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CHAPTER 2
Quick Revision Notes ACCOUNTING FOR PARTNERSHIP FIRMS: DISTRIBUTION OF PROFITS Rules Applicable in the Absence of Partnership Deed In the absence of partnership deed, the relevant provisions of the Indian Partnership Act, 1932 shall become applicable which are as follows: (i) The partners shall share firms profits or losses equally (ii) If any partner has given some loan to the firm, he is entitled to take interest on such loan @ 6 % p.a. (iii) No interest is allowed to partners on the capital invested by them. (iv) No interest will be charged on drawings made by the partners. (v) No partner is entitled to get remuneration such as salary, commission etc. for participating in the business of the firm. Main journal Entries for preparing Profit & Loss Appropriation Account For preparing the Profit & Loss Appropriation Account, the following journal entries have to be passed for various items: (a) Transfer the balance of P/L A/C to P/L Appropriation A/c : (i) If Profit and Loss A/c shows a credit balance (or net profit) : Profit & Loss A/c To Profit & Loss Appropriation A/c (ii) If Profit and Loss A/c shows a debit balance (or net loss) : Profit & Loss Appropriation A/c To Profit & Loss A/c (b) For interest on capital : (i) (ii) Interest on Capital A/c To Partners Capital/Current A/c s (Individually) Profit & Loss Appropriation A/c To Interest on Capital A/c (c) For partners remuneration : (i) (ii) Partners Salary/Commission/Bonus A/c To Partners Capital/Current A/c s (Individually) Profit & Loss Appropriation A/c To Partners Salary/Commission/Bonus A/c (d) For interest on drawings : (i) (ii) Partners Capital/Current A/c s (Individually) To Interest on Drawings A/c Interest on Drawings A/c To Profit & Loss Appropriation A/c Dr. Dr. Dr. Dr. Dr. Dr. Dr. Dr. Dr.

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(e) For transfer to reserve : Profit & Loss Appropriation To Reserve A/c (f) For transfer of partners share of profit or loss after appropriations : (i) If divisible profit (credit side is bigger) : Profit & Loss Appropriation A/c To Partners Capital/Current A/cs (Individually) OR (ii) If divisible loss(debit side is bigger) : Partners Capital/Current A/cs (Individually) To Profit & Loss Appropriation A/c Format of Profit & Loss Appropriation A/c Profit & Loss Appropriation A/c Dr. Particulars To Interest on Partners Capital A/c To Partners Salary A/c To Partners Commission A/c To Reserve A/c To Partners Capital or Current A/cs : (Divisible Profit) for the year ended Rs. . .. Particulars By Profit & Loss A/c (Net Profit) By Interest on Drawings A/c Rs. . .. Cr. Dr. Dr. Dr.

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By Partners Capital or Current A/ cs : (Divisible Loss)

Note: (i)

Divisible profit transferred to Partners Capital Account in case of Fluctuating Capital method.

(ii) Divisible profit transferred to Partners Current Account in case of Fixed Capital method. Format of Fixed Capital Account Dr. Particulars To Cash/Bank A/c (if permanent withdrawal of capital) To Balance c/d (Closing Balance) (Difference between the two sides) Total . Partners Capital A/c Rs. .. .. Particulars By Cash/Bank A/c (If capital is contributed initially), or By Balance b/d (If there is old credit balance of capital a/c) By Cash/Bank A/c Total . Rs. . Cr.

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Dr. Particulars To Balance b/d (In case of debit balance) To Drawings A/c To Interest on Drawings A/c To Profit & Loss Appropriation A/c (Share of Loss) To Balance c/d (Closing Balance) (Difference between the two sides) Total

Partners Current A/c Rs. . . . .. .. Particulars By Balance b/d (In case of credit balance) By Interest on Capital A/c By Salary A/c By Commission/Bonus A/c By Profit & Loss Appropriation A/c(Share of Profit) Rs.

Cr.

. .. . . ..

.. Partners Capital A/c Rs. . . . .. .. .. Particulars

Total

.. Cr. Rs. . . . .. .. ..

Format of Fluctuating Capital Account Dr. Particulars To Balance b/d (In case of debit balance) To Drawings A/c To Interest on Drawings A/c To Profit & Loss Appropriation A/c (Share of Loss) To Cash A/c To Balance c/d (Closing Balance) (Difference between the two sides) Total (i)

By Cash A/c Balance b/d (In case of credit balance) By Interest on Capital A/c By Salary A/c By Commission/Bonus A/c By Profit & Loss Appropriation A/c(Share of Profit)

..

Total

..

Commission on Net Divisible Profits payable to Manager/Partner On net/divisible profits before charging such commission will be calculated as follows : Commission = Net/Divisible Profit x Rate/100 (ii) On net/divisible profits after charging such commission will be calculated as follows : Commission = Net/Divisible Profit x Rate/100+Rate Calculation of Interest on Drawings 1. When dates of drawings are not given : (i) Average period method : Interest on Drawings = Total Drawings x Rate /100x 6/12 (ii) Average rate of interest method or when drawings are made irrespective of time period : Formula

Formula

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Interest on Drawings = Total Drawings x Average Rate 100 2. When dates of drawings are given : (i) Product method : Interest = Total of Product x Rate x 1/365 or 1/12 100 (ii) Monthly/quarterly drawings method : Average Time Period= Time period of Ist Drawing + Time period of Last Drawing 2 OR Average Time period =(Months left after first drawing + Months left after last drawing)/2 Points to be Remember 1. Interest on Partners Loan When a partner provides a loan to a firm, it is credited to his loan A/c and not included in his Capital A/c. A partner is entitled to interest on loan whether the firm has earned profit or not. Interest on partners loan being a charge against the profits, is transferred to the debit of the Profit & loss A/c and not to the debit of the Profit & Loss Appropriation A/c. Past Adjustments - At the time of preparation of final A/cs , it is found that few omissions or error have occurred. These may be in respect of interest on capital, interest on drawings, partners salary, distribution of profits among partners etc. These errors can be corrected by passing a single adjustment entry through partners capital A/c. In order to make an adjusting entry following steps should be taken into consideration: i. ii. iii. iv. v. vi. Prepare a correct Profit & Loss Appropriation A/c. Now calculated amount credited to each partner by adding his share of interest on capital, salary, profit and subtracting interest on drawings. Calculate total of amount to be credited of each partners capital or current A/c. Divide the profit among the partners in their profit sharing ratio. Now find out the balance of each partner separately(Debit or Credit). Pass journal entry. Formula

Formula

2.