CPT Fundamentals of Accounting:

Chapter 8 Unit 1
CA. V.K. Jain
Features of a partnership firm and need of partnership deed

Points to be covered in a partnership deed

Technique of maintaining P & L Appropriation Account

Methods of maintaining partners capital accounts, namely fixed and fluctuating

Partners capital and current accounts

Treatment of Interest on Capital and Drawings, Salaries / Commission / Bonus /

Remuneration etc. to partners
Indian partnership act the relationship between persons who have agreed to
share the profits of a business carried on by all or any of them acting for all

Essential features:

Association of two or more persons

Agreement - verbal/oral or in writing

Existence of business legal- recognition in the eyes of law

Carrying of business by all of them or any of them acting for all

Sharing of profits

Unlimited liability

Sharing of profits not necessarily losses

Mutual agreement

Relationship - principal and agent

Persons entered into partnership with one another are
individually called partners and collectively a firm

Name under which business of the firm is carried on is

called firm name

Maximum limit of partners:

Indian Partnership Act 1932 is silent on this issue

According to Companies Act 1956, maximum limit of partners for a
Banking Company is 10 and of other is 20. A partnership firm
becomes illegal if number of partners exceeds the said limit
Document contains terms and conditions as agreed among the partners

Relationship of partners is governed by mutual agreement. Agreement may be oral

or in writing.

Partnership deed is not compulsory .

When agreement is in writing, it is known as partnership deed .

It should be properly stamped, registered and comprehensive in detail so as to

avoid disputes later on.

If deed contains a clause, it will hold good, otherwise provisions of Indian Partnership
Act 1932 will be applicable
Name of the firm

Name and address of all partners

Nature and place of business

Duration of partnership

Date of commencement of partnership

Capital to be contributed by each partner

Drawings, timings of drawings etc.

Interest on capital, drawings and loans by partners

Profit / loss sharing ratio

Salary / remuneration / bonus etc. to partner

Method of valuation of goodwill

Procedure of retirement and method of settlement of accounts

Treatment of losses due to insolvency of a partner

Procedure of settlement of disputes

Preparation of accounts and their audit

Note : deed must not contain any term which is in contravention with the provisions of
Indian Partnership Act

Terms laid down in deed may be varied with the consent of all partners
Indian Partnership Act 1932 applies which provides -

No salary to any partner

No interest on capital

No interest on drawings

Interest on loan by partner to the firm @ 6% p.a.

Profit / loss sharing ratio will be equal

No new partner can be admitted without the consent of all the partners
In the absence of an agreement to the contrary interest on partners
capital and salary to partners can be paid only out of profits i.e., it is an
appropriation of profits.

If no profits are there then no salary or interest on capital can be allowed to

partners.

In case of inadequacy of profits first calculate salary and interest on capital

as usual and then distribute profits in this ratio.
Buying and selling of goods

Receiving payments on behalf of the firm and give a valid receipt

Drawing cheques , and drawing ,accepting and endorsing Bills of

Exchange and Promissory Notes in the name of the firm

Borrowing money with or without pledging stock-in-trade

Engaging servants for business

Submitting a dispute to arbitration

Opening a bank account on behalf of the firm in own name

Compromise or relinquish any claim by the firm

Withdrawal of a suit or proceeding filed on behalf of firm

Admit any liability in a suit or proceedings against the firm

Acquisition of immovable property belonging to the firm

Entering into partnership on behalf of the firm

Registration of firm is optional and not compulsory

If firm is not registered no suit can be filed by firm or partners but a third party
can file a suit against unregistered firm or its partners

With the consent of all partners a minor may be admitted to the benefits of
partnership

A person may be admitted or retired as a partner with the consent of all (including
himself) or in accordance with an express agreement among the partners

A firm is dissolved on the death of a partner unless otherwise agreed

Not much difference between partnership firm and proprietorship
accounts.

Instead of one capital account there will be as many as there are

partners.

The partners capital accounts may be maintained in two ways:

Fixed capital method and

Fluctuating capital method

Two accounts i.e;

Capital and current account for each partner

Transactions relating to introduction or withdrawal of capital are recorded in

capital account

Other transactions like interest on capital, drawings, salary, commission, share

of profits / loss and other adjustments are recorded in current account

Capital account will always have credit balance

To Cash / bank By Balance b/f
(withdrawal of capital)
To Balance c/f By Cash / Bank
(additional capital)
Only one account viz. capital account for each partner

All transactions relating to partner are recorded in his

capital account.

As a result balance keeps on fluctuating

particulars Amount particulars Amount
To Balance b/f By Balance b/f
To Bank (drawings) By Interest on capital
To Interest on drawings By Salary / Commission
To Profit & loss a/c By Profit & loss a/c
(share of loss) (share of profit)
To Balance c/f By Bbalance c/f
Basis of distinction Fixed capital method Fluctuating capital
method

Change in capital Normally unchanged Fluctuates quite

except under special frequently from period to
circumstances period
No. of accounts Two fixed capital and Only one
maintained current accounts Capital account

Adjustments for drawings, In current account In capital account

interest on drawings,
interest on capital, salary,
share of profit / loss
Can capital have negative never Can have
balance
Interest on capital and salary / bonus / commission / remuneration to partner is
an appropriation of profit.

It means it can not be provided in the absence of profits or unless there is

an express agreement in partnership deed for that

It is merely an extension of Profit & Loss A/c

It is credited with net profit and interest on drawings

It is debited with interest on capital, salary / bonus / commission /

remuneration to partner

Balance is transferred to Capital or Current accounts as the case may be in profit

sharing ratio
On allowing Interest on Capital:
Interest on Capital a/c Dr
To Partners Capital / Current A/c
On closure of Interest on Capital A/c:
Profit & Loss Appropriation Dr
To Interest on Capital A/c
On charging Interest on Drawings:
Partners Capital / Current A/c Dr
To Interest on Drawings A/c
On closure of Interest on Drawings A/c
Interest on Drawings A/c Dr
To Profit & Loss Appropriation A/c
On allowing Salary / Commission To Partner:
Salary / Commission to Partner A/c Dr
To Partners Capital / Current a/c
On closure of Salary / Commission to Partner A/c
Profit & Loss Appropriation Dr
To Salary / Commission to Partner A/c
For transfer to Reserves :
Profit & Loss Appropriation A/c Dr
To Reserve
For transfer of credit balance (being profit):
Profit & Loss Appropriation A/c Dr
To Partners Capital / Current A/c
(individually in profit sharing ratio)

For transfer of debit balance (being loss):

Partners Capital / Current A/c Dr
To Profit & Loss Appropriation
(individually in loss sharing ratio)
particulars amount particulars amount
To interest on capital By Profit & loss a/c
(net profit subject to
appropriation)
To Salary / Commission to By Interest on Drawings
partner

To Reserve

To Profit transferred to : By Loss transferred to :

(Individual Capital/Current (Individual capital/current
a/c) a/c)
It means to assurance to give a minimum amount of
profit to a partner.

If actual share of profit of a guaranteed partner is less

than the guaranteed amount , then deficiency is borne
by the guaranteeing partners in their agreed ratio
Calculate actual share of profit / loss of guaranteed partner

Calculate amount of deficiency as follows:

Deficiency = guaranteed amount actual share of profit or

Or

Guaranteed amount + actual share of loss

Distribute deficiency among guaranteeing partners in their guaranteeing ratio

Distribute actual profit / loss among all partners in their profit sharing ratio as if there is no guarantee
agreement

Recover share of deficiency from the guaranteeing partners and give credit for the same to guaranteed partner
 A , B are partners and sharing profits and losses in the ratio of 2:1. they
admit C with share with guaranteed share of 25,000. Profits for the year
amounted to Rs 76,000. Prepare profit & loss appropriation a/c
Calculation of new ratio

Cs share .

Remaining profit 1 - = to be divided between A and B in the ratio of 2 : 1 as under

As new share x 2/3 = 2/4 = 1/2

Bs new share x 1/3 = 1/4

C s actual share of profit of 76,000 = 19,000

Deficiency = guaranteed amount 25,000 19,000 = 6,000

Deficiency to be borne by A and B in the ratio of 2:1 i.e;

By A 2/3 of 6,000 = 4,000 and

By B 1/3 of 6,000 = 2,000

To As capital 34,000 By profit & loss a/c 76,000
1/2 of 76,000 38,000
Less deficiency
(2/3 of 6,000) 4,000
To Bs capital 17,000
1/4 of 76,000 19,000
Less deficiency
(2/3 of 6,000) 2,000
To Cs capital 25,000
0f 76,000
19,000
Add deficiency
recovered from
A 4,000
B 2,000
6,000
76,000 76,000
Interest on capital at the beginning or on additions on it. Expense to the business.

If capital at the end is given-adjustments are made by preparing capital a/c.

For calculation of interest simple periodical method or product method (amount

multiplied by days and get the product and interest on one day on total of products).

Interest on drawings - same as above. Income to the business

If details (dates) of drawings are not given the it is assumed to be evenly spread
over throughout the year i.e; considered for 6 months only.
 Mr X is a partner of a firm. He withdraws Rs. 2,000 at the beginning
of every month. The rate of interest is 10% p.a. and the books are
closed on 31 st march . Calculate the amount of interest on drawings.

Calculation of Interest on drawings will be :

Total drawings during the year 2,000 x 12 = 24,000

Since withdrawals are on first day of every month , total interest will be
calculated for 6.5 months

( 12 + 1)/2 = 6.5

10/100 X 24,000 X 6.5 / 12 = 1,300

Mr X is a partner of a firm. He withdraws Rs. 2,000 at the end of every month. The rate of interest is
10% p.a. and the books are closed on 31 st march. Calculate the amount of interest on drawings.

Calculation of Interest on drawings will be:

Total drawings during the year 2,000 x 12 = 24,000

Since withdrawals are on first day of every month, total interest will be calculated for
5.5 months

( 11 + 0)/2 = 5.5

10/100 X 24,000 X 5.5 / 12 = 1,100

 Mr X is a partner of a firm. He withdraws Rs. 2,000 at the middle of
every month. The rate of interest is 10% p.a. and the books are
closed on 31 st march. Calculate the amount of interest on drawings.

Calculation of Interest on drawings will be:

Total drawings during the year 2,000 x 12 = 24,000

Since withdrawals are at the middle of every month, total interest will be calculated for 6
months

( 11.5 + 0.5)/2 = 6

10/100 X 24,000 X 6 / 12 = 1,200

If withdrawals are at starting, end or middle of each monthly and
amount is same then interest can be calculated by short cut method.

Simple average of remaining period from starting and end

If at 1 st day of each month -on total amount for 6.5 months (12 + 1) / 2

If at last day of each month on total amount for 5.5.months (11 + 0) / 2

If at middle of each month-on total amount for 6 months (11.5 + .5) / 2

spread over is considered to be equal
Commission to partners on net profits

% on net profit before charging commission -

(% commission multiplied by profit before commission) / 100

% on net profits after charging commission - it means commission to be

calculated on net profits and profits will be calculated after commission

(% com. multiplied by profit before commission / % +100)

Profit before charging commission

105

Profit after charging Commission 5

commission
105 5 = 100
If some error or omission after closing of accounts i.e.;
Interest on capital / drawings
Change in profit sharing ratio
Salary / commission / remuneration to partner or
Any other adjustments
Are to made through adjustment entries which are to passed through
partners capital / current accounts , because their effect had already
been considered in capital accounts of earlier period.
What ought to be / should have been done
What has been done
Compare the two
Excess / short to be adjusted through capital / current accounts only
 Particulars X Y Total
A . Amount already recorded:
Interest on capital
Interest on drawings
Salary / Commission
Share of Profit
B. Amount which should have been recorded:
Interest on Capital
Interest on Drawings
Salary / Commission
Share of Profit

Single Adjustment Entry

Gaining Partners Capital Dr
To Sacrificing Partners Capital A/C
Question Time
(a) The Partnership Act 1932

(b) The Partnership Act 1930

( c) The Indian Partnership Act 1930

(d) The Indian Partnership Act 1932

Right Answer : D
(a) Only with a written agreement

(b) Only with an oral agreement

( c) Only with an express agreement

(d) None of the above

Right Answer : D
(a) For carrying on a business

(b) For carrying on a profession

( c) For carrying on charitable activities

(d) None of the above

Right Answer : C
(a) The partners

(b) The business under which the firm carries on business

( c) The collective name under which the firm carries on

business

(d) All of the above

Right Answer : C
(a) The Partnership Act

(b) The Societies Registration Act

( c) The Companies Act

(d) All of the above

Right Answer : C
(a) The number of partners in a non-banking business
exceeds 10

(b) The number of partners in a banking business

exceeds 10

( c) The number of partners in a banking business

exceeds 20

(d) The number of partners in a non-banking business

exceeds 20

Right Answer : A
(a) 20

(b) 10

( c) 15

(d) No limit

Right Answer : B
(a) 20

(b) 10

( c) 15

(d) No limit

Right Answer : A
(a) Has no legal existence

(b) Has a legal existence of its own

( c) Does not have a legal existence , apart from its

members

(d) None of the above

Right Answer : C
(a) A partnership has a separate legal entity apart from its members

(b) Two firms can form a new partnership

( c) The partners of individual firm can form a partnership

(d) None of the above

Right Answer : C
(a) A member of a company can enter into a contract with the
company

(b) A partner of a firm can not enter into a contract with the
partnership firm

( c) A partner of a firm can enter into a contract with the

partnership firm

(d) None of the above

Right Answer : B
(a) Majority of the partners

(b) All the senior partners

( c) All the partners

(d) One of the partners

Right Answer : C
(a) Majority of the partners

(b) All the senior partners

( c) All the partners

(d) One of the partners

Right Answer : C
(a) It must be done at the time if its formation

(b) It may be done at the time of its formation

( c) It may be done before filing a suit against the third party

(d) It may be done at any time after its formation

Right Answer : A
(a) A partner can file a suit against the firm

(b) A partner can file a suit against any partner of the

firm

( c) The firm can file a suit against third party

(d) Third party can file a suit against the firm

Right Answer : D
(a) Which does not have any deed

(b) Which does not provide for how long the business will
continue

( c) Which does not have any partner

(d) Which cannot be dissolved

Right Answer : B
(a) Active partner

(b) Dormant partner

( c) Partner by Estoppel

(d) Partner by stoppage

Right Answer : C
(a) Majority of partners

(b) All working partners

( c) All senior partners

(d) All the partners

Right Answer : D
(a) In the ratio of their capital

(b) In the ratio of time spent by them

( c) Equally

(d) Any of the above

Right Answer : C
(a) 6% per annum provided only out of profits

(b) 8% per annum provided only out of profits

( c) At any rate provided only out of profits

(d) None of the above

Right Answer : C
(a) Only agent of the firm

(b) Only Representative of the firm

( c) Principal as well as Agent of the firm

(d) Only Co-Partners of the firm

Right Answer : C
(a) Jointly liable to third parties

(b) Severally liable to third parties

( c) Jointly and Severally liable to third parties

(d) None of the above

Right Answer : C
(a) The liability of a partner of a firm is unlimited

(b) Generally liability of a member of a company is limited

( c) Both of the above

(d) None of the above

Right Answer : C
(a) Agent

(b) Employee

( c) Third party

(d) None of the above

Right Answer : A
(a) Will be allowed @ 6% p.a.

(b) Will be allowed only out of profits

( c) Both of the above

(d) Will not be allowed

Right Answer : D
(a) Interest on partners capital

(b) Remuneration to partners for services provided by him

( c) Interest on partner s loan

(d) Interest on partners drawings

Right Answer : C
(a) 6 months

(b) 5.5 months

( c) 6.5 months

(d) Any of the above

Right Answer : C
(a) 6 months

(b) 6.5 months

( c) 5.5 months

(d) Any of the above

Right Answer : C
(a) 5.5 months

(b) 6.5 months

( c) 6 months

(d) Any of the above

Right Answer : C
(a) 5.5 months

(b) 6.5 months

( c) 6 months

(d) Any of the above

Right Answer : C
(a) Salary / Commission to a partner

(b) Salary / Commission to a manager

( c) Interest on loan to a partner

(d) All of the above

Right Answer : A
(a) Salary / Commission to a partner

(b) Salary / Commission to a manager

( c) Interest on Capital to a partner

(d) All of the above

Right Answer : B
(a) An Opening entry

(b) An Adjustment entry

( c) A Closing entry

(d) A Transfer entry

Right Answer : B
(a) 6% simple interest

(b) Any amount of interest

( c) 6% simple interest p.a.

(d) Any of the above

Right Answer : C
(a) Debit side of P & L Appropriation A/c

(b) Credit side of P & L Appropriation A/c

( c) Debit side of P & L A/c

(d) Credit side of P & L A/c

Right Answer : B
(a) Debit balance

(b) Credit balance

( c) Either (a) or (b)

(d) None of the above

Right Answer : C
(a) Yes

(b) No

( c) Either (a) or (b)

(d) None of the above

Right Answer : B
(a) By transfer to credit side of capital account

(b) By transfer to credit side of current account

( c) Either (a) or (b)

(d) By transfer to capital or current account

Right Answer : D
(a) Partnership firm

(b) All the other partners of the firm

( c) Partners who gave the guarantee

(d) Any of the above

Right Answer : C
(a) At least two partners

(b) Equal share of profits and losses

( c) There is an agreement between all the partners

(d) Partnership agreement is for some legal

business

Right Answer : B
(a) Trading account

(b) Profit & loss account

( c) Balance Sheet

(d) Partners' current account

Right Answer : D
(a) Interest on loans and advances

(b) Salary / Bonus / Commission

( c) Profit share in capital ratio

(d) All of the above

Right Answer : A
(a) Accumulated profits

(b) Goodwill

( c)Reserves

(d) Current profits

Right Answer : D
(a) As per agreement

(b) In capital ratio

( c) Equally

(d) None of the above

Right Answer : C
(a) Proprietorship firm

(b) Partnership firm

( c) Both (a) and (b)

(d) None of the above

Right Answer : B
(a) 4,680 and 3,120

(b) 5,000 and 2,800

( c) 4,000 and 3,000

(d) None of the above

Right Answer :A
(a) 78,000

(b) 88,000

( c) 87,000

(d) 76,000

Right Answer :A
(a) Capital in the beginning of the year

(b) Capital at the end of the year

( c) capital at the end of the year less drawings

,if any

(d) average capital

Right Answer : A
(a) Partners Capital account

(b) Partners Current account

( c) Interest account

(d) Profit & Loss Appropriation account

Right Answer : C
Thank You

CA V.K.JAIN