NCERT Solutions Class 12 Accountancy Chapter 2 Accounting for Partnership Basic Concepts

Test Your Understanding - I

 

Question 1. Mohan and Shyam are partners in a firm. State whether the claim is valid if the partnership agreement is silent in the following matters:
(i) Mohan is an active partner. He wants a salary of Rs. 10,000 per year;
(ii) Shyam had advanced a loan to the firm. He claims interest @ 10% per annum;
(iii) Mohan has contributed Rs. 20,000 and Shyam Rs. 50,000 as capital. Mohan wants equal share in profits.
(iv) Shyam wants interest on capital to be credited @ 6% per annum.
Answer:
(i) Invalid. In the absence of a partnership agreement, partners are not entitled to receive any salary, commission, interest on capital, or interest on drawings.
(ii) Invalid. If there is no agreement, interest on a partner's loan is allowed at a fixed rate of 6% p.a. rather than 10% p.a.
(iii) Valid. When the partnership deed is silent, profits and losses must be shared equally among all partners.
(iv) Invalid. If the deed does not specify, partners are not allowed any interest on capital.
In simple words: When there is no written agreement, partners cannot claim salaries or interest on their capital, and loans get 6% interest. Also, profits are shared equally regardless of how much capital each person contributed.
Exam Tip: Remember the default rules of the Indian Partnership Act, 1932: equal profit sharing, no salary/commission, no interest on capital, no interest on drawings, and 6% p.a. interest on partner's loan.

 

Question 2. State whether the following statements are true or false:
(i) Valid partnership can be formulated even without a written agreement between the partners;
(ii) Each partner carrying on the business is the principal as well as the agent for all the other partners;
(iii) Maximum number of partners in a banking firm can be 20;
(iv) Methods of settlement of dispute among the partners can't be part of the partnership deed;
(v) If the deed is silent, interest at the rate of 6% p.a. would be charged on the drawings made by the partner;
(vi) Interest on partner's loan is to be given @ 12% p.a. if the deed is silent about the rate.
Answer:
(i) True
(ii) True
(iii) True
(iv) False
(v) False
(vi) False
In simple words: A partnership does not need a written contract to be valid, and partners act as both owners and agents. However, disputes can be settled via the deed, drawings are not charged interest by default, and silent loans only get 6% interest.
Exam Tip: Be clear on the true/false conceptual questions, especially the mutual agency relationship where every partner acts as both principal and agent.

 

Do It Yourself

 

Question 1. Soumya and Bimal are partners in a firm Sharing profits and losses in the ratio of 3:2. The balance in their capital and current accounts as on April 01, 2006 were as under:

The partnership deed provides that Soumya is to be paid salary @ Rs. 500 per month where as Bimal is to get a commission of Rs. 40,000 for the year. Interest on capital is to be credited at 6% p.a. The drawings of Soumya and Bimal for the year were Rs. 30,000 and Rs. 10,000 respectively. The net profit of the firm before making these adjustment was Rs. 2,49,000. Interest on Soumya’s drawings was Rs. 750 and Bimal’s drawings, Rs. 250. Prepare Profit and Loss Appropriation Account and Partner’s Capital and Current Accounts.
Answer:

Profit and Loss Appropriation Account for the year ending 31 March, 2007

Dr. Partners' Capital Account Cr.

Dr. Partners' Current Account Cr.

In simple words: This solution allocates the net profit of Rs. 2,49,000 by first paying Soumya her salary and Bimal his commission, and crediting both with interest on capital. We also charge them interest on their drawings. The remaining profit is shared between them in their 3:2 ratio. Since capitals are fixed, these adjustments are made in their current accounts.
Exam Tip: Under the Fixed Capital Method, always maintain two accounts: a Capital Account for recording only the capital contributed, and a Current Account for all adjustments like salary, commission, interest on capital/drawings, and profit share.

 

Question 2. Soniya, Charu and Smita started a partnership firm on April 1, 2006. They contributed Rs, 5,00,000, Rs. 4,00,000 and Rs. 3,00,000 respectively as their capitals and decided to share profits and losses in the ratio of 3:2:1.The partnership provides that Soniya is to be paid a salary of Rs. 10,000 per month and Charu a commission of Rs. 50,000. It also provides that interest on capital be allowed @6% p.a. The drawings for the year were Soniya Rs. 60,000, Charu Rs. 40,000 and Smita Rs. 20,000. Interest on drawings was charged as Rs. 2,700 on Soniya’s drawings, Rs. 1,800 on Charu’s drawings and Rs. 900 on Smita’s drawings. The net amount of profit as per Profit and Loss Account for the year 2006-07 was Rs. 3,56,600.
(i) Record necessary journal entries.
(ii) Prepare profit and loss appropriation account
(iii) Show capital accounts of the partners.
Answer:

Journal Entries

Dr. Profit and Loss Appropriation Account for the year ending 31 March, 2007 Cr.

Dr. Partners' Capital Account Cr.

In simple words: First, we record the initial capital brought in by Soniya, Charu, and Smita. We then calculate interest on capital at 6%, Soniya's salary of Rs. 10,000 per month, and Charu's commission of Rs. 50,000, and debit these to the Profit and Loss Appropriation Account. After adding interest on drawings, the remaining profit of Rs. 1,20,000 is divided in the 3:2:1 ratio. Since capitals are fluctuating, all of these adjustments are entered directly into their capital accounts.
Exam Tip: Be careful with the calculation of Soniya's salary; since it is Rs. 10,000 per month, always multiply it by 12 to get the annual salary of Rs. 1,20,000. Under the fluctuating capital method, all appropriations and drawings are directly adjusted in the Capital Account itself.

 

Test Your Understanding - II

 

Question 1. Raju and Jai commenced business in partnership on April 1, 2006. No partnership agreement was made whether oral or written. They contributed Rs. 4,00,000 and Rs. 1,00,000 respectively as capitals. In addition, Raju advanced Rs. 2,00,000 as loan to the firm on October 1, 2006. Raju met with an accident on July 1, 2006 and could not attend the business up to September 30, 2006. The profit for the year ended March 31, 2007 amounted to Rs. 50,600. Disputes have arisen between them on sharing the profits of the firm.
Raju Claims:
(i) He should be given interest at 10% p.a. on capital and so also on loan.
(ii) Profit should be distributed in the proportion of capitals.
Jai Claims:
(i) Net profit should be shared equally.
(ii) He should be allowed remuneration of Rs. 1,000 p.a. during the period of Raju’s illness.
(iii) Interest on capital and loan should be given @ 6% p.a.
State the correct position on each issue as per the provisions of the Partnership Act, 1932.
Answer:
Raju's Claims:
(i) Incorrect. Raju cannot claim any interest on capital. Regarding the loan, he is entitled to interest at the rate of 6% p.a. instead of 10% p.a.
(ii) Incorrect. Since there is no written or oral agreement, profits must be divided equally between the partners rather than in proportion to their capitals.

Jai's Claims:
(i) Correct. Profits are to be shared equally in the absence of an agreement.
(ii) Incorrect. No partner is entitled to any salary or remuneration for doing business or handling extra work during another partner's illness.
(iii) Incorrect. No interest is allowed on capital, and interest on loan is restricted to 6% p.a.
In simple words: When there is no partnership deed, all profits are shared 50:50, no interest is given on capital, and partners do not get paid salaries or extra money even if they did more work. However, any loan advanced by a partner gets interest at exactly 6% per annum.
Exam Tip: Remember that even if a partner is absent due to illness, they cannot be deprived of their equal profit share, and the other partner cannot claim any extra remuneration unless it is explicitly written in the partnership deed.

 

Question 2. Reena and Raman are partners with capitals of Rs. 3,00,000 and Rs. 1,00,000 respectively. The profit (as per Profit and Loss Account) for the year ended March 31, 2007 was Rs. 1,20,000. Interest on capital is to be allowed at 6% p.a. Raman was entitled to a salary of Rs. 30,000 p.a. The drawings of partners were Rs. 30,000 and 20,000. The interest on drawings to be charged to Reena was Rs. 1,000 and to Raman, Rs. 500. Assuming that Reena and Raman are equal partners. State their share of profit after necessary appropriations.
Answer:

Profit and Loss Appropriation Account for the year ending 31 March, 2007

In simple words: The total available credit is Rs. 1,21,500 (profit of Rs. 1,20,000 plus drawings interest of Rs. 1,500). From this, we deduct the interest on capital (Rs. 24,000) and Raman's salary (Rs. 30,000) leaving Rs. 67,500, which is divided equally between Reena and Raman (Rs. 33,750 each).
Exam Tip: Drawings interest is an income for the firm and is always credited to the Profit and Loss Appropriation Account, increasing the total distributable profit available to the partners.

 

Test Your Understanding - III

 

Question 1. Rani and Suman are in partnership with capitals of Rs. 80,000 and Rs. 60,000, respectively. During the year 2006-2007, Rani withdrew Rs. 10,000 from her capital and Suman Rs. 15,000. Profits before charging interest on capital was Rs. 50,000. Rani and Suman shared profits in the ratio of 3:2. Calculate the amounts of interest on their capitals @ 12% p.a. for the year ended March 31, 2007.
Answer:

First, we determine the opening capital since interest is always calculated on the opening balance of capitals.

Now, we calculate the Interest on Capital @ 12% p.a.:
Rani's Interest on Capital = \( 60,000 \times \frac{12}{100} = \text{Rs. } 7,200 \)
Suman's Interest on Capital = \( 55,000 \times \frac{12}{100} = \text{Rs. } 6,600 \)
In simple words: Since we are given the ending capitals, we first find the opening capitals by adding back drawings and subtracting the profits already given to them. Then we apply the 12% rate to these opening balances to find each partner's interest.
Exam Tip: Remember that interest on capital must always be calculated on the opening balance of the capital account. If only closing capital is given, reconstruct the opening capital first using the formula: Opening Capital = Closing Capital + Drawings - Share of Profit - Additional Capital.

 

Question 2. Priya and Kajal are partners in a firm, sharing profits and losses in the ratio of 5:3. The balance in their fixed capital accounts, on April 1, 2006 were: Priya, Rs. 6,00,000 and Kajal, Rs. 8,00,000. The profit of the firm for the year ended March 31, 2007 is Rs. 1,26,000. Calculate their shares of profits: (a) when there is no agreement in respect of interest on capital, and (b) when there is an agreement that the interest on capital will be allowed @ 12% p.a.
Answer:

(a) When there is no agreement in respect of interest on capital:
In the absence of an agreement, no interest on capital is allowed. The net profit of Rs. 1,26,000 is distributed between Priya and Kajal in their profit-sharing ratio of 5:3.

(b) When there is an agreement that interest on capital is allowed @ 12% p.a.:
Let's first compute the actual interest on capital required:
Priya's actual interest = \( 6,00,000 \times \frac{12}{100} = \text{Rs. } 72,000 \)
Kajal's actual interest = \( 8,00,000 \times \frac{12}{100} = \text{Rs. } 96,000 \)
Total interest required = Rs. 1,68,000.
Since the total required interest (Rs. 1,68,000) exceeds the available net profit (Rs. 1,26,000), interest can only be paid up to the profit amount. The available profit of Rs. 1,26,000 will be distributed in the ratio of their actual interest on capital (72,000 : 96,000, which simplifies to 3:4).

Priya's proportionate interest = \( 1,26,000 \times \frac{3}{7} = \text{Rs. } 54,000 \)
Kajal's proportionate interest = \( 1,26,000 \times \frac{4}{7} = \text{Rs. } 72,000 \)

In simple words: In scenario (a), we just divide the profit using the 5:3 ratio since there is no interest agreement. In scenario (b), because the calculated interest of Rs. 1,68,000 is more than our profit of Rs. 1,26,000, we must limit the interest to the actual profit of Rs. 1,26,000 and distribute it using the ratio of their individual interests (3:4) instead.
Exam Tip: If the partnership deed says interest on capital is allowed but is silent on whether it is a charge against profits, treat it as an appropriation of profit. Thus, if profits are insufficient, distribute the entire available profit in the ratio of the partners' individual interest on capital.

 

Do It Yourself

 

Question 1. Govind is a partner in a firm. He withdrew the following amounts during the year 2006-07:
April 30, 2006: Rs. 6,000
June 30, 2006: Rs. 4,000
Sept. 30, 2006: Rs. 8,000
Dec. 31, 2006: Rs. 3,000
Jan. 31, 2007: Rs. 5,000
The interest on drawings is to be charged @ 6% p.a. The books are closed on March 31, every year.
Answer:

Interest on Drawings (Product Method)

Interest on Drawings = \( 1,69,000 \times \frac{6}{100} \times \frac{1}{12} = \text{Rs. } 845 \)
In simple words: Under the product method, we count how many months remain in the financial year after each withdrawal. We multiply each amount by its remaining months to find the "product" and then calculate 6% interest for exactly 1 month on the sum of all these products.
Exam Tip: Be precise when counting months from the date of withdrawal to March 31. For instance, since the first withdrawal was on April 30, only 11 months are left in the year (May to March).

 

Question 2. Ram and Syam are partners sharing profits/losses equally. Ram withdrew Rs. 1,000 p.m. regularly on the first day of every month during the year 2006-07 for personal expenses. If interest on drawings is charged @ 5% p.a. Calculate interest on the drawings of Ram.
Answer:
Total Drawings of Ram = \( 1,000 \times 12 = \text{Rs. } 12,000 \)
Since the drawings are made regularly on the first day of every month, the interest is calculated for an average period of 6.5 months (or \( 6\frac{1}{2} \) months).
Interest on Drawings = \( 12,000 \times \frac{5}{100} \times \frac{13}{2 \times 12} = \text{Rs. } 325 \)
In simple words: When a partner withdraws a fixed amount on the very first day of each month, we calculate interest on the total annual drawings for an average time of 6.5 months.
Exam Tip: Memorize the average periods for monthly drawings: 6.5 months if withdrawn at the beginning of each month, 6 months if withdrawn in the middle of each month, and 5.5 months if withdrawn at the end of each month.

 

Question 3. Verma and Kaul are partners in a firm. The partnership agreement provides that interest on drawings should be charged @ 6% p.a. Verma withdraws Rs. 2,000 per month starting from April 01, 2006 to March 31, 2007. Kaul withdrew Rs. 3,000 per quarter, starting from April 01, 2006. Calculate interest on partner’s drawings.
Answer:
Verma's Interest on Drawings:
Total annual drawings of Verma = \( 2,000 \times 12 = \text{Rs. } 24,000 \)
Since Verma withdrew money on the first day of every month, we use an average period of 6.5 months (or \( 6\frac{1}{2} \) months).
Interest on Verma's drawings = \( 24,000 \times \frac{6}{100} \times \frac{13}{2 \times 12} = \text{Rs. } 780 \)

Kaul's Interest on Drawings:
Total annual drawings of Kaul = \( 3,000 \times 4 = \text{Rs. } 12,000 \)
Since Kaul withdrew money at the beginning of each quarter, the average period is 7.5 months (or \( 7\frac{1}{2} \) months).
Interest on Kaul's drawings = \( 12,000 \times \frac{6}{100} \times \frac{15}{2 \times 12} = \text{Rs. } 450 \)
In simple words: Verma's monthly drawings are calculated for an average of 6.5 months, whereas Kaul's quarterly drawings (made at the start of each quarter) are calculated for an average of 7.5 months.
Exam Tip: Remember the average periods for quarterly drawings: 7.5 months if withdrawn at the beginning of each quarter, 6 months in the middle of each quarter, and 4.5 months if at the end of each quarter.

 

Do It Yourself

 

Question 1. Gupta and Sarin are partners in a firm sharing profits in the ratio of 3:2. Their fixed capitals are: Gupta 2,00,000, and Sarin 3,00,000. After the accounts for the year are prepared it is discovered that interest on capital @10% p.a. as provided in the partnership agreement, has not been credited in the capital accounts of partners before distribution of profits. Record adjustment entry to rectify the error.
Answer:

Statement showing Adjustments

Journal Entry

In simple words: Since we forgot to credit interest on capital (total Rs. 50,000), this amount was wrongly distributed as profits in the 3:2 ratio. We fix this by taking back Rs. 10,000 from Gupta (who was overpaid) and giving it to Sarin.
Exam Tip: When capitals are specified as "Fixed", always pass the adjustment entry through the partners' "Current Accounts" instead of their "Capital Accounts".

 

Question 2. Krishna, Sandeep and Karim are partners sharing profits in the ratio of 3:2:1. Their fixed capitals are: Krishan Rs. 1,20,000, Sandeep 90,000 and Karim 60,000. For the year 2006-07, interest was credited to them @ 6% p.a. instead of 5% p.a. Record adjustment entry.
Answer:

Statement of Adjustment

Journal Entry

In simple words: The partners were paid 1% too much interest on their capital. We take this excess interest back and redistribute it as standard profits in their 3:2:1 ratio. This results in taking Rs. 150 from Karim and giving it to Krishna.
Exam Tip: To correct over-credited interest, debit each partner with their excess interest and credit them with their share of the resulting profit increase.

 

Question 3. Leela, Meera and Neha are partners and have omitted interest on capital @9% p.a. for three years ended March 31, 2007. Their fixed capitals on which interest was to be allowed throughout were: Leela Rs. 80,000, Meera Rs. 60,000 and Neha Rs. 1,00,000. Their profit sharing ratios during the last three years were:

Record adjustment entry.
Answer:

Statement of Adjustment

Journal Entry

In simple words: Since we forgot to give 9% interest on capital for three years, we must calculate the actual interest they should have received each year. We compare this with the profit they were actually given in those three years. Meera received Rs. 10,440 too much, so we take it back from her and give Rs. 1,440 to Leela and Rs. 9,000 to Neha.
Exam Tip: For multi-year omissions, analyze year-by-year since profit-sharing ratios change across years. Always work out the total profit credited and the total interest to be credited to compute the net adjustment.

 

Short Answer Type Questions

 

Question 1. Define Partnership Deed.
Answer: A partnership deed is a written document that outlines the terms, conditions, and regulations governing the partnership. It covers key parameters of the business operations, including capitals contributed by each member, profit-and-loss sharing ratios, interest rates on capital and drawings, salaries or commissions payable to partners, and procedures for resolving future disputes.
In simple words: A partnership deed is a written agreement that lists all the rules and details of the business that partners agree to follow.
Exam Tip: Highlighting that a partnership deed can be oral or written, but is preferred in writing to prevent conflicts, helps secure maximum marks.

 

Question 2. Why it is considered desirable to make the partnership agreement in writing?
Answer: Although the Indian Partnership Act, 1932 permits oral agreements, a written partnership deed is highly recommended. Over time, misunderstandings or disagreements may arise between partners. A written contract serves as reliable legal evidence to resolve any disputes, clarify rights and duties, and maintain a healthy working relationship among the partners.
In simple words: Having a written agreement is better because it helps prevent arguments and misunderstandings among the business partners in the future.
Exam Tip: Use terms like "evidential value" and "settlement of disputes" to make your answer sound professional and complete.

 

Question 3. List the items which may be debited or credited in capital accounts of the partners when:
(i) Capitals are fixed
(ii) Capitals are fluctuating
Answer:
(i) When capitals are fixed:
Under the fixed capital method, partners maintain two separate accounts: a Capital Account and a Current Account. The items in these accounts are recorded as follows:

Dr. Partners' Capital Account (Fixed Capitals) Cr.

(ii) When capitals are fluctuating:
Under this method, only one account - the Capital Account - is prepared, and all transactions relating to the partner are adjusted directly within it.

Dr. Partners' Capital Account (Fluctuating Capitals) Cr.

In simple words: When capitals are fixed, only capital contributions and withdrawals go into the Capital Account, while everything else goes into the Current Account. When capitals are fluctuating, everything is tracked inside a single Capital Account.
Exam Tip: Clearly point out that under the fixed capital system, the Capital Account always shows a credit balance (unless it is zero), whereas under the fluctuating capital system, it can occasionally show a debit balance due to heavy drawings or losses.

 

Question 4. Why is Profit and Loss Adjustment Account prepared? Explain.
Answer: To correct mistakes and insert forgotten entries after finalizing the annual accounts and distributing profits to partners, a Profit and Loss Adjustment Account is opened. These omissions or errors often involve interest on capitals, partner salaries, commissions, interest on drawings, or outstanding expenses. Additionally, retrospective amendments to the partnership deed or accounting methods require adjustments. While it is possible to pass these corrective entries straight into the partners' capital accounts, using a Profit and Loss Adjustment Account provides a more structured and organized approach.
In simple words: This account is used to correct errors or record transactions that were missed before the final profits were distributed to partners. It helps make sure the capital accounts are accurate without messing up previous financial statements.
Exam Tip: State clearly that this account is prepared after the final accounts have been closed. Mention key omissions like interest on capital, drawings, and partner salaries as examples to score full marks.

 

Question 5. Give two circumstances under which the fixed capitals of partners may change.
Answer: When using the fixed capital system, the capital balances of partners remain constant unless specific events occur. The two situations where these balances can alter are:
(i) When a partner brings in additional capital with the agreement of the other members.
(ii) When a partner permanently withdraws a portion of their capital, provided all other partners agree.
In simple words: Under the fixed capital method, partners' capital accounts only change if they permanently add more money or permanently take some of their capital out with everyone's permission.
Exam Tip: Remember that temporary drawings do not change fixed capital; only permanent withdrawal of capital or introduction of fresh capital can alter these balances.

 

Question 6. If a fixed amount is withdrawn on the first day of every quarter, for what period the interest on total amount withdrawn will be calculated?
Answer: When a partner withdraws a constant sum at the start of each quarter, the interest on the entire drawings is computed for an average duration of 7.5 months.
In simple words: If you take out the same amount of money on the first day of every quarter, you calculate the interest based on an average time of seven and a half months.
Exam Tip: Memorize the average periods for quarterly drawings: 7.5 months for the beginning, 6 months for the middle, and 4.5 months for the end of each quarter.

 

Question 7. In the absence of partnership deed, specify the rules relating to the following
(i) Sharing of profits and losses
(ii) Interest on partner's capital
(iii) Interest on partner's drawings
(iv) Interest on partner's loan
(v) Salary to a partner
Answer: If partners do not have a written agreement, the provisions of the Indian Partnership Act, 1932 apply:
(i) Sharing of profits and losses: All profits and losses must be divided equally among all partners.
(ii) Interest on partner's capital: No interest is allowed or paid on the capital contributed by partners.
(iii) Interest on partner's drawings: The firm cannot charge any interest on drawings made by the partners.
(iv) Interest on partner's loan: If a partner provides a loan or advance to the business, they are entitled to receive interest at a fixed rate of 6% per annum.
(v) Salary to a partner: No partner is entitled to receive any salary, commission, or remuneration for taking part in the business.
In simple words: Without a partnership deed, profits/losses are shared equally, partners get 6% interest only on loans they gave the firm, and they get no interest on capital, pay no interest on drawings, and receive no salary.
Exam Tip: This is a highly scoring question. Be sure to list all five rules clearly and specify the exact 6% per annum rate for interest on partners' loans.

 

Long Answer Type Questions

 

Question 1. What is partnership? What are its chief characteristics? Explain.
Answer: As defined under Section 4 of the Indian Partnership Act, 1932, a partnership is the relationship between individuals who have agreed to distribute the profits of a business run by all of them or any of them acting on behalf of all. Those who enter into this association are individually called 'partners' and collectively known as a 'firm', operating under a chosen 'firm name'. The main characteristics of a partnership include:
(i) Two or More Persons: To form a partnership, there must be at least two people. While the minimum is two, there is a legal limit on the maximum number of partners: it is capped at 10 for banking businesses and 20 for other business activities.
(ii) Partnership Deed: This is the mutual agreement among partners detailing all operational terms. It covers business goals, capital contributions, profit-sharing ratios, interest rates on capitals or loans, and other mutual rights.
(iii) Business: A partnership must be established to carry out a lawful business or trade. Forming an association for illegal purposes is not recognized as a valid partnership.
(iv) Sharing of Profit: The primary objective must be to divide profits or losses. This sharing is done in an agreed ratio, or equally if no agreement exists, as per the Partnership Act.
(v) Unlimited Liability: Partners have joint and several unlimited liability. If business assets are insufficient to cover outstanding debts, partners' personal properties can be used to pay off creditors.
In simple words: A partnership is when two or more people run a legal business together and share its profits. However, they are also personally responsible for any debts the business cannot pay.
Exam Tip: When defining partnership, always cite "Section 4 of the Indian Partnership Act, 1932" and list at least four key characteristics, especially highlighting unlimited liability and profit sharing.

 

Question 2. Discuss the main provisions of the Indian Partnership Act, 1932 that are relevant to partnership accounts if there is no partnership deed.
Answer: Although having a written deed is highly recommended, partnerships can exist without one. In such cases, the financial and accounting relations are governed by the Indian Partnership Act, 1932:
(i) Profit Sharing Ratio: All profits and losses of the business must be shared equally among the partners, regardless of their capital contributions.
(ii) Interest on Capital: Partners are not entitled to receive any interest on the capital they have introduced.
(iii) Interest on Drawings: The partnership firm cannot charge any interest on the funds withdrawn by partners for personal use.
(iv) Interest on Partner's Loan: If a partner advances any loan to the firm beyond their capital, they are entitled to interest at a fixed rate of 6% per annum.
(v) Salary to Partner: No salary, commission, or any other form of remuneration is payable to any partner for managing the business affairs.
In simple words: If there is no written agreement, the law says partners share all profits equally, get 6% interest on loans, but get no interest on capital, pay no interest on drawings, and get no salary.
Exam Tip: Memorize these five fundamental rules as they are critical for solving both theoretical questions and numerical problems where a deed is absent.

 

Question 3. Explain why it is considered better to make a partnership agreement in writing.
Answer: While the Indian Partnership Act, 1932 does not make a written agreement mandatory, having a written partnership deed is highly recommended. It is superior to an oral agreement for several key reasons:
- It helps prevent misunderstandings and resolve conflicts among partners by clearly defining everyone's roles, rights, and duties from the beginning.
- It serves as vital written evidence that can be presented in a court of law to settle legal disputes.
- It ensures the seamless and organized operation of the firm's business activities by removing ambiguity. Therefore, a written and registered deed is always preferred to avoid potential friction in the future.
In simple words: Having a written agreement is better because it clearly states the rules everyone agreed to, which prevents arguments and can be used as proof in court if needed.
Exam Tip: Highlight "preventing future disputes" and "admissibility as legal evidence in court" as the two primary benefits of a written partnership deed.

 

Question 4. Illustrate how interest on drawings will be calculated under various situations.
Answer: Drawings refer to the cash or goods taken by partners from the firm for personal use. The interest charged on these amounts by the business is called interest on drawings. The calculation method depends on the frequency and timing of the drawings:

Situation I: When amount, date, and interest rate are explicitly provided
Interest is calculated for the exact period from the date of withdrawal to the closing of the financial year.
For example, if a partner withdraws Rs. 10,000 on July 01 at an annual interest rate of 12%, and the books close on December 31:
\( \text{Interest on Drawings} = \text{Total Amount Drawn} \times \frac{\text{Rate of Interest}}{100} \times \frac{\text{Period}}{12} \)
\( \text{Interest on drawings} = 10,000 \times \frac{12}{100} \times \frac{6}{12} = \text{Rs. } 600 \)

Situation II: When amount and rate are given, but the withdrawal dates are missing
- Case I: When the rate is given 'per annum' (p.a.)
Interest is calculated on an average basis for a period of 6 months.
\( \text{Interest on drawings} = 10,000 \times \frac{12}{100} \times \frac{6}{12} = \text{Rs. } 600 \)
- Case II: When the rate is given without 'per annum'
Interest is charged for the full year without considering the time factor.
For instance, if a partner withdraws Rs. 10,000 and the interest rate is 12%:
\( \text{Interest on drawings} = \text{Total Amount withdrawn} \times \frac{\text{Rate}}{100} \)
\( \text{Interest on drawings} = 10,000 \times \frac{12}{100} = \text{Rs. } 1,200 \)

Situation III: When a fixed amount is withdrawn at regular intervals
- Case I: Withdrawn at the beginning of each month
Interest is calculated for 6.5 months.
For example, if a partner withdraws Rs. 1,000 at the start of every month at 12% p.a.:
Total drawings = Rs. \( 1,000 \times 12 = \text{Rs. } 12,000 \)
\( \text{Interest on drawings} = 12,000 \times \frac{12}{100} \times \frac{6.5}{12} = \text{Rs. } 780 \)
- Case II: Withdrawn at the end of each month
Interest is calculated for 5.5 months.
For example, if a partner withdraws Rs. 1,000 at the end of each month at 12% p.a.:
\( \text{Interest on drawings} = 12,000 \times \frac{12}{100} \times \frac{5.5}{12} = \text{Rs. } 660 \)
- Case III: Withdrawn in the middle of each month
Interest is calculated for 6 months.
For example, if a partner withdraws Rs. 1,000 on the 15th of every month at 12% p.a.:
\( \text{Interest on drawings} = 12,000 \times \frac{12}{100} \times \frac{6}{12} = \text{Rs. } 720 \)
- Case IV: Withdrawn at the beginning of each quarter
Interest is calculated for 7.5 months.
For example, if a partner withdraws Rs. 5,000 at the start of every quarter at 12% p.a.:
Total drawings = Rs. \( 5,000 \times 4 = \text{Rs. } 20,000 \)
\( \text{Interest on drawings} = 20,000 \times \frac{12}{100} \times \frac{7.5}{12} = \text{Rs. } 1,800 \)
- Case V: Withdrawn at the end of each quarter
Interest is calculated for 4.5 months.
For example, if a partner withdraws Rs. 5,000 at the end of each quarter at 12% p.a.:
\( \text{Interest on drawings} = 20,000 \times \frac{12}{100} \times \frac{4.5}{12} = \text{Rs. } 900 \)

Situation IV: When varying amounts are withdrawn at irregular intervals
In this case, the Product Method is used. The outstanding period is computed from the date of withdrawal to the year-end.
For example, if a partner makes the following withdrawals (interest rate is 12% p.a., ending Dec 31):
- March 01: Rs. 6,000 (Outstanding: 10 months)
- June 01: Rs. 4,000 (Outstanding: 7 months)
- August 01: Rs. 5,000 (Outstanding: 5 months)
- Nov 30: Rs. 2,000 (Outstanding: 1 month)

\( \text{Interest on drawings} = \text{Sum of products} \times \frac{\text{Rate}}{100} \times \frac{1}{12} \)
\( \text{Interest on drawings} = 1,15,000 \times \frac{12}{100} \times \frac{1}{12} = \text{Rs. } 1,150 \)
In simple words: Interest on drawings is calculated based on how much money is taken out and how long that money is kept. If drawings are done regularly, we use average months (like 6.5 or 7.5); if irregular, we use the product method.
Exam Tip: Pay close attention to whether "p.a." (per annum) is written next to the interest rate. If "p.a." is missing, calculate interest for the entire year without applying the monthly fraction.

 

Question 5. How will you deal with a change in profit sharing ratio among existing partners? Take imaginary figures to illustrate your answer.
Answer: A shift in the profit-sharing ratio among existing partners represents a reconstruction of the firm. This happens during partner admissions, retirements, deaths, or simply by mutual agreement. To handle this transition, several adjustments are made, such as valuing goodwill, distributing accumulated reserves and profits, revaluing assets and liabilities, and adjusting capital balances. Accumulated profits (like general reserves) and revaluation gains or losses should be transferred to the partners' capital accounts using their old profit-sharing ratio. When the profit-sharing ratio changes, some partners gain while others sacrifice. The gaining partner must compensate the sacrificing partner. The capital account of the gaining partner is debited (to the extent of their gain), and the sacrificing partner's capital account is credited (to the extent of their sacrifice). The adjustment entry is: Gaining Partner's Capital A/c Dr. To Sacrificing Partner's Capital A/c (Being adjustment entry passed for change in profit sharing ratio)

Example: Ram, Mohan, and Shyam are partners sharing profits in the ratio of 3:2:1. They decide to share future profits equally (1:1:1). The books show a General Reserve of Rs. 2,40,000 and a profit on revaluation of Plant and Machinery of Rs. 60,000. Total amount to adjust = Rs. 2,40,000 (Reserve) + Rs. 60,000 (Revaluation Profit) = Rs. 3,00,000.

Since Shyam gains at the expense of Ram, Shyam must compensate Ram by Rs. 50,000. The following adjusting journal entry is recorded:

In simple words: When partners change their profit-sharing ratio, some gain and some lose. Gaining partners must pay back the losing partners. We do this by moving money from the gaining partner's capital account to the losing partner's capital account.
Exam Tip: Always calculate the sacrificing and gaining ratios first using the formula: \( \text{Sacrificing Ratio} = \text{Old Ratio} - \text{New Ratio} \). A positive result means a sacrifice, while a negative one means a gain.

 

Numerical Type Problems

 

Question 1. Tripathi and Chauhan are partners in a firm sharing profits and losses in the ratio of 3:2. Their capitals were Rs.60,000 and Rs.40,000 as on January 01, 2005. During the year they earned a profit of Rs. 30,000. According to the partnership deed both the partners are entitled to Rs. 1,000 per month as Salary and 5% interest on their capital. They are also to be charged an interest of 5% on their drawings, irrespective of the period, which is Rs. 12,000 for Tripathi, Rs. 8,000 for Chauhan. Prepare Partner's Accounts when, capitals are fixed.
Answer: When partner accounts are maintained under the fixed capital method, two separate accounts are prepared: Capital Account and Current Account. Here, all adjustments regarding salary, interest on drawings, and interest on capital are processed through the Current Accounts, while the Capital Accounts remain unchanged at their original balances.

In simple words: Under the fixed capital method, we keep the original capital in a Capital Account, and use a separate Current Account to record salaries, interest, and drawings for each partner.
Exam Tip: When capitals are fixed, remember to route all routine transactions (salaries, drawings, interest) through the Partner's Current Account, and only record the initial capital in the Capital Account.

 

Question 2. Anubha and Kajal are partners of a firm sharing profits and losses in the ratio of 2:1. Their capital, were Rs.90, 000 and Rs.60,000. The profit during the year were Rs. 45,000. According to partnership deed, both partners are allowed salary, Rs. 700 per month to Anubha and Rs. 500 per month to Kajal. Interest allowed on capital @ 5%p.a. The drawings at the end of the period were Rs. 8,500 for Anubha and Rs. 6,500 for Kajal. Interest is to be charged @ 5% p.a. on drawings. Prepare partners capital accounts, assuming that the capital account are fluctuating.
Answer: Under the fluctuating capital method, all adjustments such as partners' salaries, interest on capital, share of profits, drawings, and interest on drawings are recorded directly in the Capital Accounts. This causes the capital balance of each partner to change or fluctuate over the year.

In simple words: Under the fluctuating capital method, we only maintain one Capital Account for each partner. All transactions, including drawings and salaries, are recorded directly in this account.
Exam Tip: Double check whether capitals are fluctuating or fixed. If fluctuating, prepare only one account (Capital Account) and record all adjustments in it.

 

Question 3. Harshad and Dhiman are in partnership since April 01, 2006. No Partnership agreement was made. They contributed Rs. 4, 00,000 and 1,00,000 respectively as capital. In addition, Harshad advanced an amount of Rs. 1, 00,000 to the firm, on October 01, 2006. Due to long illness, Harshad could not participate in business activities from August 1, to September 30, 2006. The profits for the year ended March 31, 2006 amounted to Rs. 1 ,80,000. Dispute has arisen between Harshad and Dhiman.
Harshad Claims:
(i) he should be given interest @ 10% per annum on capital and loan;
(ii) Profit should be distributed in proportion of capital;
Dhiman Claims:
(i) Profits should be distributed equally;
(ii) He should be allowed Rs. 2,000 p.m. as remuneration for the period he managed the business, in the absence of Harshad;
(iii) Interest on Capital and loan should be allowed @ 6% p.a. You are required to settle the dispute between Harshad and Dhiman. Also prepare Profit and Loss Appropriation Account.
Answer: According to the provisions of the Indian Partnership Act, 1932, since there is no written partnership agreement:

Decisions on Harshad's Claims:
(i) Interest on capital will not be allowed to any partner. Interest on partner's loan is allowed only at 6% per annum, not 10%.
(ii) Profits and losses must be shared equally, not in the ratio of their capital contributions.

Decisions on Dhiman's Claims:
(i) The claim to share profits equally is valid and accepted.
(ii) No remuneration or salary is allowed to Dhiman for managing the business in Harshad's absence.
(iii) Interest on capital is not allowed at all. Interest on loan is allowed at 6% per annum, which is accepted.

In simple words: When partners have no agreement, the law decides. No one gets salary or interest on capital, profits are shared 50 - 50, and interest on loans is strictly 6% per year.
Exam Tip: Interest on partner's loan is a charge against profits and is debited before distributing profits in the Profit and Loss Appropriation Account.

 

Question 4. Aakriti and Bindu entered into partnership for making garment on April 01, 2006 without any Partnership agreement. They introduced Capitals of Rs. 5, 00,000 and Rs. 3,00,000 respectively on October 01, 2006. Aakriti Advanced. Rs, 20,000 by way of loan to the firm without any agreement as to interest. Profit and Loss account for the year ended March 2007 showed profit of Rs, 43,000. Partners could not agree upon the question of interest and the basis of division of profit. You are required to divide the profits between them giving reason for your solution.
Answer: Since there is no written partnership agreement, the disputes must be resolved in accordance with the Indian Partnership Act, 1932:
(i) Interest on partner's loan: Aakriti is entitled to receive interest on her loan of Rs. 20,000 at 6% per annum. Since the loan was advanced on October 01, 2006, the interest is calculated for 6 months (up to March 31, 2007): \( \text{Interest on Loan} = 20,000 \times \frac{6}{100} \times \frac{6}{12} = \text{Rs. } 600 \)
(ii) Interest on capital: No interest is allowed on the capitals introduced by either partner.
(iii) Profit sharing: The remaining profits must be distributed equally between Aakriti and Bindu.

In simple words: With no agreement, we pay Aakriti 6% interest on her loan for the 6 months she lent it. The rest of the profit is divided equally between the two partners.
Exam Tip: Calculate the period for interest on loan carefully. From October 1 to March 31 is exactly 6 months, so only half a year's interest is charged.

 

Question 5. Rakhi and Shikha are partners in a firm, with capitals of Rs. 2,00,000 and Rs, 3,00,000 respectively. The profit of the firm, for the year ended 2006-07 is Rs. 23,200. As per the Partnership agreement, they share the profit in their capital ratio, after allowing a salary of Rs. 5,000 per month to Shikha and interest on Partner's capital at the rate of 10% p.a. During the year Rakhi withdrew Rs. 7,000 and Shikha Rs. 10,000 for their personal use. You are required to prepare Profit and Loss Appropriation Account and Partner's Capital Accounts.
Answer: Since the partnership deed permits salary and interest on capital, these are credited to the partners despite the net profit being lower than the total appropriations. This leads to a net divisible loss of Rs. 86,800, which is distributed between Rakhi and Shikha in their capital ratio of 2:3.

In simple words: Even though the company didn't make enough profit, the agreement says we must still credit Shikha's salary and both partners' interest. This creates a loss of Rs. 86,800, which they share in their capital ratio (2:3).
Exam Tip: When appropriations exceed the net profit, make sure you verify whether the deed treats them as a charge or an appropriation. If treated as a charge, show the complete salary and interest on capital, resulting in a divisible loss.

 

Question 6. Lokesh and Azad are partners sharing profits in the ratio 3:2, with capitals of Rs. 50,000 and 30,000, respectively. Interest on capital is agreed to be paid @ 6% p.a. Azad is allowed a salary of Rs. 2,500 p.a. During 2006, the profits prior to the calculation of interest on capital but after charging Azad's salary amounted to Rs. 12,500. A provision of 5% of profits is to be made in respect of manager's commission. Prepare accounts showing the allocation of profits and partner's capital accounts.
Answer: We first find the true profit of Rs. 14,250 by taking the original profit before Azad's salary (Rs. 12,500 + Rs. 2,500 = Rs. 15,000) and subtracting the manager's 5% commission (Rs. 750). After paying Azad's salary and interest on capital, the remaining Rs. 6,950 is shared in the 3:2 ratio.

In simple words: We first find the true profit of Rs. 14,250 by taking the original profit of Rs. 15,000 and subtracting the manager's 5% commission (Rs. 750). After paying Azad's salary and interest on capital, the remaining Rs. 6,950 is shared in the 3:2 ratio.
Exam Tip: Remember that manager's commission is a charge against profits and must be debited to the Profit and Loss Account before determining the net profit to be transferred to the P&L Appropriation Account.

 

Question 7. The partnership agreement between Maneesh and Girish provides that:
(i) Profits will be shared equally;
(ii) Maneesh will be allowed a salary of Rs. 400 p.m;
(iii) Girish who manages the sales department will be allowed a commission equal to 10% of the net profits, after allowing Maneesh's salary;
(iv) 7% interest will be allowed on partner's fixed capital;
(v) 5% interest will be charged on partner's annual drawings;
(vi) The fixed capitals of Maneesh and Girish are Rs. 1,00,000 and Rs. 80,000, respectively. Their annual drawings were Rs. 16,000 and 14,000, respectively. The net profit for the year ending March 31, 2006 amounted to Rs. 40,000; prepare firm's Profit and Loss Appropriation Account.
Answer: Since the partnership deed specifies fixed capitals, the final profits are transferred to the partners' current accounts instead of capital accounts. Interest on drawings is charged as a flat rate of 5% (without considering any average monthly period because the term 'p.a.' is absent). Girish's commission is calculated as 10% of the net profit after deducting Maneesh's salary.

In simple words: We calculate Maneesh's salary (Rs. 4,800) and Girish's commission (Rs. 3,520, which is 10% of the remaining profit). Since 'p.a.' is missing from the 5% drawing interest rate, we charge the full 5% on the total drawings. The final profits are shared equally and put into Current Accounts because their capitals are fixed.
Exam Tip: Look closely at whether the interest rate on drawings has the word "p.a." attached. If it does not, do not calculate interest for an average of 6 months; charge it on the full amount for the whole year.

 

Question 4. Why is Profit and Loss Adjustment Account prepared? Explain.
Answer: To correct mistakes and insert forgotten entries after finalizing the annual accounts and distributing profits to partners, a Profit and Loss Adjustment Account is opened. These omissions or errors often involve interest on capitals, partner salaries, commissions, interest on drawings, or outstanding expenses. Additionally, retrospective amendments to the partnership deed or accounting methods require adjustments. While it is possible to pass these corrective entries straight into the partners' capital accounts, using a Profit and Loss Adjustment Account provides a more structured and organized approach.
In simple words: This account is used to correct errors or record transactions that were missed before the final profits were distributed to partners. It helps make sure the capital accounts are accurate without messing up previous financial statements.
Exam Tip: State clearly that this account is prepared after the final accounts have been closed. Mention key omissions like interest on capital, drawings, and partner salaries as examples to score full marks.

 

Question 5. Give two circumstances under which the fixed capitals of partners may change.
Answer: When using the fixed capital system, the capital balances of partners remain constant unless specific events occur. The two situations where these balances can alter are:
(i) When a partner brings in additional capital with the agreement of the other members.
(ii) When a partner permanently withdraws a portion of their capital, provided all other partners agree.
In simple words: Under the fixed capital method, partners' capital accounts only change if they permanently add more money or permanently take some of their capital out with everyone's permission.
Exam Tip: Remember that temporary drawings do not change fixed capital; only permanent withdrawal of capital or introduction of fresh capital can alter these balances.

 

Question 6. If a fixed amount is withdrawn on the first day of every quarter, for what period the interest on total amount withdrawn will be calculated?
Answer: When a partner withdraws a constant sum at the start of each quarter, the interest on the entire drawings is computed for an average duration of 7.5 months.
In simple words: If you take out the same amount of money on the first day of every quarter, you calculate the interest based on an average time of seven and a half months.
Exam Tip: Memorize the average periods for quarterly drawings: 7.5 months for the beginning, 6 months for the middle, and 4.5 months for the end of each quarter.

 

Question 7. In the absence of partnership deed, specify the rules relating to the following
(i) Sharing of profits and losses
(ii) Interest on partner's capital
(iii) Interest on partner's drawings
(iv) Interest on partner's loan
(v) Salary to a partner
Answer: If partners do not have a written agreement, the provisions of the Indian Partnership Act, 1932 apply:
(i) Sharing of profits and losses: All profits and losses must be divided equally among all partners.
(ii) Interest on partner's capital: No interest is allowed or paid on the capital contributed by partners.
(iii) Interest on partner's drawings: The firm cannot charge any interest on drawings made by the partners.
(iv) Interest on partner's loan: If a partner provides a loan or advance to the business, they are entitled to receive interest at a fixed rate of 6% per annum.
(v) Salary to a partner: No partner is entitled to receive any salary, commission, or remuneration for taking part in the business.
In simple words: Without a partnership deed, profits/losses are shared equally, partners get 6% interest only on loans they gave the firm, and they get no interest on capital, pay no interest on drawings, and receive no salary.
Exam Tip: This is a highly scoring question. Be sure to list all five rules clearly and specify the exact 6% per annum rate for interest on partners' loans.

 

Long Answer Type Questions

 

Question 1. What is partnership? What are its chief characteristics? Explain.
Answer: As defined under Section 4 of the Indian Partnership Act, 1932, a partnership is the relationship between individuals who have agreed to distribute the profits of a business run by all of them or any of them acting on behalf of all. Those who enter into this association are individually called 'partners' and collectively known as a 'firm', operating under a chosen 'firm name'. The main characteristics of a partnership include:
(i) Two or More Persons: To form a partnership, there must be at least two people. While the minimum is two, there is a legal limit on the maximum number of partners: it is capped at 10 for banking businesses and 20 for other business activities.
(ii) Partnership Deed: This is the mutual agreement among partners detailing all operational terms. It covers business goals, capital contributions, profit-sharing ratios, interest rates on capitals or loans, and other mutual rights.
(iii) Business: A partnership must be established to carry out a lawful business or trade. Forming an association for illegal purposes is not recognized as a valid partnership.
(iv) Sharing of Profit: The primary objective must be to divide profits or losses. This sharing is done in an agreed ratio, or equally if no agreement exists, as per the Partnership Act.
(v) Unlimited Liability: Partners have joint and several unlimited liability. If business assets are insufficient to cover outstanding debts, partners' personal properties can be used to pay off creditors.
In simple words: A partnership is when two or more people run a legal business together and share its profits. However, they are also personally responsible for any debts the business cannot pay.
Exam Tip: When defining partnership, always cite "Section 4 of the Indian Partnership Act, 1932" and list at least four key characteristics, especially highlighting unlimited liability and profit sharing.

 

Question 2. Discuss the main provisions of the Indian Partnership Act, 1932 that are relevant to partnership accounts if there is no partnership deed.
Answer: Although having a written deed is highly recommended, partnerships can exist without one. In such cases, the financial and accounting relations are governed by the Indian Partnership Act, 1932:
(i) Profit Sharing Ratio: All profits and losses of the business must be shared equally among the partners, regardless of their capital contributions.
(ii) Interest on Capital: Partners are not entitled to receive any interest on the capital they have introduced.
(iii) Interest on Drawings: The partnership firm cannot charge any interest on the funds withdrawn by partners for personal use.
(iv) Interest on Partner's Loan: If a partner advances any loan to the firm beyond their capital, they are entitled to interest at a fixed rate of 6% per annum.
(v) Salary to Partner: No salary, commission, or any other form of remuneration is payable to any partner for managing the business affairs.
In simple words: If there is no written agreement, the law says partners share all profits equally, get 6% interest on loans, but get no interest on capital, pay no interest on drawings, and get no salary.
Exam Tip: Memorize these five fundamental rules as they are critical for solving both theoretical questions and numerical problems where a deed is absent.

 

Question 3. Explain why it is considered better to make a partnership agreement in writing.
Answer: While the Indian Partnership Act, 1932 does not make a written agreement mandatory, having a written partnership deed is highly recommended. It is superior to an oral agreement for several key reasons:
- It helps prevent misunderstandings and resolve conflicts among partners by clearly defining everyone's roles, rights, and duties from the beginning.
- It serves as vital written evidence that can be presented in a court of law to settle legal disputes.
- It ensures the seamless and organized operation of the firm's business activities by removing ambiguity. Therefore, a written and registered deed is always preferred to avoid potential friction in the future.
In simple words: Having a written agreement is better because it clearly states the rules everyone agreed to, which prevents arguments and can be used as proof in court if needed.
Exam Tip: Highlight "preventing future disputes" and "admissibility as legal evidence in court" as the two primary benefits of a written partnership deed.

 

Question 4. Illustrate how interest on drawings will be calculated under various situations.
Answer: Drawings refer to the cash or goods taken by partners from the firm for personal use. The interest charged on these amounts by the business is called interest on drawings. The calculation method depends on the frequency and timing of the drawings:

Situation I: When amount, date, and interest rate are explicitly provided
Interest is calculated for the exact period from the date of withdrawal to the closing of the financial year.
For example, if a partner withdraws Rs. 10,000 on July 01 at an annual interest rate of 12%, and the books close on December 31:
\( \text{Interest on Drawings} = \text{Total Amount Drawn} \times \frac{\text{Rate of Interest}}{100} \times \frac{\text{Period}}{12} \)
\( \text{Interest on drawings} = 10,000 \times \frac{12}{100} \times \frac{6}{12} = \text{Rs. } 600 \)

Situation II: When amount and rate are given, but the withdrawal dates are missing
- Case I: When the rate is given 'per annum' (p.a.)
Interest is calculated on an average basis for a period of 6 months.
\( \text{Interest on drawings} = 10,000 \times \frac{12}{100} \times \frac{6}{12} = \text{Rs. } 600 \)
- Case II: When the rate is given without 'per annum'
Interest is charged for the full year without considering the time factor.
For instance, if a partner withdraws Rs. 10,000 and the interest rate is 12%:
\( \text{Interest on drawings} = \text{Total Amount withdrawn} \times \frac{\text{Rate}}{100} \)
\( \text{Interest on drawings} = 10,000 \times \frac{12}{100} = \text{Rs. } 1,200 \)

Situation III: When a fixed amount is withdrawn at regular intervals
- Case I: Withdrawn at the beginning of each month
Interest is calculated for 6.5 months.
For example, if a partner withdraws Rs. 1,000 at the start of every month at 12% p.a.:
Total drawings = Rs. \( 1,000 \times 12 = \text{Rs. } 12,000 \)
\( \text{Interest on drawings} = 12,000 \times \frac{12}{100} \times \frac{6.5}{12} = \text{Rs. } 780 \)
- Case II: Withdrawn at the end of each month
Interest is calculated for 5.5 months.
For example, if a partner withdraws Rs. 1,000 at the end of each month at 12% p.a.:
\( \text{Interest on drawings} = 12,000 \times \frac{12}{100} \times \frac{5.5}{12} = \text{Rs. } 660 \)
- Case III: Withdrawn in the middle of each month
Interest is calculated for 6 months.
For example, if a partner withdraws Rs. 1,000 on the 15th of every month at 12% p.a.:
\( \text{Interest on drawings} = 12,000 \times \frac{12}{100} \times \frac{6}{12} = \text{Rs. } 720 \)
- Case IV: Withdrawn at the beginning of each quarter
Interest is calculated for 7.5 months.
For example, if a partner withdraws Rs. 5,000 at the start of every quarter at 12% p.a.:
Total drawings = Rs. \( 5,000 \times 4 = \text{Rs. } 20,000 \)
\( \text{Interest on drawings} = 20,000 \times \frac{12}{100} \times \frac{7.5}{12} = \text{Rs. } 1,800 \)
- Case V: Withdrawn at the end of each quarter
Interest is calculated for 4.5 months.
For example, if a partner withdraws Rs. 5,000 at the end of each quarter at 12% p.a.:
\( \text{Interest on drawings} = 20,000 \times \frac{12}{100} \times \frac{4.5}{12} = \text{Rs. } 900 \)

Situation IV: When varying amounts are withdrawn at irregular intervals
In this case, the Product Method is used. The outstanding period is computed from the date of withdrawal to the year-end.
For example, if a partner makes the following withdrawals (interest rate is 12% p.a., ending Dec 31):
- March 01: Rs. 6,000 (Outstanding: 10 months)
- June 01: Rs. 4,000 (Outstanding: 7 months)
- August 01: Rs. 5,000 (Outstanding: 5 months)
- Nov 30: Rs. 2,000 (Outstanding: 1 month)

\( \text{Interest on drawings} = \text{Sum of products} \times \frac{\text{Rate}}{100} \times \frac{1}{12} \)
\( \text{Interest on drawings} = 1,15,000 \times \frac{12}{100} \times \frac{1}{12} = \text{Rs. } 1,150 \)
In simple words: Interest on drawings is calculated based on how much money is taken out and how long that money is kept. If drawings are done regularly, we use average months (like 6.5 or 7.5); if irregular, we use the product method.
Exam Tip: Pay close attention to whether "p.a." (per annum) is written next to the interest rate. If "p.a." is missing, calculate interest for the entire year without applying the monthly fraction.

 

Question 5. How will you deal with a change in profit sharing ratio among existing partners? Take imaginary figures to illustrate your answer.
Answer: A shift in the profit-sharing ratio among existing partners represents a reconstruction of the firm. This happens during partner admissions, retirements, deaths, or simply by mutual agreement. To handle this transition, several adjustments are made, such as valuing goodwill, distributing accumulated reserves and profits, revaluing assets and liabilities, and adjusting capital balances. Accumulated profits (like general reserves) and revaluation gains or losses should be transferred to the partners' capital accounts using their old profit-sharing ratio. When the profit-sharing ratio changes, some partners gain while others sacrifice. The gaining partner must compensate the sacrificing partner. The capital account of the gaining partner is debited (to the extent of their gain), and the sacrificing partner's capital account is credited (to the extent of their sacrifice). The adjustment entry is: Gaining Partner's Capital A/c Dr. To Sacrificing Partner's Capital A/c (Being adjustment entry passed for change in profit sharing ratio)

Example: Ram, Mohan, and Shyam are partners sharing profits in the ratio of 3:2:1. They decide to share future profits equally (1:1:1). The books show a General Reserve of Rs. 2,40,000 and a profit on revaluation of Plant and Machinery of Rs. 60,000. Total amount to adjust = Rs. 2,40,000 (Reserve) + Rs. 60,000 (Revaluation Profit) = Rs. 3,00,000.

Since Shyam gains at the expense of Ram, Shyam must compensate Ram by Rs. 50,000. The following adjusting journal entry is recorded:

In simple words: When partners change their profit-sharing ratio, some gain and some lose. Gaining partners must pay back the losing partners. We do this by moving money from the gaining partner's capital account to the losing partner's capital account.
Exam Tip: Always calculate the sacrificing and gaining ratios first using the formula: \( \text{Sacrificing Ratio} = \text{Old Ratio} - \text{New Ratio} \). A positive result means a sacrifice, while a negative one means a gain.

 

Numerical Type Problems

 

Question 1. Tripathi and Chauhan are partners in a firm sharing profits and losses in the ratio of 3:2. Their capitals were Rs.60,000 and Rs.40,000 as on January 01, 2005. During the year they earned a profit of Rs. 30,000. According to the partnership deed both the partners are entitled to Rs. 1,000 per month as Salary and 5% interest on their capital. They are also to be charged an interest of 5% on their drawings, irrespective of the period, which is Rs. 12,000 for Tripathi, Rs. 8,000 for Chauhan. Prepare Partner's Accounts when, capitals are fixed.
Answer: When partner accounts are maintained under the fixed capital method, two separate accounts are prepared: Capital Account and Current Account. Here, all adjustments regarding salary, interest on drawings, and interest on capital are processed through the Current Accounts, while the Capital Accounts remain unchanged at their original balances.

In simple words: Under the fixed capital method, we keep the original capital in a Capital Account, and use a separate Current Account to record salaries, interest, and drawings for each partner.
Exam Tip: When capitals are fixed, remember to route all routine transactions (salaries, drawings, interest) through the Partner's Current Account, and only record the initial capital in the Capital Account.

 

Question 2. Anubha and Kajal are partners of a firm sharing profits and losses in the ratio of 2:1. Their capital, were Rs.90, 000 and Rs.60,000. The profit during the year were Rs. 45,000. According to partnership deed, both partners are allowed salary, Rs. 700 per month to Anubha and Rs. 500 per month to Kajal. Interest allowed on capital @ 5%p.a. The drawings at the end of the period were Rs. 8,500 for Anubha and Rs. 6,500 for Kajal. Interest is to be charged @ 5% p.a. on drawings. Prepare partners capital accounts, assuming that the capital account are fluctuating.
Answer: Under the fluctuating capital method, all adjustments such as partners' salaries, interest on capital, share of profits, drawings, and interest on drawings are recorded directly in the Capital Accounts. This causes the capital balance of each partner to change or fluctuate over the year.

In simple words: Under the fluctuating capital method, we only maintain one Capital Account for each partner. All transactions, including drawings and salaries, are recorded directly in this account.
Exam Tip: Double check whether capitals are fluctuating or fixed. If fluctuating, prepare only one account (Capital Account) and record all adjustments in it.

 

Question 3. Harshad and Dhiman are in partnership since April 01, 2006. No Partnership agreement was made. They contributed Rs. 4, 00,000 and 1,00,000 respectively as capital. In addition, Harshad advanced an amount of Rs. 1, 00,000 to the firm, on October 01, 2006. Due to long illness, Harshad could not participate in business activities from August 1, to September 30, 2006. The profits for the year ended March 31, 2006 amounted to Rs. 1 ,80,000. Dispute has arisen between Harshad and Dhiman.
Harshad Claims:
(i) he should be given interest @ 10% per annum on capital and loan;
(ii) Profit should be distributed in proportion of capital;
Dhiman Claims:
(i) Profits should be distributed equally;
(ii) He should be allowed Rs. 2,000 p.m. as remuneration for the period he managed the business, in the absence of Harshad;
(iii) Interest on Capital and loan should be allowed @ 6% p.a. You are required to settle the dispute between Harshad and Dhiman. Also prepare Profit and Loss Appropriation Account.
Answer: According to the provisions of the Indian Partnership Act, 1932, since there is no written partnership agreement:

Decisions on Harshad's Claims:
(i) Interest on capital will not be allowed to any partner. Interest on partner's loan is allowed only at 6% per annum, not 10%.
(ii) Profits and losses must be shared equally, not in the ratio of their capital contributions.

Decisions on Dhiman's Claims:
(i) The claim to share profits equally is valid and accepted.
(ii) No remuneration or salary is allowed to Dhiman for managing the business in Harshad's absence.
(iii) Interest on capital is not allowed at all. Interest on loan is allowed at 6% per annum, which is accepted.

In simple words: When partners have no agreement, the law decides. No one gets salary or interest on capital, profits are shared 50 - 50, and interest on loans is strictly 6% per year.
Exam Tip: Interest on partner's loan is a charge against profits and is debited before distributing profits in the Profit and Loss Appropriation Account.

 

Question 4. Aakriti and Bindu entered into partnership for making garment on April 01, 2006 without any Partnership agreement. They introduced Capitals of Rs. 5, 00,000 and Rs. 3,00,000 respectively on October 01, 2006. Aakriti Advanced. Rs, 20,000 by way of loan to the firm without any agreement as to interest. Profit and Loss account for the year ended March 2007 showed profit of Rs, 43,000. Partners could not agree upon the question of interest and the basis of division of profit. You are required to divide the profits between them giving reason for your solution.
Answer: Since there is no written partnership agreement, the disputes must be resolved in accordance with the Indian Partnership Act, 1932:
(i) Interest on partner's loan: Aakriti is entitled to receive interest on her loan of Rs. 20,000 at 6% per annum. Since the loan was advanced on October 01, 2006, the interest is calculated for 6 months (up to March 31, 2007): \( \text{Interest on Loan} = 20,000 \times \frac{6}{100} \times \frac{6}{12} = \text{Rs. } 600 \)
(ii) Interest on capital: No interest is allowed on the capitals introduced by either partner.
(iii) Profit sharing: The remaining profits must be distributed equally between Aakriti and Bindu.

In simple words: With no agreement, we pay Aakriti 6% interest on her loan for the 6 months she lent it. The rest of the profit is divided equally between the two partners.
Exam Tip: Calculate the period for interest on loan carefully. From October 1 to March 31 is exactly 6 months, so only half a year's interest is charged.

 

Question 5. Rakhi and Shikha are partners in a firm, with capitals of Rs. 2,00,000 and Rs, 3,00,000 respectively. The profit of the firm, for the year ended 2006-07 is Rs. 23,200. As per the Partnership agreement, they share the profit in their capital ratio, after allowing a salary of Rs. 5,000 per month to Shikha and interest on Partner's capital at the rate of 10% p.a. During the year Rakhi withdrew Rs. 7,000 and Shikha Rs. 10,000 for their personal use. You are required to prepare Profit and Loss Appropriation Account and Partner's Capital Accounts.
Answer: Since the partnership deed permits salary and interest on capital, these are credited to the partners despite the net profit being lower than the total appropriations. This leads to a net divisible loss of Rs. 86,800, which is distributed between Rakhi and Shikha in their capital ratio of 2:3.

In simple words: Even though the company didn't make enough profit, the agreement says we must still credit Shikha's salary and both partners' interest. This creates a loss of Rs. 86,800, which they share in their capital ratio (2:3).
Exam Tip: When appropriations exceed the net profit, make sure you verify whether the deed treats them as a charge or an appropriation. If treated as a charge, show the complete salary and interest on capital, resulting in a divisible loss.

 

Question 6. Lokesh and Azad are partners sharing profits in the ratio 3:2, with capitals of Rs. 50,000 and 30,000, respectively. Interest on capital is agreed to be paid @ 6% p.a. Azad is allowed a salary of Rs. 2,500 p.a. During 2006, the profits prior to the calculation of interest on capital but after charging Azad's salary amounted to Rs. 12,500. A provision of 5% of profits is to be made in respect of manager's commission. Prepare accounts showing the allocation of profits and partner's capital accounts.
Answer: We first find the true profit of Rs. 14,250 by taking the original profit before Azad's salary (Rs. 12,500 + Rs. 2,500 = Rs. 15,000) and subtracting the manager's 5% commission (Rs. 750). After paying Azad's salary and interest on capital, the remaining Rs. 6,950 is shared in the 3:2 ratio.

In simple words: We first find the true profit of Rs. 14,250 by taking the original profit of Rs. 15,000 and subtracting the manager's 5% commission (Rs. 750). After paying Azad's salary and interest on capital, the remaining Rs. 6,950 is shared in the 3:2 ratio.
Exam Tip: Remember that manager's commission is a charge against profits and must be debited to the Profit and Loss Account before determining the net profit to be transferred to the P&L Appropriation Account.

 

Question 7. The partnership agreement between Maneesh and Girish provides that:
(i) Profits will be shared equally;
(ii) Maneesh will be allowed a salary of Rs. 400 p.m;
(iii) Girish who manages the sales department will be allowed a commission equal to 10% of the net profits, after allowing Maneesh's salary;
(iv) 7% interest will be allowed on partner's fixed capital;
(v) 5% interest will be charged on partner's annual drawings;
(vi) The fixed capitals of Maneesh and Girish are Rs. 1,00,000 and Rs. 80,000, respectively. Their annual drawings were Rs. 16,000 and 14,000, respectively. The net profit for the year ending March 31, 2006 amounted to Rs. 40,000; prepare firm's Profit and Loss Appropriation Account.
Answer: Since the partnership deed specifies fixed capitals, the final profits are transferred to the partners' current accounts instead of capital accounts. Interest on drawings is charged as a flat rate of 5% (without considering any average monthly period because the term 'p.a.' is absent). Girish's commission is calculated as 10% of the net profit after deducting Maneesh's salary.

In simple words: We calculate Maneesh's salary (Rs. 4,800) and Girish's commission (Rs. 3,520, which is 10% of the remaining profit). Since 'p.a.' is missing from the 5% drawing interest rate, we charge the full 5% on the total drawings. The final profits are shared equally and put into Current Accounts because their capitals are fixed.
Exam Tip: Look closely at whether the interest rate on drawings has the word "p.a." attached. If it does not, do not calculate interest for an average of 6 months; charge it on the full amount for the whole year.

 

Question 28. Pinki, Deepati and Kaku are partner’s sharing profits in the ratio of 5:4:1. Kaku is given a guarantee that his share of profits in any given year would not be less than Rs. 5,000. Deficiency, if any, would be borne by Pinki and Deepti equally. Profits for the year amounted to Rs. 40,000. Record necessary journal entries in the books of the firm showing the distribution of profit.
Answer:
The distribution of profits is shown in the following Profit and Loss Appropriation Account:

In simple words: The firm first divides the profit of Rs. 40,000 among the partners. Because Kaku's share is Rs. 4,000, the remaining Rs. 1,000 of his guaranteed profit is paid equally by Pinki and Deepti.
Exam Tip: Always make sure to deduct the deficiency amount from the capital accounts of the guaranteeing partners and add it to the guaranteed partner's account.

 

Question 29. Abhay, Siddharth and Kusum are partners in a firm, sharing profits in the ratio of 5:3:2. Kusum is guaranteed a minimum amount of Rs. 10,000 as per share in the profits. Any deficiency arising on that account shall be met by Siddharth. Profits for the years ending March 31, 2006 and 2007 are Rs. 40,000 and 60,000 respectively. Prepare Profit and Loss Appropriation Account.
Answer:
The Profit and Loss Appropriation Accounts for the two years are prepared below:
Profit and Loss Appropriation Account for the year ending 31 March, 2006

Profit and Loss Appropriation Account for the year ending 31 March, 2007

Note: For the year 2007, Kusum's calculated share of profit exceeds the guaranteed minimum of Rs. 10,000, so no adjustments are required.
In simple words: In 2006, Kusum's share of profit was Rs. 8,000, so Siddharth gave Rs. 2,000 from his share to meet the guarantee. In 2007, Kusum's natural share was Rs. 12,000, which is already above Rs. 10,000, so no changes were needed.
Exam Tip: Remember that if a partner's actual share of profit is more than the guaranteed minimum, no adjustment is made, and they receive their full actual share.

 

Question 30. Radha, Mary and Fatima are partners sharing profits in the ratio of 5:4:1. Fatima is given a guarantee that her share of profit, in any year will not be less than Rs. 5,000. The profits for the year ending March 31, 2006 amounts to Rs. 35,000. Shortfall if any, in the profits guaranteed to Fatima is to be borne by Radha and Mary in the ratio of 3:2. Record necessary journal entry to show distribution of profit among partner.
Answer:
The ledger adjustments are shown in the following journal entries:

Note: One single combined journal entry can also be recorded instead of two separate entries.
In simple words: Fatima is first given her normal profit share of Rs. 3,500. The Rs. 1,500 gap to reach her Rs. 5,000 guarantee is paid by Radha (Rs. 900) and Mary (Rs. 600) based on their 3:2 sharing ratio.
Exam Tip: When a deficiency is borne by other partners in a specific ratio, always divide the total shortfall by that ratio and debit their respective capital accounts.

 

Question 31. X, Y and Z are in Partnership, sharing profits and losses in the ratio of 3 : 2 : 1, respectively. Z’s share in the profit is guaranteed by X and Y to be a minimum of Rs. 8,000. The net profit for the year ended March 31, 2006 was Rs. 30,000. Prepare Profit and Loss Appropriation Account, indicating the amount finally due to each partner.
Answer:
The Profit and Loss Appropriation Account is prepared as follows:

Working Note:
Z's deficiency = Guaranteed minimum profit - Z's actual share of profit
= Rs. 8,000 - Rs. 5,000 = Rs. 3,000
This deficiency is shared between X and Y in their mutual ratio of 3:2:
X's share in Z's deficiency = Rs. 3,000 * 3/5 = Rs. 1,800
Y's share in Z's deficiency = Rs. 3,000 * 2/5 = Rs. 1,200
In simple words: Out of Rs. 30,000 profit, Z gets Rs. 5,000. To reach Z's Rs. 8,000 guarantee, the Rs. 3,000 difference is paid by X (Rs. 1,800) and Y (Rs. 1,200) from their own shares.
Exam Tip: Showing working notes for deficiency distribution is essential for securing full marks in partnership accounts questions.

 

Question 32. Arun, Boby and Chintu are partners in a firm sharing profit in the ratio or 2:2:1. According to the terms of the partnership agreement, Chintu has to get a minimum of Rs. 60,000, irrespective of the profits of the firm. Any Deficiency to Chintu on Account of such guarantee shall be borne by Arun. Prepare the profit and loss appropriation account showing distribution of profits among partners in case the profits for year 2006 are: (i) Rs. 2,50,000; (ii) 3,60,000.
Answer:
The Profit and Loss Appropriation Accounts for both cases are as follows:
Case (i): When Profits are Rs. 2,50,000

Case (ii): When Profits are Rs. 3,60,000
In this case, the profit is shared in the ratio 2:2:1:
Arun's share = Rs. 3,60,000 * 2/5 = Rs. 1,44,000
Boby's share = Rs. 3,60,000 * 2/5 = Rs. 1,44,000
Chintu's share = Rs. 3,60,000 * 1/5 = Rs. 72,000
Since Chintu's share of Rs. 72,000 is greater than his guaranteed amount of Rs. 60,000, no adjustments are required. Each partner gets their normal share.
In simple words: When total profit is Rs. 2,50,000, Chintu's share is Rs. 50,000, so Arun pays the Rs. 10,000 deficiency to him. When total profit is Rs. 3,60,000, Chintu gets Rs. 72,000, which is already above his guarantee.
Exam Tip: If the guarantee is given by only one partner, do not charge the other partners for the deficiency; deduct the entire shortfall only from the guaranteeing partner's share.

 

Question 33. Ashok, Brijesh and Cheena are partners sharing profits and losses in the ratio of 2 : 2 : 1. Ashok and Brijesh have guaranteed that Cheena share in any year shall be less than Rs. 20,000. The net profit for the year ended March 31, 2006 amounted to Rs. 70,000. Prepare Profit and Loss Appropriation Account .
Answer:
The Profit and Loss Appropriation Account is shown below:

Working Note:
Ashok's Profit share = Rs. 70,000 * 2/5 = Rs. 28,000
Brijesh's Profit share = Rs. 70,000 * 2/5 = Rs. 28,000
Cheena's Profit share = Rs. 70,000 * 1/5 = Rs. 14,000
Cheena's deficiency = Rs. 20,000 - Rs. 14,000 = Rs. 6,000
This deficiency is borne by Ashok and Brijesh equally, so Rs. 3,000 each.
In simple words: Cheena gets Rs. 14,000 from the profit of Rs. 70,000. Since she is guaranteed Rs. 20,000, Ashok and Brijesh contribute Rs. 3,000 each from their profit shares.
Exam Tip: If no ratio for deficiency sharing is specified, assume that the guaranteeing partners bear it in their mutual profit-sharing ratio (which is 2:2, or 1:1 in this case).

 

Question 34. Ram, Mohan and Sohan are partners with capitals of Rs. 5,00,000, Rs. 2,50,000 and 2,00,000 respectively. After providing interest on capital @ 10% p.a. the profits are divisible as follows: Ram 1/2 , Mohan 1/3 and Sohan 1/6 . But Ram and Mohan have guaranteed that Sohan’s share in the profit shall not be less than Rs. 25,000, in any year. The net profit for the year ended March 31, 2007 is Rs. 2,00,000, before charging interest on capital. You are required to show distribution of profit
Answer:
The Profit and Loss Appropriation Account is prepared as follows:

Working Note:
Profit sharing ratio = 1/2 : 1/3 : 1/6 = 3:2:1
Interest on capital = Ram (Rs. 50,000), Mohan (Rs. 25,000), Sohan (Rs. 20,000)
Remaining divisible profit = Rs. 2,00,000 - Rs. 95,000 = Rs. 1,05,000
Initial profit distribution:
Ram = Rs. 52,500, Mohan = Rs. 35,000, Sohan = Rs. 17,500
Sohan's deficiency = Rs. 25,000 - Rs. 17,500 = Rs. 7,500
This is borne by Ram and Mohan in their ratio of 3:2:
Ram's share = Rs. 7,500 * 3/5 = Rs. 4,500
Mohan's share = Rs. 7,500 * 2/5 = Rs. 3,000
In simple words: First, interest on capital is paid to everyone. The remaining profit of Rs. 1,05,000 is divided. Sohan's share is Rs. 17,500, and the Rs. 7,500 shortfall to reach his guarantee is paid by Ram and Mohan.
Exam Tip: When calculating divisible profits, always subtract interest on capital from net profit first, then distribute the balance among partners.

 

Question 35. Amit, Babita and Sona form a partnership firm, sharing profits in the ratio of 3 : 2 : 1, subject to the following : (i) Sona’s share in the profits, guaranteed to be not less than Rs. 15,000 in any year. (ii) Babita gives guarantee to the effect that gross fee earned by her for the firm shall be equal to her average gross fee of the proceeding five years, when she was carrying on profession alone (which is Rs. 25,000). The net profit for the year ended March 31, 2007 is Rs. 75,000. The gross fee earned by Babita for the firm was Rs. 16,000. You are required to show Profit and Loss Appropriation Account (after giving effect to the alone).
Answer:
The Profit and Loss Appropriation Account is prepared as follows:

Working Note:
Total divisible profit = Rs. 75,000 + Rs. 9,000 = Rs. 84,000
Initial Profit Share:
Amit = Rs. 84,000 * 3/6 = Rs. 42,000
Babita = Rs. 84,000 * 2/6 = Rs. 28,000
Sona = Rs. 84,000 * 1/6 = Rs. 14,000
Sona's deficiency = Rs. 15,000 - Rs. 14,000 = Rs. 1,000
This is borne by Amit and Babita in their 3:2 ratio:
Amit's contribution = Rs. 1,000 * 3/5 = Rs. 600
Babita's contribution = Rs. 1,000 * 2/5 = Rs. 400
In simple words: Since Babita earned Rs. 9,000 less than her guaranteed fee, her capital is debited by Rs. 9,000, bringing the total profit to Rs. 84,000. Sona's Rs. 1,000 deficiency is then met by Amit and Babita.
Exam Tip: If a partner guarantees a certain amount of gross fee, any shortfall must be credited to the Profit and Loss Appropriation Account and debited to that partner's capital account first.

 

Question 36. The net profit of X, Y and Z for the year ended March 31, 2006 was Rs. 60,000 and the same was distributed among them in their agreed ratio of 3 : 1 : 1. It was subsequently discovered that the under mentioned transactions were not recorded in the books : (i) Interest on Capital @ 5% p.a. (ii) Interest on drawings amounting to X Rs. 700, Y Rs. 500 and Z Rs. 300. (iii) Partner’s Salary : X Rs. 1000, Y Rs. 1500 p.a. The capital accounts of partners were fixed as : X Rs. 1,00,000, Y Rs. 80,000 and Z Rs. 60,000. Record the adjustment entry.
Answer:
The correction is carried out through the following adjustment statement and journal entry:
Statement Showing Adjustment

Note: Dr represents a negative difference, while Cr represents a positive difference.
Journal Entry

In simple words: Since the partners have fixed capital accounts, the adjustments for interest, salary, and wrong profit distribution are passed through their Current Accounts.
Exam Tip: Under the Fixed Capital system, always use the Partner's Current Account for making past adjustments, never their Capital Account.

 

Question 37. The firm of Harry, Porter and Ali, who have been sharing profits in the ratio of 2 : 2 : 1, have existed for same 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 were for the last three year. Harry and Porter have agreement on this account. The profits for the last three years were: (Rs.) 2003-04 22,000; 2004-05 24,000; 2005-06 29,000. Show adjustment of profits by means of a single adjustment journal entry.
Answer:
The retrospective adjustment is shown below:
Total profits of the last three years = Rs. 22,000 + Rs. 24,000 + Rs. 29,000 = Rs. 75,000.
Adjustment Table

Note: A negative balance indicates a debit.
Journal Entry

In simple words: To change the profit-sharing ratio to equal terms retrospectively for three years, Harry and Porter return Rs. 5,000 each, which is credited to Ali.
Exam Tip: When adjusting past profits, sum up the profits of all the affected years first, then compare the total division under both old and new ratios.

 

Question 38. Mannu and Shristhi are partners in a firm sharing profit in the ratio of 3 : 2. Following is the balance sheet of the firm as on March 31, 2006.

Profit for the year ended March 31, 2006 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 enquired. Adjust interest on drawings on an average basis for 6 months. Give the adjustment entry
Answer:
The required adjustments are performed using the opening capitals:
Calculation of Opening Capital

Note: Since drawings are shown directly on the asset side of the Balance Sheet, they were not deducted from the capital accounts. Therefore, they are not added back when calculating the opening capital.

Adjustment of Profits Table

Journal Entry

In simple words: Since interest on capital and drawings were omitted, we first find the opening capital, calculate the correct interests, re-divide the adjusted profits, and settle the differences with a journal entry.
Exam Tip: Always pay attention to whether drawings appear inside the Balance Sheet. If they do, they must not be added to closing capital to find opening capital.

 

Question 39. On March 31, 2006 the balance in the capital accounts of Eluin, Monu and Ahmed, after making adjustments for profits, drawing, etc; were Rs. 80,000, Rs. 60,000 and Rs. 40,000 respectively. Subsequently, it was discovered that interest on capital and interest on drawings had been omitted. The partners were entitled to interest on capital @ 5% p.a. The drawings during the year were Eluin Rs. 20,000; Monu, Rs. 15,000 and Ahmed, Rs. 9,000. Interest on drawings chargeable to partners were Eluin Rs, 500, Monu Rs. 360 and Ahmed Rs. 200. The net profit during the year amounted to Rs. 1,20,000
Answer:
The required adjustments are calculated below starting with the opening capitals:
Calculation of Opening Capital

Statement for Adjustment

Note: Dr represents a debit balance.
Journal Entry

In simple words: Since closing capitals were given, we first calculated the opening capitals by adding back drawings and deducting distributed profits. Then we calculated the accurate interest amounts and recorded the correction.
Exam Tip: Interest on capital is always calculated on the opening balance of capital. If closing balances are given, find the opening capital first.

 

Question 40. Azad and Benny are equal partners. Their capitals are Rs. 40,000 and Rs. 80,000, respectively. After the accounts for the year have been prepared it is discovered that interest at 5% p.a. as provided in the partnership agreement, has not been credited to the capital accounts before distribution of profits. It is decided to make an adjustment entry at the beginning of the next year. Record the necessary journal entry.
Answer:
The past adjustment table and journal entry are shown below:
Interest on capital @ 5%:
Azad = Rs. 40,000 * 5% = Rs. 2,000
Benny = Rs. 80,000 * 5% = Rs. 4,000
Total Interest to be allowed = Rs. 6,000.
Since profits were distributed equally without charging interest, the Rs. 6,000 was shared equally (Rs. 3,000 each) as profit.
Statement for Adjustment

Journal Entry

In simple words: Azad was credited Rs. 1,000 too much, and Benny was credited Rs. 1,000 too little, because interest on capital was not given before profits were shared. This is fixed by debiting Azad's account and crediting Benny's.
Exam Tip: If interest on capital is omitted, calculate the total omitted interest, write off this amount in the profit-sharing ratio, and compare it with the interest to be credited.

 

Question 41. Kavita and Pradeep are partners, sharing profits in the ratio of 3 : 2. They employed Chandan as their manager, to whom they paid a salary of Rs. 750 p.m. Chandan deposited Rs. 20,000 on which interest is payable @ 9% p.a. At the end of 2001 (after the division of profit), it was decided that Chandan should be treated as partner w.e.f. Jan. 1., 1998 with 1/6 th share in profits. His deposit being considered as capital carrying interest @ 6% p.a. like capital of other partners. Firm’s profits after allowing interest on capital were as follows: 2001 Profit 59,000; 2002 Profit 62,000; 2003 Loss (4,000); 2004 Profit 78,000. Record the necessary journal entries to give effect to the above
Answer:
The calculation for retroactively converting Chandan from manager to partner for the 4-year period (1998-2001) is shown below:
1. Amount received by Chandan as a Manager:
(i) Salary = Rs. 750 * 12 * 4 years = Rs. 36,000
(ii) Interest on Loan = Rs. 20,000 * 9% * 4 years = Rs. 7,200
Total amount received as manager = Rs. 43,200

2. Amount due to Chandan as a Partner:
Total profit of the firm (after partner interest) = Rs. 59,000 + Rs. 62,000 - Rs. 4,000 + Rs. 78,000 = Rs. 1,95,000
Add: Manager's Salary = Rs. 36,000
Add: Excess interest previously paid on loan (9% - 6% = 3% on Rs. 20,000) for 4 years = Rs. 2,400
Total divisible profit before Chandan's share = Rs. 2,33,400
Chandan's share of profit (1/6) = Rs. 2,33,400 * 1/6 = Rs. 38,900
Add: Interest on capital (6% of Rs. 20,000 for 4 years) = Rs. 4,800
Total amount payable as partner = Rs. 43,700
Deficiency to be borne by Kavita and Pradeep = Rs. 43,700 - Rs. 43,200 = Rs. 500
This is shared in their ratio of 3:2:
Kavita's share = Rs. 500 * 3/5 = Rs. 300
Pradeep's share = Rs. 500 * 2/5 = Rs. 200

Journal Entry

In simple words: When Chandan is retroactively treated as a partner, he is entitled to Rs. 500 more than what he received as a manager. Kavita and Pradeep pay this Rs. 500 in their 3:2 sharing ratio.
Exam Tip: When converting a manager into a partner retroactively, remember to add back the manager's salary and interest on loan to the firm's profits to calculate the revised divisible profits.

 

Question 42. Mohan, Vijay and Anil are partners, the balance on their capital accounts being Rs. 30,000, Rs. 25,000 and Rs. 20,000 respectively. In arriving at these figures, the profits for the year ended March 31, 2007 amounting to Rupees 24,000 had been credited to partners in the proportion in which they shared profits. During the tear their drawings for Mohan, Vijay and Anil were Rs. 5,000, Rs. 4,000 and Rs. 3,000, respectively. Subsequently, the following omissions were noticed: (a) Interest on Capital, at the rate of 10% p.a., was not charged. (b) Interest on Drawings: Mohan Rs. 250, Vijay Rs. 200, Anil Rs. 150 was not recorded in the books. Record necessary corrections through journal entries.
Answer:
The opening capitals are first calculated as follows:
Calculation of Opening Capital

Interest on capital @ 10% = Mohan (Rs. 2,700), Vijay (Rs. 2,100), Anil (Rs. 1,500).
Statement for Adjustment

Journal Entry

In simple words: The closing capitals are first adjusted to find the opening capitals. After correcting the interest calculations, Anil's capital account is debited by Rs. 550 and Mohan's is credited by Rs. 550.
Exam Tip: Remember to subtract interest on drawings from the total profit before distributing the final remaining divisible profits among partners.

 

Question 43. Anju, Manju and Mamta are partners whose fixed capitals were Rs. 10,000, Rs. 8,000 and Rs. 6,000, respectively. As per the partnership agreement, there is a provision for allowing interest on capitals @ 5% p.a. but entries for the same have not been made for the last three years. The profit sharing ratio during there years remained as follows: Year Anju Manju Mamta; 2004 4:3:5; 2005 3:2:1; 2006 1:1:1. Make necessary and adjustment entry at the beginning of the fourth year i.e. Jan. 2007.
Answer:
The omitted interest on fixed capital is adjusted as follows:
Interest on capital for 1 year:
Anju = Rs. 10,000 * 5% = Rs. 500
Manju = Rs. 8,000 * 5% = Rs. 400
Mamta = Rs. 6,000 * 5% = Rs. 300
Total interest for one year = Rs. 1,200.
Over three years, the total omitted interest equals Rs. 3,600 (Rs. 1,200 per year).
Adjustment Table

Journal Entry

In simple words: Interest on capital is calculated year-by-year and compared to how the same money was distributed as profit in different ratios each year. Mamta is debited by Rs. 200, and Anju and Manju are credited by Rs. 100 each.
Exam Tip: When the profit-sharing ratios are different for each year, do the profit distribution step separately for each year before compiling the final totals.

 

Question 44. Dinker and Ravinder were partners sharing profits and losses in the ratio of 2:1. The following balances were extracted from the books of account, for the year ended December 31, 2005.

Prepare final accounts for the year ended December 31, 2005, with following adjustment:
(a) Stock on December 31, 2005, was Rs. 42,500.
(b) A Provision is to be made for bad debts at 5% on debtors.
(c) Rent outstanding was Rs. 1,600.
(d) Wages outstanding were Rs. 1,200.
(e) Interest on capital to be allowed on capital @ 4% per annum and interest on drawings to be charged @ 6% per annum.
(f) Dinker and Ravinder are entitled to a Salary of Rs. 2,000 per annum.
(g) Ravinder is entitled to a commission Rs. 1,500.
(h) Depreciation is to be charged on Building @ 4%, Plant and Machinery, 6%, and furniture and fixture, 5%.
(i) Outstanding interest on loan amounted to Rs. 350.
Answer:
The financial statements for the year ended December 31, 2005 are prepared as follows:
Trading Account

Profit and Loss Account

In simple words: First we prepare the Trading Account to determine the Gross Profit of Rs. 81,500. This is transferred to the Profit and Loss Account, where all remaining expenditures and adjustments are accounted for to get a Net Profit of Rs. 32,200.
Exam Tip: Be sure to calculate depreciation and outstanding adjustments on the respective trial balance items carefully before posting them in the final Profit and Loss Account.