rs. 90,000;
Commission:/—Rs. 17,500; Interest on Drawings:/—Rs. 5,000; Y—Rs. 6,250; Share of
Profit:/—Rs. 1,18,125; Y~Rs. 93,125; Capital Balance: X— Rs. 3,14,625; Y— Rs. 2,19,875;
Interest on X's Loan:Rs. 1,500;Transfer to General Reserve—Rs. 50,000.
57. Debit Nisha's Capital A/c and Credit Reya's Capital A/c by Rs. 55,000.
58. Debit P's Current A/c and Credit Q's Current A/c by Rs. 6,000.
59. Debit Azad by Rs. 1,000 and Credit Benny by Rs. 1,000.
60. Debit Ram and Credit Sohan by Rs. 300.
61. Debit Shyam's Current A/c by Rs. 200 and Mohan's Current A/c by Rs. 400; Credit
Ram's Current A/c by Rs. 600.
62. (a) Simrat—Rs. 35,400; Bir—Rs. 27,300; (b) Simrat—Rs. 33,960; Bir—Rs. 25,140.
63. Debit Pankaj's Capital A/c and Credit Anu's Capital A/c by Rs.1,000.
64. Debit Usha's Capital A/c and Credit Mita's Capital A/c by Rs. 6,816.
65. Dr.A's Current A/c—Rs. 16,080; Cr.B's Current A/c—Rs. 14,253 and C's Current A/c—
Rs. 1,827.
[Hint: C's Commission = 5/100 x Rs. 74,000 [/.e.,Rs. 80,000 - Rs. 6,000 (Interest on Capital)]
= Rs. 3,700.]
66. Debit P's Capital A/c by Rs. 300; Credit Q's Capital A/c by Rs. 8 and R’s Capital A/c by
Rs. 292.
[Hint: Opening Capital: P—Rs. 20,000; Q—Rs. 17,500;/Rs.—Rs. 14,500.]
67. Debit Anil by Rs.550 and Credit Mohan by Rs.550; Corrected Profit transferred to each
partner Rs. 6,100.
68. Debit Bina's Capital A/c and Credit Piya's Capital A/c by Rs. 5,856.
69. Dr. Rajesh's Current A/c—Rs. 17,800; Cr. Naveen's Current A/c—Rs. 10,000 and
Qadir's Current A/c—Rs. 7,800.
70. Debit Shristhi and Credit Mannu by Rs. 2,880.
71. Dr. Sudhir's Current A/c—Rs. 6,000; Cr. Mudit's Current A/c—Rs. 1,000 and Uday's
Current A/c—Rs. 5,000.
72. Dr.A's Capital A/c—Rs. 2,520 and C's Capital A/c—Rs. 2,740;Cr.B's Capital A/c—Rs.
5,260.
73. Dr. Bobby's Capital A/c—Rs. 14,402; Cr.Abhir's Capital A/c—Rs. 10,112; and Vineet's
Capital A/c—Rs. 4,290.
74. Dr.Saroj's Capital A/c—Rs. 2,350 and Mahinder's Capital A/c—Rs. 1,300; Cr. Umar's
75. Debit A by Rs. 66,000 and Credit B by Rs. 30,000 and C by Rs. 36,000.
76. Partners' Capital Accounts: A—Rs. 3,98,790; B—Rs. 3,01,210; Capitals on 1.4.2018:
(Opening Capital): A—Rs. 3,28,000; B—Rs. 2,56,000; Interest on Capital: A—Rs. 16,400; B
—Rs. 12,800; Interest on Drawings: A—Rs. 900; B—Rs. 450.
[Hints: (i) For Interest on Capital: Dr. Profit and Loss Adjustment A/c:Rs. 29,200;
Cr.A's Capital'A/c:Rs. 16,400 and B's Capital A/c:Rs. 12,800.
(ii) For Interest on Drawings: Dr.A's Capital A/c:Rs. 900 and B's Capital A/c:Rs. 450;
Cr. Profit and Loss Adjustment A/c:Rs. 1,350.
(iII) Losson Adjustment: Dr.A's Capital A/c:Rs. 16,710 and B's Capital A/c:Rs. 11,140;
Cr. Profit and Loss Adjustment A/c: Rs. 27,850.]
77. Debit Harry by Rs. 50,000 and Porter by Rs. 50,000; Credit Ali by Rs. 1,00,000.
78. A's share—Rs. 26,400; B's share—Rs. 17,600; C's share—Rs. 10,000.
79. Share of Profit: A—Rs. 1,60,000; B—Rs. 80,000; C—Rs. 75,000.

80. Not Profit— Rs.11 ,27,500; Share of Profit X- Rs.51,000 - Rs. 1 ,750 = Rs. 49,250; V—
Rs. 1,27,500 x 3/16 = Rs.38,250; Z—Rs. 38,250 + Rs. 1,750=Rs. 40,000.
[Hints Guaranteed amount for half-year« Rs. 80,000 x 1/2 = Rs. 40,006.]
81. Deficiency to be met by B in: 2019—Rs. 20,000; 2020—Nil.
82. Deficiency of C—Rs. 1,000 borne by 4 and 6 equally, /.e., Rs. 500 each.
83. Deficiency of Vandana—Rs. 37,500 borne by Vikas—Rs. 22,500 and Vivek—Rs. 15,000.
Share of Profit: Vikas— Rs. 4,50,000; Vivek—Rs. 3,00,000; Vandana—Rs. 1,50,000.
84. (a) 4—Rs. 14,400; B—Rs. 9,600 and C—Rs. 6,000;
(b) 4—Rs. 14,000; B—Rs. 10,000 and C—Rs. 6,000;
(c) 4—Rs. 15,000; B—Rs. 9,000 and C-Rs. 6,000;
(d) 4—Rs. 14,250; B—Rs. 9,750 and C—Rs. 6,000.
85. Shareof Profit: 4—Rs. 96,750; 6—Rs. 72,606; C-Rs. 56,250.
86. For Deficiency—year ended 31st March, 2018:
Dr. P's Capital A/c—Rs. 3,600 and Q's Capital A/c—Rs. 2,400;
Cr. B's Capital A/c—Rs. 6,000.
For Deficiency—year ended 31st March, 2020:
Dr. P's Capital A/c—Rs. 32,400 and Q's Capital A/c—Rs. 21,600;
Cr. B's Capital A/c—Rs. 54,000.
87. Share of Profit: Asgar—Rs. 70,000; Chaman—Rs. 40,000 and Dholu—Rs. 70,000.
[Hint: Deficiency of Rs.10,000 in Dholu's share is recovered from Asgar.]
88. Share of Profit: Ankur—Rs. 4,14,000; Bhavna—Rs. 1,80,000 and Disha—Rs. 1,26,000.
[Hint: Deficiency of Rs. 6,000 is contributed by Ankur for Disha.]
89. Dr. Ajay's Capital A/c: Rs. 6,400 and Binay's Capital A/c: Rs. 2,000; Cr. Chetan's Capital
A/c: Rs. 8,400.
90. Dr. Bhanu's Capital A/c—Rs. 21,000 and Chand's Capital A/c—Rs. 2,000; Cr. Alia's
91. A’s share—Rs. 41,400; B's share—Rs. 18,600; C's share—Rs. 15,000.
[Hint: The Gross fee of Rs. 16,000 earned by B for the firm is less than the amount
guaranteed by him. So the deficiency of Rs. 9,000 (/.e., Rs. 25,000 -Rs. 16,000) will be
debited to B's Capital Account and credited to Profit and Loss Appropriation Account.]
The study of this Chapter would enable you to understand:

Meaning of Goodwill 3.1
q Characteristics or Features and Nature of Goodwill 3.2
q Need for Valuing Goodwill 3.2
q Factors Affecting the Value of Goodwill .3
q Classification of Goodwill 3.3
q Methods of Valuation of Goodwill 3.5
(a) Average Profit Method
—Simple Average Profit Method
— Weighted Average Profit Method
(b) Super Profit Method
(c) Capitalisation Method
— Capitalisation of Average Profit
— Capitalisation of Super Profit
q Difference between Average Profit and Super Profit
Goodwill is an intangible asset which places an enterprise at an advantageous position due
to which the enterprise is able to earn higher profits without putting extra efforts. It is so
because the efforts made in the past put the enterprise in an advantageous position. For
example, if the enterprise has rendered good service to its customers, the customers will be
satisfied from the quality of service, which in all likelihood will bring them back to the
enterprise. In turn, the enterprise will achieve higher sales and, thus, higher profits.
Goodwill is the present value of expected future income that is in excess of normal return on
the investment in tangible assets or for the excess of price paid for a business as a whole
over the book value or over the computed or agreed value of all tangible net assets
purchased.
"When a man pays for goodwill, he pays for something which places him in the position of
being able to
earn more than he would be able to do by his own unaided efforts." —Dicksee
"Goodwill may be said to be that element arising from the reputation, connections or other
advantages possessed by a business which enables it to earn greater profits than the
returns normally to be expected
on capital represented by the net tangible assets employed in the business." —Spicer
and Pegler
"Goodwill is a thing very easy to describe, very difficult to define. It is the benefit and
advantage of the good name, reputation and connections of a business. It is the attractive
force which brings in customers. It is one thing which distinguishes an old established
business from a new business at its first start."
-Lord Macnaghten

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CHAPTER 2

Accounting for Partnership Firms - Fundamentals

INTERESRT ON LOAN BY THE PARTNER AND BT THE FIRM TO THE PARTNER

2020 Rent A/c

DISTRIBUTION OF PROFIT AMONG PARTNERS:

(ii) To Close Interest on Capital Account

Alternatively, a combined entry may be passed as:

Add: Outstanding Rent 10,000 34,400

Computers 44,000 84,000

Ayub's Capital A/c 825 1,650-

4,24,825. Machinery 3;00,000

Dr. LOAN BY A ACCOUNT

March Profit and Loss Appropriation A/c ...Dr. 79,000 60,000

To Interest on Capital— Nihar's

Aseem's Capital A/c (3/5) 84,600

deference between Fixed Capital Account and Fluctuating Capital Account

Dr. AS DRAWINGS ACCOUNT Cr.

2. When the Partnership Deed provides for 2. Interest on capital is accounted as

Rs .30,000 x Rs . 24,000 Rs .30,000 x Rs . 12,000

To Interest on Capital A/cs: By Profit (Before Interest) 30,000

(b) When Capitals are Fluctuating:

Particulars Rs. Rs.

Average Period = 12 Months +1 Month 61/2Months.

Average Period = 111/2 Months + 1/2 Month = 6 Months.

"Average Period = 11 Months + 0 Month = 51/2 Months.

Total Drawings x Rate of Interest 7 1/2

12 Months+3 Months 15 Months

10.5 Months+ 1.5 Months 12 Months

If Partners Capital Accounts are fixed. If Partners Capital Accounts are

To A's Commission A/c (WN 2)

III. Profit* credited to 6,000 3,600 2,400 12,000

Net Balance (Effect) 400 Dr. 400 Cr.

Working note: TABLE SHOWING THE ADJUSTMENT TO BE MADE

Working Note: Loss of the firm = Rs.22,00,000

To Cs Capital A/c 22,500

Dr. PARTNERS' CURRENT ACCOUNTS Cr.

1. Calculation of Interest on Drawings:

Note: A. Biswas's Share of Profit Rs.44,000

Dr. PARTNERS' CAPITAL ACCOUNTS Cr.

Illustration 57 (Guarantee of Profit by the Firm).

Dr. PARTNERS' CAPITAL ACCOUNTS Cr.

Working Note: Calculation of Deficiency in Karan's share and its recovery:

3. Match the following:

Partners' Capital Accounts

Guarantee of Profit to a Partner

EVALUATION QUESTIONS: QUESTIONS WITH MISSING VALUES

1. (Commission to Partners and Distribution of Profit). X and Y are partners in a firm.

Dr. PARTNERS' CAPITAL ACCOUNTS Cr.

Dr. KS LOAN ACCOUNT Cr.

Dr. PARTNERS' CAPITAL ACCOUNTS Cr.

Dr. X'S LOAN ACCOUNT Cr.

Objective Type Questions

1. (a) Notallowed; (b) Not allowed;

(c) 6% p.a.; (d) Equal;

(e) Not charged; (f) Allowed @ 6% p.a.;

(g) Not charged.

2. (a) P must pay—25,000; (b) Q must pay—Rs. 5,000;

(c) Goods may be bought from A Ltd.; (d) C cannot be admitted;

(e) R will get interest @ 6% p.a.