CA.

Naresh Aggarwal’s
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(i) Put the printed paper backof ACCOUNTS
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 CA. Naresh Aggarwal’s
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Accounting • Costing • Taxation • Financial Management
West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org

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 CA. Naresh Aggarwal’s
ACADEMY of ACCOUNTS
Accounting • Costing • Taxation • Financial Management
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Class XII

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Partnership
https://www.youtube.com/CaNareshAggarwal

CA. Naresh Aggarwal’s

ACADEMY of ACCOUNTS
Accounting • Costing • Taxation • Financial Management
West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
 Practice in Accountancy 41

Q-10: If the Partners capital Accounts are fixed, where will you record the following:
(a) Salary payableCA.to a Naresh
partner. Aggarwal’s
Assignment - 1 ACADEMY of ACCOUNTS
(b) Drawings made by a partner.
(c) Fresh capital introduced by a partner.
Accounting Costing
(d) Share of•profit earned •byTaxation
a partner. • Financial Management
West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
Q-11: List any two circumstances under which the fixed capital of partners may
change.

Q-12: Give two items appearing on the credit side of partners’ capital accounts
when capitals are fixed.

Q-13: List the items that may appear on the debit side of a partner’s fixed capital
account.

Q-14: List any two items appearing on the debit side of a partner’s current account.

Q-15: List any two items appearing on the credit side of a partner’s current account.

AoA
Q-16: List any three items appearing on the credit side of a partner’s capital account,
when capitals are fluctuating.
Watch us on Q-17: List any three items appearing on the debit side of a partner’s capital account,
when capitals are fluctuating.

https://www.youtube.com/CaNareshAggarwal * Very Important Questions

••••••••••••••••••••••

Price: 40/-
40 Fundamentals of Partnership

salary. Prepare the Appropriation Account showing the division of the profits of the
CA. Naresh Aggarwal’s
year. Contents
[Share of Profit: A- Rs.21,500, B- Rs.16,000, C- Rs.12,500]

ACADEMY of ACCOUNTS
Preparation of Profit and Loss Appropriation Account
Q-75: X, Y and Z are partners in a firm. X and Y sharing profits in the ratio of 5 : 3  Accounting Costing
Preparation of•Profit & Loss Taxation • A/c
• Appropriation Financial Management
and Partners Capital A/cs
and Z receiving a salary of Rs.12,000 p.a. plus a commission of 5% on the profits  Calculation of Interest on Drawings

West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
Calculation of Interest on Capital and Capital Ratios
aftercharging such salary and com m ission or 1/5th of the profits of the firm, whichever
 Adjustment Entry
is larger. Any excess of the later over the former is, under the partnership agreement,  Guarantee in Partnership
to be borne personally by X.  Theoretical Questions
The profits for the year ended 31.03.2012 amounted to Rs.84,000 after charging
Z’s salary. Prepare the Appropriation Account showing the division of the profits of
the year. What is Partnership ?
[Share of Profit: X- Rs.46,800, Y- Rs.30,000, Z- Rs.19,200] Partnership is the relation between persons who have agreed to share profits of a
business carried on by all or any of them acting for All.

Essentials of Partnership :
1. Minimum Two and Maximum 50 Members

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2. Carrying on a Business (i.e. vocation with profit motive)
3. Sharing of Profits
4. Agreement
5. Legal Objects

Theoretical Questions What is Partnership Agreement / Deed ?

Partnership agreement is the mutual understanding on which some people decide
Q-1*: What is meant by partnership ? to do a legal business to earn profits. It may be oral or written. The written and
or registered version of the agreement is also called partnership deed.
Define Partnership. The Partnership Agreement / Deed may contains basically two type of matters:
1. Management Related Matters: e.g. Name of the business, nature of the business,
Q-2*: What is meant by partnership deed ?
responsibilities and duties of partners, way of settlement of disputes etc.
Q-3*: List any four contents of a partnership deed. 2. Money Related Matters: e.g. Capitals of Partners, Profit sharing Ratios, Interest
on Capital and Drawings, Interest on Loans, Remunerations to partners, Method
Q-4*: Distinguish between fixed capital and fluctuating capital. of valuation of Goodwill and Method of maintaining Books of Accounts etc.
For accounting purpose, only money related matters are considered.
Q-5*: State the main provisions of the Partnership Act related to accounting, if If an agreement is made then that is always followed.
there is no Partnership deed.
What happens if there is no agreement ?
Q-6*: Name any six items which are shown in Profit & Loss Appropriation Account.
If there is no agreement at all then following provisions of Law will apply.
Q-7: Why is Profit & Loss Appropriation Account prepared by partnership firm ? 1. Profit sharing ratio of all partners will be equal (irrespective of any factor)
2. Interest on loan will be 6% p.a. (whether loan is given to firm or taken from firm)
Q-8: State any three items that may be included in the partnership agreement 3. Interest on capitals is not allowed.
from accounting point of view. 4. Interest on drawings is not charged.
5. Any remuneration (e.g.. salary or commission) is not allowed to any partner.
Q-9: List any four essential elements of Partnership.
If, there is an agreement which is silent on a specific matter then for only that
particular matter above rules will apply.
2 Fundamentals of Partnership Practice in Accountancy 39

Illustration-1: A and B form a partnership without any partnership agreement. After

the end of first year of partnership, A draw the following Profit and Loss Appropriation CA. Naresh Aggarwal’s
Account:
Dr. Profit and Loss Appropriation Account Cr.
ACADEMY of ACCOUNTS
Accounting • Costing • Taxation • Financial Management
Particulars Amount Particulars Amount
West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
To Salary to : By Profit & Loss A/c 24,000
A 4,800 (Net Profit)
B 3,000 7,800 By Interest on Drawings : Q-71: A, B and C are partners sharing profits in the ratio of 3 : 2 : 1. The terms of
To Interest on Capital @ 6% A 250 partnership is as follows :
A 2,400 B 150 400 (i) C’s share of profit will not be less than Rs.12,000 in any year.
B 1,200 3,600 (ii) A’s contribution in firm’s profit will not be less than Rs.30,000 in any year.
To Commission to A 3,000 During the year, firm earns a total profit of Rs.60,000 (including A’s contribution
To Profit transferred to : Rs.27,000. You are required to show firm’s Profit & Loss Appropriation Account.
A 6,000 [A’s Deficiency: Rs.3,000; Profit: A- Rs.30,600; B- Rs.20,400; C- Rs.12,000]
B 4,000 10,000

24,400 24,400 Q-72: A, B and C are partners sharing profit and losses in the ratio of 3 : 2 : 1. C is

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guaranteed by the firm that his share of profit including his salary of Rs.2,000; will
You are required to point out any contravention of the law, found in above account not be less than Rs.10,000 in any year. It is further decided that any loss arising
and draw it in proper manner. from this guarantee will be borne by A and B in equal proportions. Another guarantee
Ans: As there is no any partnership deed, the above mentioned Profit and Loss is given by B to the firm that he will earn at least Rs.7,000 for the firm’s profits.
Appropriation Account contains the following errors: The profit (after charging C’s salary and including B’s contribution Rs.4,000)
1. There should not be any salary to any partner. amounted to Rs.33,000.
2. There should not be any interest on capital. You are required to allocate the profit though proper accounts.
3. Commission should not be allowed to partner [A- Rs.17,000; B- Rs.11,000; C- Rs.8,000; Deficiency of B: Rs.3,000]
4. No interest on drawings should be charged.
5. Profit sharing ratio should be equal. Q-73: X, Y and Z are partners in the ratio of 3 : 2 : 1. X gives guarantee to the firm
If all the above mentioned errors are eliminated, then correct account will appear that his contribution in firm’s profit would not be less than Rs.24,000 in any year.
as given bellow: The partnership deed also provides that Z’s share of profit will not be less than
Dr. Profit and Loss Appropriation Account Cr. Rs.10,000. Further, X has personally guaranteed Y that his share of profit including
Particulars Amount Particulars Amount his salary and interest on capital will not be less that Rs.20,000. Terms of the deed
provides for Rs.100 p.m. to each partner as salary and interest comes to Rs.1,200
To Profit transferred to: By Profit & Loss A/c 24,000 for X; Rs.800 for Y and Rs.600 for Z.
A: 12,000 (Net Profit) The profit after charging partner’s salary and interest on capital is determined as
B: 12,000 24,000 Rs.42,000 in which X contributed to extent of Rs.18,000 only.
24,000 24,000 [X- Rs.20,000; Y- Rs.18,000; Z- Rs.10,000; Deficiency of X: Rs.6,000]

Illustration-2: Hema and Jaya started business on 1st January 2012 with capitals Q-74: A, B and C are partners in a firm. A and B sharing profits in the ratio of 3 : 2
of Rs.20,000 and Rs.15,000 respectively. Due to further need of money Jaya gave and C receiving a salary of Rs.6,000 p.a. plus a commission of 10% on the profits
a loan of Rs.10,000 to the firm on 1st July 2012. At the end of year 2012 they after charging such salary and commission or 1/4th of the profits of the firm,
earned a net profit of Rs.4,000. You are required to draw their Profit and Loss whichever is larger. Any excess of the later over the former is, under the partnership
Appropriation Account to show allocation of the profit. agreement, to be borne personally by A.
The profits for the year ended 31.03.2012 amounted to Rs.44,000 after charging C’s
38 Fundamentals of Partnership Practice in Accountancy 3

after charging interest on capitals @ 5% p.a. would not be less than Rs.40,000 in any
year. The capital contributions were : CA. Naresh Aggarwal’s
A- Rs.3,00,000; B- Rs.2,00,000 and C- Rs.1,50,000.
The profit for the year ended on 31.03.2012 amounted to Rs.1,60,000.
ACADEMY of ACCOUNTS
Show the Profit and Loss Appropriation Account. Accounting • Costing • Taxation • Financial Management
[CBSE (Delhi)] [Profits: A- Rs.49,250; B- Rs.38,250; C- Rs.40,000] West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org

Q-66: A, B and C entered into a partnership on 01.04.2011 to share profits and

Solution:
losses in the ratio of 4 : 3 : 3. A, however, personally guaranteed that C’s share of
Dr. Profit and Loss Appropriation Account Cr.
profit after charging interest on capitals at 5% p.a. would not be less than Rs.40,000
p.a. The capital contributions were A- Rs.3,00,000, B- Rs.2,00,000 and C- Particulars Amount Particulars Amount
Rs.1,00,000. The profits for the year ended 31.03.2012 were Rs.1,20,000. Show
To Profit transferred to : By Profit & Loss A/c 3,700
the distribution of profits.
Hema 1,850 (Net Profit)
[Delhi 2001 Compartment ; All India 2002 Compartment]
Jaya 1,850 3,700
[Share of Profits: A- Rs.23,000; B- Rs.27,000; C- Rs.40,000]
3,700 3,700
Q-67: A, B and C are partners sharing profit and losses in the ratio of 5 : 4 : 1. C is
Working Notes:

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given a guaranteed that his share of profit in any year would not be less than
Interest on Loan @ 6% = 10,000 x 6 x 6 .
Rs.5,000. Deficiency, if any would be borne by A and B equally. The profits for the
(for 6 months only) 100 12
year 2012 amounted to Rs.40,000. Pass Journal Entries in the Books of the firm.
= Rs. 300
[CBSE (Delhi) 2002] [Profits: A- Rs.19,500; B- Rs.15,500; C- Rs.5,000]
Net Profit = Rs.4,000 - Rs.300 = Rs.3,700
Q-68: A and B are partners in a firm sharing profits in the ratio of 2 : 1. On 01.04.2011
Illustration-3: Ram and Shyam start business on 1st January 2012 with capital of
they decided to admit C for 1/5 share in profits with a guaranteed amount of
Rs.1,00,000 and Rs.40,000 respectively. According to the deed Ram is entitled to
Rs.25,000 p.a. A undertook to meet the liability arising out of the guaranteed
salary of Rs.1,000 p.m. and Shyam is to be allowed a commission at the rate of
amount to C. The firm earned a profit of Rs.75,000 for the year ended 31.03.2012.
10% of net profit. Interest on capital is also allowed @ 5% p.a. During the first year
Prepare Profit and Loss Appropriation Account.
of partnership they earn a net profit of Rs.50,000. You are to show a Profit and
[Delhi 2004 Compartment] [Share of Profits: A- Rs.30,000; B- Rs.20,000; C- Rs.25,000]
Loss Appropriation Account to allocate the profit and necessary Journal Entries.
Solution:
Q-69: A and B sharing profits and losses in the ratio of 3 : 2 admit C for 1/10 share
Dr. Profit and Loss Appropriation Account Cr.
in the firm. He is guaranteed a minimum of Rs.15,000 profits. Any deficiency arising
due to gaurantee to be contributed by A and B in the ratio of 4 : 1. Calculate profits Particulars Amount Particulars Amount
of A, B and C. Profits of the firm for the year are Rs.1,00,000.
To Salary to Ram 12,000 By Profit & Loss A/c 50,000
[Delhi 1997 Compartment]
To Commission to Shyam 5,000 (Net Profit)
[Share of Profits: A Rs.50,000; B Rs.35,000; C Rs.15,000]
To Interest on Capitals:
Ram 5,000
Q-70: P, Q and R are partners in a firm. Their profit sharing ratio is 3 : 2 : 1.
Shyam : 2,000 7,000
However, R is guaranteed a minimum amount of Rs.10,000 as share of profit every
To Profit transferred to:
year. Any deficiency arising on that account shall be met by P only. The profits for
Ram (1/2) 13,000
two years ending December 31, 2011 and 2012 were Rs.45,000 and Rs.75,000
Shyam (1/2) 13,000 26,000
respectively. Prepare Profit and Loss Appropriation Account for the two years.
[Delhi 2002 Compartment] 50,000 50,000
[Share of Profits(2011): P- Rs.20,000; Q- Rs.15,000; R- Rs.10,000
Share of Profits(2012): P- Rs.37,500; Q- Rs.25,000; R- Rs.12,500]
4 Fundamentals of Partnership Practice in Accountancy 37

Date Particulars L.F. Debit Credit

____________________________________________________________________ CA. Naresh Aggarwal’s
(i) Partner’s Salary A/c
To Ram’s Capital A/c
Dr. 12,000
12,000
ACADEMY of ACCOUNTS
(Being salary allowed to Ram) Accounting • Costing • Taxation • Financial Management
___________________________________________
West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
(ii) Partner’s Commission A/c Dr. 5,000
To Shyam’s Capital A/c 5,000 less than Rs.7,500. The profits for the year 2012 amount to Rs.31,500. You are
(Being commission allowed to Shyam) required to show the appropriation amongst the partners. Profit and Loss
___________________________________________
Appropriation Account is not required.
(iii) Interest on Capital A/c Dr. 7,000 [CBSE (Delhi)] [Profits: A- Rs.16,000; B- Rs.8,000; C- Rs.7,500]
To Ram’s Capital A/c 5,000
To Shyam’s Capital A/c 2.000 Q-61: A, B and C are partners sharing profits in the ratio of 16 : 12 : 7 with a
(Being interest on capital allowed to partners) minimum profit of Rs.10,000 for C. The profit for the year ended December 31,
___________________________________________
2012 amounted to Rs.39,500. Pass the journal entries in the books of the partnership
(iv) Profit and Loss Appropriation A/c Dr. 24,000 firm for distributing the profit.
To Partner’s Salary A/c 12,000 [Adopted CBSE (Compt.)]

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To Partner’s Commission A/c 5,000 [Deficiency met by: A- Rs.1,200; B- Rs.900; Profit of A Rs.16,857; B Rs.12,643; C Rs.10,000]
To Interest on Capital 7,000
(Being remuneration of partner transferred to Q-62: X, Y and Z are partners sharing profit and losses in the ratio of 5 : 3 : 2. Z is
Profit and Loss Appropriation A/c) given a guarantee that his share of profit in any year will not be less than Rs.10,000.
___________________________________________
During the year 2012, firm earns a profit of Rs.40,000. You are required to show
(v) Profit and Loss Appropriation A/c Dr. 26,000 Profit and Loss Appropriation Account to allocate the profits.
To Ram’s Capital A/c 13,000 [X- Rs.18,750; Y- Rs.11,250; Z- Rs.10,000]
To Shyam’s Capital A/c 13,000
(Being remaining profit distributed to partners) Q-63: P, Q and R are partners sharing profit and losses in the ratio of 3 : 2 : 1. R is
guaranteed that his share of profit including his salary will not be less than Rs.12,000
Illustration-4: Seeta and Geeta are partners with capital of Rs.15,000 and in any year. It is further decided that any loss arising from the guarantee will be
Rs.10,000 respectively. The terms of partnership deed is as follows: borne by other partners in equal proportions. The profit, after charging R’s salary
(i) Interest on capital is allowed at the rate of 6% p.a. Rs.3,000; amounted to Rs.48,000.
(ii) Salary is allowed to Seeta at Rs.500 p.a. You are required to allocate the profit though proper accounts.
(iii) Commission to Geeta at the rate of 10% on net profit. [P- Rs.23,500; Q- Rs.15,500; R- Rs.9,000]
(iv) Remaining profits is to be shared by Seeta and Geeta in the ratio of 3 : 2.
During the year they earned a profit of Rs.7,000 after charging Seeta’s salary but Q-64: A, B and C are partners sharing profit and losses in the ratio of 5 : 4 : 1. C is
before making other adjustments. guaranteed that his share of profit will not be less than Rs.10,000 in any year. It is
Prepare an account showing distribution of profits. Show calculations clearly. further decided that any loss arising from the guarantee will be borne by A only.
Solution: You are required to allocate the profit though proper accounts, if :
Dr. Profit and Loss Appropriation Account Cr. (i) The profit for the year amounted to Rs.80,000.
Particulars Amount Particulars Amount (ii) The profit for the year amounted to Rs.1,20,000.
[(i): A’s Profit - Rs.38,000; B’s Profit - Rs.32,000; C’s Profit - Rs.10,000]
To Interest on Capital to : By Profit & Loss A/c (Profit) 7,500 [(ii): A’s Profit - Rs.60,000; B’s Profit - Rs.48,000; C’s Profit - Rs.12,000]
Seeta 900
Geeta 600 1,500 Q-65: A, B and C entered into partnership on 01.04.2011 to share profits and
losses in the ratio of 4 : 3 : 3. A, however personally guaranteed that C’s share of profit
36 Fundamentals of Partnership Practice in Accountancy 5

Q-57: 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 CA. Naresh Aggarwal’s
profits for the year ended 31.03.2012, Rs.24,000 had already been credited to partners
in the proportion in which they shared profits. Their drawings were Rs.5,000 (Mohan);
ACADEMY of ACCOUNTS
Rs.4,000 (Vijay) and Rs.3,000 (Anil) in 2012-2011. Subsequently the following Accounting • Costing • Taxation • Financial Management
omissions were noticed and it was decided to bring them into account: West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
(i) Interest on capital at 10% p.a.
(ii) Interest on drawings (Mohan Rs.250; Vijay Rs.200; Anil Rs.150).
Make the necessary corrections through Profit and Loss Adjustment Account and To Commission to Geeta 750
through a journal entry. To Salary to Sita 500
[CBSE] [Anil- Rs.550 (Dr.); Mohan- Rs.550 (Cr.); Correct profit: Rs.18,300] To Profit transferred to :
Seeta (3/5) : 2,850
Q-58: A and B are partners sharing profits and losses in the ratio of 3 : 2. They Geeta (2/5) : 1,900 4,750
employed C as their manager to whom they paid a salary of Rs.750 p.m. C had 7,500 7,500
deposited Rs.20,000 on which interest was payable @ 9% p.a. At the end of 2012
(after division of the year’s profit), it was decided that C should be treated as Working Notes:
partner with effect from 1st January 2009 with 1/6 share of profits, his deposit being Net profit = Profit after Seeta’s Salary + Seeta’s Salary
= 7,000 + 500

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considered as capital carrying interest at 6% p.a. like capitals of other partners.
The firms’s profits and losses after allowing interest on capitals were as follows: = 7,500
2009 Profit 59,000 Geeta’s Commission = 7,500 x 10 = Rs. 750
2010 Profit 62,600 100
2011 Loss 4,000  ‘Net profit’ is the profit earned by the business after debiting all expenses.
2012 Profit 78,000 Any remuneration (e.g. salary, commission etc.) given to partner is not an
Record the necessary Journal Entries to give effect to the above. expenses but it is an appropriation of profit. Therefore, if any calculation is
[Adapted SSC (All India)] [A- Rs.360 (Dr.); B- Rs.240 (Dr.); C- Rs.600 (Cr.)] based on ‘Net Profit’ then such remuneration (if already given to partners)
should be added back to determine the real ‘Net Profit’.
Q-59: X and Y are partners sharing profits and losses in the ratio of 3 : 2. At the end
of the year, i.e., on 31.12.2012 they decided to take their manager Z into partnership. Illustration-5: A and B started a partnership business on 01.04.2011. They
As manager Z was getting annual salary of Rs.9,000. He had also advanced contributed Rs.90,000 and Rs.60,000 respectively, as their capitals. The terms of
Rs.60,000 to the firm by way of a loan on which he is getting interest @ 10% p.a. the partnership agreement are as under :
During the three years, firm’s profits after adjusting salary to Z, interest on loan and (i) A and B to get a monthly salary of Rs.1,000 and Rs.1,500 respectively
interest on capital of partners were : (ii) B is allowed a commission at the rate of 5% on Net Profit.
2010 Profit 80,000 (iii) Interest on capital and drawings will be at the rate of 10% p.a.
2011 Loss 40,000 (iv) Sharing of profit or loss will be in the ratio of their capital contribution.
2012 Profit 1,20,000 The profit for the year ended 31.03.2012, before making the above appropriations
According to the new agreement, Z is to be given annual salary of Rs.7,000 and was Rs.80,000. The drawings of A and B were Rs.20,000 and Rs.30,000
1/5th share in the profits of the firm. Z’s loan shall be treated as his capital from the respectively. Interest on drawings amounted to Rs.1,000 for A and Rs.1,500 for B.
beginning and similar to other partners, his capital will carry interest @ 6% p.a. Prepare Profit and Loss Appropriation Account and Partners Capital Accounts
Record the necessary Journal Entries to give effect to the above arrangement. assuming that their capitals are :
[X- Rs.12,864 (Dr.); Y- Rs.8,576 (Dr.); Z- Rs.21,440 (Cr.)] (i) fluctuating (ii) Fixed
Solution:
GUARANTEE IN PARTNERSHIP As Capital Ratio is the Profit Sharing ratio of the partners and Capitals are in
Q-60: A, B and C were in partnership sharing profit and losses in the ratio of proportions of 90,000 : 60,000 it may be simplified as 3 : 2.
4 : 2 : 1 respectively It was provided that in no case C’s share in profit should be
6 Fundamentals of Partnership Practice in Accountancy 35

Dr. Profit and Loss Appropriation Account Cr.

CA. Naresh Aggarwal’s
Particulars Amount Particulars Amount

To Salary to : By Profit & Loss A/c (Profit) 80,000

ACADEMY of ACCOUNTS
A 12,000 By Interest on Drawings: Accounting • Costing • Taxation • Financial Management
B 18,000 30,000 A 1,000 West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
To Commission to B 4,000 B 1,500 2,500
To Interest on Capital to :
A 9,000 Q-52: A and B had been sharing profits and losses equally. After dividing the profits
B 6,000 15,000 for the year 2012, Rs.60,000 it was agreed that they would share profits and losses
from 01.01.2012 in the ratio of 3 : 2. At that time it was also found that while preparing
To Profit transferred to: accounts for 2012 interest on capitals @ 5% p.a. was ignored. The fixed capitals of A
A (3/5) 20,100 and B were Rs.1,00,000 and Rs.80,000 respectively.
B (2/5) 13,400 33,500 Pass a single adjustment entry to adjust the accounts of the partners.
[A: Rs.5,600 (Cr.); B: Rs.5,600 (Dr.)]
82,500 82,500
(i) When capitals are fluctuating : Q-53: Ram and Mohan are equal partners with capital of Rs.5,000 and Rs.9,000
respectively. After accounts of the year are prepared, it is discovered that interest

AoA
Dr. Partner’s Fluctuating Capital Accounts Cr.
at 7% p.a. has not been credited to capital account before distribution of profits. It
Particulars A B Particulars A B is decided to make an adjustment entry at the beginning of next year.
To Cash (Drawings) 20,000 30,000 By Cash 90,000 60,000 Give the necessary journal entry.
To Interest on Drawings 1,000 1,500 By Salaries 12,000 18,000 [All India 2003] [Ram: Rs.140 (Dr.); Mohan: Rs.140 (Cr.)]
To Balance c/d 1,10,100 69,900 By Commission - 4,000
By Interest on Capital 9,000 6,000 Q-54: A, B and C are partners in a firm with capitals of Rs.40,000; Rs.60,000 and
By P&L App A/c (Profit) 20,100 13,400 Rs.80,000 respectively. After the accounts of the firm for the year have been closed,
it is discovered that interest @ 8% p.a. was allowed to each partner although no
1,31,100 1,01,400 1,31,100 1,01,400 such agreement was made in the partnership agreement. It is decided to make an
(ii) When capitals are Fixed : adjustment entry at the beginning of the next year. Pass necessary journal entry.
Dr. Partner’s Fixed Capital Accounts Cr. [AlI India 2004 Compartment]
[A: Rs.1,600 (Cr.); C: Rs.1,600 (Dr.)]
Particulars A B Particulars A B
To Balance c/d 90,000 60,000 By Cash 90,000 60,000 Q-55: Ram, Shyam and Mohan are partners in a firm sharing profits in the ratio of
2 : 1 : 2. Their fixed capitals were Rs.3,00,000; Rs.1,00,000 and Rs.2,00,000
90,000 60,000 90,000 60,000 respectively. Interest on capital for the year 2012 was credited to them @ 9%
Dr. Partner’s Current Capital Accounts Cr. instead of 10% p.a.
Showing your working notes clearly, pass the necessary adjustment journal entry.
Particulars A B Particulars A B [CBSE Outside] [Shyam- Rs.200 (Dr.); Mohan- Rs.400 (Dr.); Ram- Rs. 600 (Cr.)]
To Cash (Drawings) 20,000 30,000 By Salaries 12,000 18,000
To Interest on Drawings 1,000 1,500 By Commission - 4,000 Q-56: Ram and Mohan were partners in a firm sharing profits in 3 : 2 ratio. Their
To Balance c/d 20,100 9,900 By Interest on Capital 9,000 6,000 fixed capitals were : Ram- Rs.1,20,000 and Mohan- Rs.90,000. For the year 2012,
By P&L App A/c (Profit) 20,100 13,400 interest on capital was credited to them at the rate of 6% instead 5%. Give necessary
adjusting entry for the rectification of the error. Show also the working notes clearly.
41,100 41,400 41,100 41,400 [Delhi 2000 Compartment]
[Ram: Rs.60 (Cr.); Mohan: Rs.60 (Dr.)]
34 Fundamentals of Partnership Practice in Accountancy 7

for Ram and Shyam are ascertained as under:

Year 2012 - 2 : 1, Year 2011 - 2 : 3, Year 2010 - 4 : 1. CA. Naresh Aggarwal’s
Show a journal entry to make adjustment in capital accounts.
[Ram- Rs.1,500 (Cr.); Mohan- Rs. 1,500 (Dr.)]
ACADEMY of ACCOUNTS
Accounting • Costing • Taxation • Financial Management
Q-48: Jagdish, Ashish and Deepak are partners sharing profits in the ratio of 3 : 2 West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
: 1. The firm has been in existence for many years. Now the partners decide to
share profits in the ratio of 2 : 2 : 1. They also decided that the change shall be
carried out with retrospective effect from 2009. The profit and loss during the last  When ‘Fluctuating Capital A/c’ is prepared then all transactions related
few years have been: 2008 - Rs.16,000; 2009 - Rs.12,000; 2010 - Rs.14,000; with partners are transferred in that Account only.
2011 - Rs.19,000; 2012 - Rs.15,000 (Loss). Show the adjustment of profits for the  When ‘Fixed Capital A/c’ and ‘Current Capital A/c’ is prepared then all
last four years by means of a single journal entry. transactions from Profit & Loss Appropriation A/c and ordinary drawings are
[CBSE Compt. (Delhi) 2001] transferred to Current Account and only capital contribution of partner and
[Jagdish- Rs.3,000 Dr.; Ashish- Rs.2,000 Cr.; Deepak- Rs. 1,000 Cr.] capital withdrawal (not ordinary drawings) of partners are shown in the Fixed
Capital A/c.
Q-49: P, Q and R were partners in a firm sharing profits in the ratio of 1 : 2 : 2. After  Difference between ‘Ordinary Drawings’ and ‘Capital Drawings’ : ‘Capital
the division of the profits for the year ended 31.3.2012 their capitals were: Drawings’ are the drawings from the contributions (i.e. capital invested to run
business) of partners, while ‘Ordinary Drawings’ are withdrawn from the profits

AoA
P: Rs.1,50,000; Q: Rs.1,80,000; R: Rs.2,10,000
During the year they withdrew Rs.20,000 each. The profit for the year was in regular intervals. In the normal circumstances owner of business never
Rs.60,000. The Partnership Deed provided that interest on capital will be allowed makes ‘Capital Drawings’, therefore unless the question specifically recognize
@ 10% p.a. While preparing the final accounts, interest on Partner’s Capital was it, we should always assume that drawings given are ‘Ordinary Drawings’.
not allowed. You are required to calculate the capitals of P, Q and R on 01.04.2011
and pass the necessary adjustment entry for providing interest on capitals. Show Illustration-6: A and B are partners sharing profits in the ratio of 3 : 2 with capitals
your working clearly. of Rs.1,00,000 and Rs.60,000 respectively. Interest on capital is allowed at the
[CBSE (Delhi) 2002] [Q- Rs.4,000 (Dr.); R- Rs.1,000 (Dr.); P- Rs. 5,000 (Cr.)] rate of 6% p.a. B is to be allowed an annual salary of Rs.5,000. During 2012, the
profits of the year prior to calculation of interest on capital but after charging B’s
Q-50: After including the profits for the year ended 31.03.2012 the capital accounts Salary amounted to Rs.25,000. A provision of 5% of Net Profit is to be made in
of A, B and C stood at Rs.20,000, Rs.15,000 and Rs.10,000 respectively. respect of manager’s commission. Drawings of partners are Rs.12,000 and Rs.9,000
Subsequently, it was discovered that interest on capitals at 10% p.a. had respectively. Prepare Profit & Loss Appropriation A/c and Partners Capital A/c.
inadvertently been ignored. The profits for the year in arriving at the above figures Solution:
of capitals amounted to Rs.10,000. They shared profits and losses in the ratio of Dr. Profit and Loss Appropriation Account Cr.
2 : 1 : 1 respectively. Give the necessary journal entry to rectify the above. Particulars Amount Particulars Amount
[Modified Foreign 2003]
[A: Rs.250 (Dr.); B: Rs.375 (Cr.); C: Rs.125 (Dr.)] To Salary to B 5,000 By Profit & Loss A/c 28,500
To Interest on Capital to : (Net Profit)
Q-51: On 31.12.2012 after closing the capital accounts, capitals of X, Y and Z A 6,000
stood at Rs.80,000; Rs. 60,000 and Rs.40,000 respectively. It was subsequently B 3,600 9,600
discovered that interest @ 5% p.a. on capitals at the beginning of the year was left To Profit transferred to :
out. Their drawings during the year were Rs.20,000; Rs.15,000 and Rs.9,000 A (3/5) 8,340
respectively. Profit for the year was Rs.1,20,000. Partners share profits as 3 : 2 : 1. B (2/5) 5,560 13,900
Give necessary adjustment entry and show the working notes.
28,500 28,500
[All India 1999]
[Opening Capital of X, Y and Z are: Rs.40,000; Rs.35,000 and Rs.29,000 respectively;
Adjustment entry:- X: Rs.600 (Dr.); Y: Rs.17 (Cr.); Z: Rs.583 (Cr.)]
8 Fundamentals of Partnership Practice in Accountancy 33

Dr. Partner’s Fluctuating Capital Accounts Cr.

CA. Naresh Aggarwal’s
Particulars A B Particulars A B
To Cash (Drawings) 12,000 9,000 By Balance b/d 1,00,000 60,000
ACADEMY of ACCOUNTS
To Balance c/d 1,02,340 65,160 By Interest on Capital 6,000 3,600 Accounting • Costing • Taxation • Financial Management
By Salaries - 5,000 West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
By P&L App A/c (Profit) 8,340 5,560

1,14,340 74,160 1,14,340 74,160 (b) Partners were entitled to interest on capital at 5% p.a.
(c) Profits were to be shared in the ratio of capitals.
Working Notes:
The net profit for the year 2012 of Rs.33,000 was divided equally without providing
Profit for manager’s commission = Profit after B’s Salary + B’s Salary
for the above terms. Pass an adjustment entry to rectify the above error.
= 25,000 + 5,000= 30,000
[AlI India 1999]
Manager’s Commission = 30,000 x 5 = Rs.1,500 [A: Rs.500 (Dr.); B: Rs.5,750 (Dr.); C: Rs.6,250 (Cr.)]
100
Net Profit = Profit before manager’s commission - Manager’s Commission
Q-45: X and Y are partners. At the end of the year 2012, their fixed capital accounts
= 30,000 - 1,500 = Rs.28,500
shows the balance of Rs.50,000 and Rs.30,000 respectively. After crediting the
 Manager is an employee of the business, therefore his salary or commission
profit of Rs.25,000 in their current capital account, they noticed the following

AoA
should be shown in Profit and Loss Account itself. His remuneration can not
errors:
be called as appropriation of the profits. Therefore, we should not show his
(i) Commission was given to X and Y as Rs.3,000 and Rs.1,000 respectively;
commission in the Profit and Loss Appropriation A/c.
instead of Rs.1,000 and Rs.2,000 respectively.
(ii) There was an agreement for allowing Y an annual salary of Rs.2,000 which is
INTEREST ON DRAWINGS
not yet provided.
Interest on drawings is calculated only when it is specifically mentioned in the
(iii) Interest on drawings of Rs.500 for X and Rs.300 for Y has not been recorded.
Partnership Deed. It may be calculated by using following methods:
(iv) Interest on capital was allowed to them @ 5% p.a., though no agreement was
1. Product Method : In this method, first we generate a statement indicating the
made in the partnership deed.
date of drawings, amount, months (between date of drawings and ending date of
You are asked to prepare a single journal entry to rectify the above mistakes.
financial year) and product of drawings and months.
Working notes should also be shown clearly.
Then amount of interest is determined by the following formula :
[X- Rs.3,100 (Dr.); Y- Rs.3,100 (Cr.)]
Interest on Drawings = Total of Products x Rate x 1 .
100 12
Q-46: X, Y and Z are partners for the last three years and till now they were sharing
Illustration-7: Ajay is a partners in a firm. During the year, Ajay has withdrawn
profits or losses in the ratio of 3 : 2 : 1 respectively. During the 1st year of partnership
Rs.1,000 at the beginning of each month. Calculate his interest on drawings, if the
they got a loss of Rs.3,000 but during 2nd and 3rd year they earned profits of
rate of interest is 6% p.a.
Rs.9,000 and Rs.18,000 respectively.
Solution:
Now they decide to share profit or losses in equal proportions with effect form the
Date Amount Months Product
beginning of the partnership.
1st January 1,000 12 12,000
You are required to pass a single journal entry to give effect to new agreement.
1st February 1,000 11 11,000
[X- Rs.4,000 (Dr.); Z- Rs. 4,000 (Cr.)]
1st March 1,000 10 10,000
1st April 1,000 9 9,000
Q-47: Ram and Mohan are partners in a firm sharing profit and loss equally.
1st May 1,000 8 8,000
During the Last three years they were distributed following profits :
1st June 1,000 7 7,000
Year 2012: Rs.15,000; Year 2011: Rs.10,000; Year 2010: Rs.5,000.
1st July 1,000 6 6,000
Now all partner decide to share profits in their capital ratios with retrospective
1st August 1,000 5 5,000
effect for last two completed years. From the capital accounts of the partners, ratio
1st September 1,000 4 4,000
32 Fundamentals of Partnership Practice in Accountancy 9

During the year partners withdrawn Rs. 3,000 each. Further capital introduced by
Monu during the middle of the year was Rs.4,000. The profit earned and distributed CA. Naresh Aggarwal’s
between the partners was Rs.15,000.
Calculate interest on capital to be allowed at the end of the year @ 10% p.a.
ACADEMY of ACCOUNTS
[Sonu- Rs.2,500; Monu- Rs.2,200] Accounting • Costing • Taxation • Financial Management
West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
Q-41: Ajay and Vijay are partners sharing profits in the ratio of 3 : 2. Their capitals
at the end of the year after division of profits were Rs.50,000 and Rs.30,000
respectively. During the year Ajay and Vijay were got total salaries of Rs.2,000 and 1st October 1,000 3 3,000
Rs.1,000 respectively. The drawings of Ajay was Rs.5,000 and of Vijay was 1st November 1,000 2 2,000
Rs.3,000. Vijay had also introduced Rs.5,000 as new capital after the expiry of six 1st December 1,000 1 1,000
months of the financial year. Divisible profit of the year was Rs.15,000. 12,000 78 78,000
Calculate interest on capital at the rate of 10% p.a.
[Ajay- Rs.4,400; Vijay- Rs.2,350] Interest on Drawings = Total of Products x Rate x 1 .
100 12
Q-42: Ram and Mohan are partners sharing profits and losses in the ratio of 3 : 2 = 78,000 x 6 x 1 .
respectively. Their capitals at the end of the year were Rs.50,000 and Rs.30,000 100 12
= Rs.390

AoA
respectively. The profit of the year distributed to them in their profit sharing ratio
was Rs.15,000. Ram had got an annual salary of Rs.2,000 and Mohan had got an 2. Direct Method (Short-cut Method) : This method can calculate interest in
annual salary of Rs.1,000. During the year Ram’s drawings were Rs.5,000 and relatively very low time. But this method can not be used always. The conditions
Mohan’s drawings were Rs.3,000. In the exact middle of the year Mohan had also for applicability of this method is that amount are constantly withdrawn in similar
invested Rs.5,000 as further capital in the firm. amounts and in similar interwals during the year.
You are required to calculate interest on capital @ 10% p.a. in the following cases: Interest on drawings may be calculated by using following formulae which depends
(i) If the closing capital given in the above question is of fluctuating Capital A/c upon the time schedule of the drawings :
(ii) If the closing capital given in the above question is of Fixed Capital A/c Interest on Drawings = Total Drawings x Rate x Average Months
[(i) : Ram’s Interest - Rs.4,400; Mohan’s Interest - Rs.2,350; 100 12
(ii) : Ram’s Interest - Rs.5,000; Mohan’s Interest - Rs.2,750] Average Months will be counted by adding months from first and last drawings and
dividing by two.
ADJUSTMENT ENTRY If amount withdrawn at the beginning of every month, then average months are :
Q-43: A, B and C started a business with capital of Rs.50,000; Rs.30,000 and 12 + 1 = 6.5 Months
Rs.20,000 respectively. During the year they earned a profit of Rs.27,000 which 2
was distributed among them in their profit sharing ratio without taking into If amount withdrawn at the end of every month, then average months are :
consideration the following matters of the Deed. 11 + 0 = 5.5 Months
(i) Interest on Capital at the rate of 5% p.a. 2
(ii) Salary to B and C Rs.2,000 each. If amount withdrawn at the Middle of every month, then average months are :
(iii) Special commission to A Rs.3,000. 11.5 + 0.5 = 6 Months
You are asked to prepare a single journal entry to rectify the above mistake. Working 2
notes should also be shown clearly. If amount withdrawn at the beginning of every quarter, then average months are:
[B- Rs.500 (Dr.); C- Rs.1,000 (Dr.); A- Rs. 1,500 (Cr.)] 12 + 3 = 7.5 Months
2
Q-44: A, B and C were partners in a firm. On 01.01.2012 their capitals stood at If we continue the previous illustration then we could have found the interest by
Rs.50,000; Rs.25,000 and Rs.25,000 respectively. As per the provisions of the using the following alternative method :
partnership deed : Interest on Drawings = Total Drawings x Rate x 6.5 .
(a) C was entitled for a salary of Rs.1,000 p.m. 100 12
10 Fundamentals of Partnership Practice in Accountancy 31

= 12,000 x 6 x 6.5 .
100 12 CA. Naresh Aggarwal’s
= Rs. 390
ACADEMY of ACCOUNTS
Illustration-8: Bimal is a partner in a firm. During the year, Bimal has withdrawn Accounting • Costing • Taxation • Financial Management
Rs. 1,000 at the end of each month. Calculate interest on drawings, if the rate of West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
interest is 6% p.a.
Solution: By Product method:
Date Amount Months Product Q-37: From the following information related with A and B whose capital as on
31st January 1,000 11 11,000 01.04.2011 were Rs.20,000 and Rs.10,000 respectively. You are required to
28th February 1,000 10 10,000 calculate their capital ratio and interest on capital, if the rate of interest is 6% p.a.
31st March 1,000 9 9,000 A B
30th April 1,000 8 8,000 Date Introduced Withdrawn Introduced Withdrawn
31st May 1,000 7 7,000 June-1 6,000 - - 2,000
30th June 1,000 6 6,000 Aug.-31 7,000 - 8,000 -
31st July 1,000 5 5,000 Oct.-31 - - 6,000 -
31st August 1,000 4 4,000 Dec.-1 - 3,000 - 3,000
Jan.-31 4,000 - 10,000 -

AoA
30th September 1,000 3 3,000
31st October 1,000 2 2,000 March.-1 5,000 - 6,000 -
30th November 1,000 1 1,000 [Capital Ratio- 7 : 4; Interest: A- Rs.1,750; B- Rs.1,000]
31st December 1,000 0 0
12,000 66 66,000 Q-38: A and B start business on 1st April with capital of Rs.37,500 and Rs.15,000
respectively. They agree to share profits in the proportion to their capital after
Interest on Drawings = Total of Products x Rate x 1 .
100 12 allowing interest on capital at 12% p.a.
6 1 . You are to show proper accounts to allocate the net profit of Rs.30,000 taking into
= 66,000 x x
100 12 consideration the following further information:
= Rs.330 A B
Date Introduced Withdrawn Introduced Withdrawn
By Direct Method: July-1 - 5,000 6,000 -
Sept.-30 4,000 - 6,500 -
Interest on Drawings = Total Drawings x Rate x 5.5 .
100 12 Nov.-1 5,000 - 6,000 -
6 5.5 . Dec.-31 - 2,500 - -
= 12,000 x x
100 12 March-1 3,500 - - 3,000
= Rs. 330 [Ratio- 3 : 2; Interest: A- Rs.4,500; B- Rs.3,000; Divisible Profit Rs.22,500]

Illustration-9: X and Y are partner in a firm. During the year, X has withdrawn Q-39: A and B are partners in equal ratio. Their capital at the end of the year are
Rs.2,000 per month and Y has withdrawn as follows: Rs.48,000 and Rs.36,000 respectively. A is entitled to an annual Salary of Rs.4,000.
Feb.1: Rs.4,000; April 1: Rs.2,000; June1: Rs.6,000; Aug.30: Rs.5,000; During the year A has withdrawn Rs.8,000 and B Rs.6,000. The profit distributed
Nov.1: Rs.4,000. after charging A’s Salary was Rs.24,000.
Calculate interest on drawings, if the rate of interest is 12% p.a. You are required to calculate interest on capital @ 5% p.a.
Solution: [A- Rs.2,000; B- Rs.1,500]
As X has withdrawn similar drawings in regular manner in every month of the year,
therefore his interest on drawings may be calculated by Direct method in the Q-40: Sonu and Monu are partners in a firm sharing profits in the ratio of
following way: 3 : 2. Their capital at the end of the year were Rs.31,000 and Rs.27,000 respectively.
30 Fundamentals of Partnership Practice in Accountancy 11

Q-31: Ram and Mohan are partners in a firm. The drawings of partners during the
current year were Rs.8,400 of Ram and Rs.6,000 of Mohan. Calculate interest on CA. Naresh Aggarwal’s
drawings, if the rate of interest is 10% p.a.
[Ram: Rs.420; Mohan: Rs.300]
ACADEMY of ACCOUNTS
Accounting • Costing • Taxation • Financial Management
Q-32: Reena and Meena are in partnership with profit ratio of 3 : 2. At the end of West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
year 2012 it is ascertained that Reena had withdrawn regularly Rs.500 at the end
of every month upto 30th June but she did not withdraw anything after that date,
Interest on Drawings = Total Drawings x Rate x 6 .
while Meena did not made any drawings upto 30th June and after that she started 100 12
a monthly drawing of Rs.500 at the beginning of the each month. 12 6 .
= 24,000 x x
Calculate interest on drawings for both the partners, to be charged at the end of the 100 12
year 2012, if the rate of interest is 12% p.a. = Rs.1,440
[Reena: Rs.255; Meena: Rs.105] As Y has neither withdrawn money in similar figures, nor continuity of every month
is maintained, therefore his interest may be calculated only by product method:
Q-33: P, Q, R, S and T are partners having following drawings : Date Amount Months Product
‘P’ has withdrawn Rs.1,000 at the beginning of each month. 1st February 4,000 11 44,000
‘Q’ has withdrawn Rs.2,000 at the end of each month. 1st April 2,000 9 18,000

AoA
‘R’ has withdrawn Rs.1,000 in each month. 1st June 6,000 7 42,000
‘S’ has withdrawn total Rs.24,000 in complete year. 30th August 5,000 4 20,000
‘T’ has withdrawn as follows : 1st November 4,000 2 8,000
Feb-1: Rs.5,000; May-31: Rs.5,000; Sept-30: Rs.10,000; Dec-31: Rs.7,000 1,32,000
Calculate interest on drawings, if the rate of interest is 12% p.a.
Interest on Drawings = Total of Products x Rate x 1 .
[P- Rs.780; Q- Rs.1,320; R- Rs.720; S- Rs.1,440; T- Rs.1,200] 100 12
= 1,32,000 x 12 x 1 .
INTEREST ON CAPITAL AND CAPITAL RATIO 100 12
Q-34: Amar and Akber start business on 1st January 2012 with capitals of Rs.25,000 = Rs.1,320
and Rs.20,000 respectively. On 1st July 2012 Akber brings more money to make
his capital equal to Amar. INTEREST ON CAPITAL / CAPITAL RATIOS
Calculate interest on capital to be allowed at the end of the year 2012, if the rate of Interest on capital is calculated only when it is specifically mentioned in the
interest is 10% p.a. partnership deed. The formulae to calculate it is given as under :
[Amar: Rs.2,500; Akber: Rs.2,250] (i) If there is no change in the Capital throughout the period:
Interest = Capital x Rate
Q-35: A and B start business as equal partners on 1st January 2012. On that date 100
A brings Rs.40,000 but B could arrange only Rs.10,000. B, then promise to bring (ii) If there are frequent changes in the Capital throughout the period:
balance of his capital in three equal installments at the end of the each quarter of
Interest = Total of Products x Rate x 1 .
the year. Calculate interest on capital to be allowed at the end of the year 2012 to 100 12
each partner assuming that B kept his promise and the rate of interest is 6% p.a. (This is the same formula which we had used for calculating interest on Drawings.
[A: Rs. 2,400; B: 1,500] The way of calculating products for interest on Capital is also similar to the way of
calculating products in case of interest on drawings.)
Q-36: A and B started business on 01.01.2012 with capitals of Rs.60,000 and
Rs.40,000 respectively. During the year, A introduced Rs.10,000 to the firm as Illustration-10: A and B start business as equal partners on 1st January 2012. On
additional capital on 01.07.2012. Interest on capital is to be allowed @ 10% per that date A brings Rs.80,000 but B could arrange only Rs.20,000. B, then promise
annum. Calculate the interest payable to A and B for the year ending 31.12.2012. to bring balance of his capital in 3 equal installments at the end of each quarter of
[CBSE Delhi] [Interest on A’s Capital: Rs.6,500; Interest on B’s Capital: Rs.4,000] the year.
12 Fundamentals of Partnership Practice in Accountancy 29

Calculate interest on capital to be allowed at the end of year 2012 to each partner
assuming that B kept his promise and rate of interest is 6% p.a. CA. Naresh Aggarwal’s
Solution:
As A’s Capital is constant throughout the year, his interest may be calculated as
ACADEMY of ACCOUNTS
follows: Accounting • Costing • Taxation • Financial Management
Interest = Capital x Rate West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
100
Interest = 80,000 x 6 = Rs.4,800
100 Prepare Profit and Loss Appropriation Account showing the distribution of profit and
As B’s Capital is changing throughout the year, his interest may be calculated by the Capital Accounts of partners.
product method in the following way: [Net Divisible Profit: Rs.48,000; A Rs.21,000; B Rs.15,000 and C Rs.12,000
Date Amount Months Product Closing Balance of Capital A/cs : A Rs.1,17,000; B Rs.97,500 and C Rs.88,500]
1st January 20,000 12 2,40,000
31st March 20,000 9 1,80,000 INTEREST ON DRAWINGS
30th June 20,000 6 1,20,000 Q-27: Ajay, Bimal and Chandan are partners in a firm. During the year, Ajay has
30th September 20,000 3 60,000 withdrawn Rs.1,000 at the beginning of each month; Bimal has withdrawn Rs.500
6,00,000 at the end of each month and Chandan has withdrawn Rs.1,500 each month
Calculate interest on drawings, if the rate of interest is 6% p.a.

AoA
Interest = Total of Products x Rate x 1 .
100 12 [Ajay: Rs.390; Bimal: Rs.165; Chandan: Rs.540]
= 6,00,000 x 6 x 1 = Rs.3,000
100 12 Q-28: Chander and Dhanesh are partner in a firm. During the year ending 31st
December, Chander has withdrawn Rs.1,000 per month and Dhanesh has
Illustration-11: Silver and Gold start business on 1st January with capital of withdrawn as follows :
Rs.75,000 and Rs.30,000 respectively. They agree to share profits in the proportion Feb.1: Rs.2,000; April 30: Rs.1,000; June1: Rs.3,000;
to their capital after allowing interest on capital at 10% p.a. Aug.31: Rs.2,500; Nov.1: Rs.2,000.
You are to show proper accounts to allocate the net profit of Rs.50,000, taking into Calculate interest on drawings, if the rate of interest is 12% p.a.
consideration the following further information: [Chander: Rs.720; Dhanesh: Rs.650]
Silver Gold
Date Introduced Withdrawn Introduced Withdrawn Q-29: X and Y are partners in a firm. During the year ending 31st March, X has
April-1 - 10,000 12,000 - withdrawn Rs.24,000 while Y has withdrawn in the following manner:
June-30 8,000 - 13,000 - May-1: Rs.5,000; Aug.-31: Rs.5,000; Dec.-31: Rs.10,000; March-31: Rs.4,000
Aug.-1 10,000 - 12,000 - Calculate interest on drawings, if the rate of interest is 9% p.a.
Sept.-30 - 5,000 - - [X: Rs.1,080; Y: Rs.900]
Dec.-1 7,000 - - 6,000
Solution: Q-30: Vinod and Mohan were partners in a firm. The partnership agreement
Calculations for Silver: provided that interest on drawings was to be charged @ 12% p.a. Vinod had
Date Amount Months Product withdrawn the following amounts during the year ended 31.12.2012.
1st January 75,000 12 9,00,000 Date Amount (Rs.)
1st April (-) 10,000 9 (-) 90,000 01.01.2012 10,000
30th June 8,000 6 48,000 31.03.2012 16,000
1st August 10,000 5 50,000 01.07.2012 20,000
30th September (-) 5,000 3 (-) 15,000 31.12.2012 4,000
1st December 7,000 1 7,000 Calculate interest on Vinod’s drawings.
9,00,000 [All India 2000 Compartment] [Rs.3,840]
28 Fundamentals of Partnership Practice in Accountancy 13

Q-23: A and B are partners in a firm sharing profits and losses as 3 : 2. Their
Capital Accounts, as on 01.01.2012 stand as A: Rs.50,000 and B: Rs.30,000. The CA. Naresh Aggarwal’s
partners are allowed 5% p.a. by way of interest on capitals. The drawings of the
partners during the year ended 31.12.2012 amounted to Rs.7,000 and Rs.6,000
ACADEMY of ACCOUNTS
respectively. The profit during the year, before charging interest on capital and Accounting • Costing • Taxation • Financial Management
annual salary of B at the rate of Rs.6,000; amounted to Rs.50,000. 10% of this profit West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
is to be kept in a Reserve Account. You are required to prepare Profit & Loss
Appropriation A/c and Partners Capital A/cs.
[Divisible profit: Rs.35,000; A’s Capital: 66,500; B’s Capital: 45,500] Calculations for Gold:
Date Amount Months Product
Q-24: A, B and C are partners sharing profits and losses in the ratio of 2 : 2 : 1 after 1st January 30,000 12 3,60,000
providing for interest at 5% on their respective capitals and allowing B and C a 1st April 12,000 9 1,08,000
salary of Rs.10,000 each p.a. Capital of A is Rs.1,00,000; B is Rs.60,000 and C is 30th June 13,000 6 78,000
Rs.40,000. During the year 2012, A has drawn Rs.15,000 and B and C in addition 1st August 12,000 5 60,000
to their salaries have drawn Rs.3,000 and Rs.2,000 respectively. The Profit and 1st December (-) 6,000 1 (-) 6,000
Loss Account for the year ended 31.12.2012 showed a net profit of Rs.90,000. On 6,00,000
01.01.2012, the balances in the Current Account of the partners were: Capital ratio of Silver and Gold :
Total of products of Silver’s Capital : Total of products of Gold’s Capital

AoA
A Rs.7,500 (Cr.); B Rs.4,500 (Cr.) and C Rs.1,000 (Dr.). Show the Partners Capital
and Current Accounts after division of profits in accordance with the partnership i.e. 9,00,000 : 6,00,000 or 3 : 2
agreement. Interest on Capitals:
[Divisible Profit: Rs.60,000; Current Alcs: A Rs.21,500(Cr.); B Rs.28,500(Cr.); C Rs.11,000(Cr.)] Interest = Total of Products x Rate x 1 .
100 12
Q-25: A and B are partners sharing profits in the ratio of 3 : 2. Their capitals at the Silver’s Interest = 9,00,000 x 10 x 1 . = Rs.7,500
beginning was Rs.1,50,000 and Rs.1,00,000 respectively. Prepare Profit and Loss 100 12
Appropriation Account, Fixed Capital Accounts and Current Capital Accounts from Gold’s Interest = 6,00,000 x 10 x 1 . = Rs.5,000
the information given as under : 100 12
(i) Profit shown by Profit and Loss Account is Rs.1,80,000. Dr. Profit and Loss Appropriation Account Cr.
(ii) B will get 5% commission on trading profit. Particulars Amount Particulars Amount
(iii) Allow interest on capital @ 10% p.a.
(iv) A and B are to get salaries of Rs.2,000 p.m. and Rs.1,000 p.m. respectively. To Interest on Capital to : By Profit & Loss A/c (Profit) 50,000
(iv) Charge interest on drawings as A- Rs.2,000 and B- Rs.1,000. Silver 7,500
(v) Drawings of A and B were Rs.20,000 and Rs.10,000 respectively. Gold 5,000 12,500
[Commission of B: Rs.9,000; Fixed Capital: A- Rs.1,50,000; B- Rs.1,00,000; To Profit transferred to:
Current Capital: A- Rs.84,800; B- Rs.65,200; Divisible Profit: Rs.1,13,000] Silver (3/5) 22,500
Gold (2/5) 15,000 37,500
Q-26: A, B and C are in partnership and as on 1st April, 2011 their respective 50,000 50,000
capitals were: Rs.1,20,000, Rs.90,000 and Rs.90,000. B is entitled to a salary of
Rs.18,000 and C Rs.12,000 per annum, payable before division of Profit. Interest Illustration-12: A and B are partners in a firm sharing profits in the ratio of 3 : 2.
is allowed on capital at 5% per annum and is not charged on drawings. Of the Their capital at the end of the year 2012, were Rs.93,000 and Rs.81,000
divisible Profits A is entitled to 50% of the first Rs.30,000; B to 30% and C to 20%, respectively. During the year partners withdrawn Rs.9,000 each. Further capital
over that amount of Profits are shared equally. The profit for the year ended 31st introduced by B during the middle of the year was Rs.12,000. The profit earned
March 2012, after debiting partner's salaries, but before charging interest on capital and distributed between the partners was Rs.45,000.
was Rs.63,000 and the partners had drawn Rs.30,000 each on account of salaries, Calculate interest on capital to be allowed at the end of the year @ 10% p.a.
interest and profit. Solution:
14 Fundamentals of Partnership Practice in Accountancy 27

Calculations for Opening Capital of the Partners :

A B CA. Naresh Aggarwal’s
Capital at the end of the current year
Add : Drawings
93,000
9,000
81,000
9,000
ACADEMY of ACCOUNTS
1,02,000 90,000 Accounting • Costing • Taxation • Financial Management
Less : Further Capital - 12,000 West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
1,02,000 78,000
Less : Profits 27,000 18,000
Capital at the beginning of year 2012 75,000 60,000 interest on drawings from the partners as follows:
A - Rs.3,000; B - Rs.4,000.
Now interest on capital may be calculated as given bellow : Prepare Profit and Loss Appropriation Account and Partners Capital Accounts
assuming that their capitals are fluctuating.
A’s Interest = 75,000 x 10 = Rs. 7,500
100 [Adopted All India] [Divisible Profit: 1,32,000; A’s Capital: Rs.1,85,200; B’s Capital: Rs.1,24,800]

B’s Interest = 60,000 x 10 + 12,000 x 10 x 6 = Rs. 6,600

100 100 12 Q-20: A and B are partners sharing profits in the ratio of 3 : 2 with capitals of
Alternative solution by product method for calculating B’s Interest on Capital: Rs.50,000 and Rs.30,000 respectively. Interest on capital is agreed @ 6% p.a. B is
Date Amount Months Product to be allowed an annual salary of Rs.2,500. During 2012, the profits of the year
prior to calculation of interest on capital but after charging B’s Salary amounted to

AoA
1st January 60,000 12 7,20,000
1st July 12,000 6 72,000 Rs.12,500. A provision of 5% of the net profit is to be made in respect of manager’s
7,92,000 commission. Prepare Profit & Loss Appropriation A/c and Partners Capital A/c.
[CBSE] [Commission: Rs.750; Profit: Rs.6,950; Capitals: A- Rs.57,170; B- Rs.37,080]
Interest = Total of Products x Rate x 1 .
100 12
10 1 Q-21: A and B are partners with capital of Rs.20,000 and Rs.15,000 respectively,
= 7,92,000 x x = Rs. 6,600
100 12 on 01.01.2012. The trading profit earned during the year 2012, before considering
the provisions of the deed is Rs.13,350. According to the deed Interest on capital
is to be allowed @ 10% p.a. and B is entitled to a salary of Rs.200 p.m. Interest on
 If we are given closing balance of capital then first of all we will have to
drawings is also charged which is calculated as Rs.300 for A and Rs.250 for B.
determine its opening balance by simply reversing the effects of all the
transactions which took place in Capital A/c during that year. Thereafter Total drawings of A and B were Rs.3,000 and Rs.2,000 respectively. Partners are
interest can be calculated on the opening capital in simple way or by product agreed to share profits in the proportion of 7/10 for A and 3/10 for B.
method (if there are frequent changes in capitals). You are required to show profit and loss Appropriation Account and Partners Fixed
and Current Capital Accounts.
 For finding the opening balance of capital a statement in following way [Divisible Profit: 8,000; Fixed Capital: A- 20,000; B- 15,000; Current Capital: A- 4,300; B- 4,050]
may be drawn:
Capital at the end of the current year xxxxx
Add : Drawings xxxx Q-22: A and B are partners sharing profits in the ratio of 3 : 2. Their capitals at the
Less : Further Capital xxxx beginning was Rs.75,000 and Rs.50,000 respectively. Prepare Profit and Loss
Less : Salary or other remuneration to Partners xxxx Appropriation Account, Fixed Capital Account and Current Capital Account from
(only if it was already given to them) the information given as under :
Add : Losses xxxx (a) Profit shown by Profit and Loss Account is Rs.90,000.
Less : Profits xxxx (b) B will get 5% commission on trading profit.
Capital at the beginning of year xxxxx (c) Allow interest on capital @ 10% p.a.
(d) Charge interest on drawings as Rs.1,000 for A and Rs.500 for B.
ADJUSTMENT ENTRY (e) Drawings of A and B were Rs.10,000 and Rs.5,000 respectively.
Adjustment entry is made in accounts when some errors or omissions is noticed [Commission of B: Rs.4,500; Fixed Capital: A- Rs.75,000; B- Rs.50,000
after closing the accounts of that year. It may also be required if a change occurred Current Capital: A- Rs.41,200; B- Rs.33,800; Divisible Profit: Rs.74,500]
26 Fundamentals of Partnership Practice in Accountancy 15

together with a commission of 10% of Net Profit after charging all commission and
partners salaries. Net Profit before providing for partners salaries and commission CA. Naresh Aggarwal’s
for the year 2012 was Rs.8,40,000. Show the distribution of profit.
[A's commission Rs.55,000; B's commission Rs.45,000;
ACADEMY of ACCOUNTS
Net Profit Rs.4,50,000; A's and B's share Rs.2,25,000 each] Accounting • Costing • Taxation • Financial Management
West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
Q-17: Ravi and Vijay are partners sharing profits and losses in the ratio of 3 : 1. On
1st April, 2011, their capitals were: Ravi Rs.2,00,000 and Vijay Rs.1,20,000. During
the year ended 31st March, 2012 they earned a Net profit of Rs.2,00,000. The in the partnership agreement with retrospective effect.
terms of partnership are as follows: A single adjustment entry may adjust many errors, omissions and changes. For
(a) Interest on capital is to be allowed @ 6% per annum. this, we have to make a statement to find out the amounts which are to be filled in
(b) Ravi will get a commission of 2% on turnover. Adjustment Journal Entry. In this statement some mathematical calculations is
(c) Vijay will get a salary of Rs.24,000 per annum. done to give effect to rectifications and changes. If a partner’s capital increases by
(d) Vijay will get a commission of 5% on profit after deduction of all expenses rectification it is added in his column but at the same time firm gets a loss therefore
including such commission. it is subtracted in firm’s column. Similarly if a partner’s capital decreases by
Partners drawings for the year were: Ravi Rs.32,000 and Vijay Rs.24,000. Turnover rectification it is subtracted from his column but at the same time firm gets a profit
for the year was Rs.12,00,000. therefore it is added in firm’s column.
After all adjustments are done the total of firm’s profit or loss is divided in all the

AoA
After considering the above facts, you are required to prepare the Profit and Loss
Appropriation Accounts. partners as per their profit sharing ratios. Now if partner’s balance is negative
[Commission of Vijay Rs.6,324; Divisible Profit: Ravi Rs.94,857; Vijay Rs.31,619] then it will be debited and if partner’s balance is positive then it will be credited
in Adjustment Journal Entry.
Preparation of Profit & Loss Appropriation A/c and Partners Capital A/cs
Q-18: X and Y started a partnership business on 01.01.2012. They contributed Illustration -13: X, Y and Z started a business with capital of Rs.1,00,000; Rs.60,000
Rs.80,000 and Rs.60,000 respectively as their capitals. The terms of the partnership and Rs.40,000 respectively. During the year they earned a profit of Rs.54,000
agreement are as under : which was distributed among them in their profit sharing ratio without taking into
(i) Interest on capital and drawings will be allowed @ 12% p.a. consideration the following matters of the Deed.
(ii) X and Y to get a monthly salary of Rs.2,000 and Rs.3,000 respectively. (i) Interest on Capital at the rate of 5% p.a.
(iii) Sharing of profit or loss will be in the ratio of their capital contribution. (ii) Salary to Y and Z Rs.4,000 each.
The profit for the year ended 31.12.2012, before making the above appropriations (iii) Special commission to X Rs.6,000.
was Rs.1,00,300. The drawings of X and Y were Rs.40,000 and Rs.50,000 You are asked to prepare a single journal entry to rectify the above mistake. Working
respectively. Interest on drawings amounted to Rs.2,000 for X and Rs.2,500 for Y. notes should also be shown clearly.
Prepare Profit and Loss Appropriation Account and Partners Capital Accounts
assuming that their capitals are fluctuating. Solution:
[Divisible Profit: Rs.28,000; Profit Sharing Ratio 4 : 3; X’s Capital: Rs.87,600; Y’s Capital: Rs.62,700] Calculations for Adjustment Entry :
Particulars X Y Z Firm
Q-19: A and B are partners in a firm sharing profits and losses in the ratio 3 : 2. The Interest on capital + 5,000 + 3,000 + 2,000 - 10,000
balances standing to the credit of their capital accounts as on 01.04.2011 were : Salary to partners - + 4,000 + 4,000 - 8,000
A - Rs.1,00,000; B - Rs.80,000. Commission to X + 6,000 - - - 6,000
The terms of the partnership deed provide for the following : Total + 11,000 + 7,000 + 6,000 - 24,000
(i) That the partners will be paid interest on their capitals @ 15% p.a. Loss Adjustment (1 : 1 : 1) - 8,000 - 8,000 - 8,000 + 24,000
(ii) Both the partners to get a monthly salary of Rs.2,000 each. Balance + 3,000 - 1,000 - 2,000 Nil
The profits of the firm for the year ended 31.03.2012, before making the above Journal Entry :
appropriations and charging interest on capital were Rs.2,00,000. The drawings
of A and B were Rs.30,000 and Rs.40,000 respectively. The firm decided to charge
16 Fundamentals of Partnership Practice in Accountancy 25

Date Particulars L.F. Debit Credit

____________________________________________________________________ CA. Naresh Aggarwal’s
Y’s Capital A/c
Z’s Capital A/c
Dr.
Dr.
1,000
2,000
ACADEMY of ACCOUNTS
To X’s Capital A/c 3,000 Accounting • Costing • Taxation • Financial Management
(Being adjustment entry recorded for omission of West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
interest on capital, salary and commission)

(i) Interest on capital at 10% p.a.

Illustration-14: Ravi and Vijay are partners in a firm sharing profit and loss equally.
(ii) Amit to get salary of Rs.2,000 p.m. and Vijay Rs.3,000 p.m.
During the Last three years they were distributed following profits :
(iii) Profits are to be shared in the ratio of 3 : 2.
Year 2012: Rs.60,000; Year 2011: Rs.40,000; Year 2010: Rs.20,000.
The profits for the year ended 31.03.2012 before making above appropriations
Now all partner decide to share profits in their capital ratios with retrospective
were Rs.2,16,000. Interest on drawings amounted to Rs.2,200 for Amit and Rs.2,500
effect for last two completed years.
for Vijay. Prepare Profit and Loss Appropriation Account
From the capital accounts of the partners, ratio for Ravi and Vijay are ascertained
[CBSE (Delhi)]
as follows : Year 2012:- 2 : 1, Year 2011:- 2 : 3, Year 2010:- 4 : 1.
[Divisible Profit: Rs.1,25,700; Amit’s: Rs.75,420; Vijay’s: Rs. 50,280]
Show a journal entry to make adjustment in capital accounts.
Solution:
Q-13: Mahesh and Ramesh are partners with capitals of Rs.50,000 and Rs.60,000

AoA
Calculations for Adjustment Entry :
respectively. On 1st January, 2012, Mahesh gives a loan of Rs.10,000 and Ramesh
Particulars Ravi Vijay Firm
introduced Rs.20,000 as additional capital. Profit for the year ending 31st March
Profit of year 2012 and year 2011 taken back in old ratio (1 : 1) - 50,000 - 50,000 + 1,00,000
2012 was Rs.15,200. There is no partnership deed. Both Mahesh and Ramesh
Profit Adjustment for year 2012 in ratio (2 : 1) + 40,000 + 20,000 - 60,000
expect interest @ 10% p.a. on the loan and additional capital advanced by them.
Profit Adjustment for year 2011 in ratio (2 : 3) + 16,000 + 24,000 - 40,000
Show how the profits would be divided ? Give reasons.
Balance + 6,000 - 6,000 Nil
[Delhi, 2001 Compt.] [Divisible Profit: Rs.15,050; Interest on Loan: Rs.150; Interest on Capital: Nil]
Journal Entry :
Date Particulars L.F. Debit Credit Q-14: X and Y contribute Rs.50,000 and Rs.30,000 respectively. They decide to
____________________________________________________________________
allow interest on capital @ 6% per annum. Their respective share of profits is 3 : 2
Vijay’s Capital A/c Dr. 6,000
and the business profit (before interest) for the year is Rs.4,000. Show the
To Ravi’s Capital A/c 6,000
distribution of profits if :
(Being adjustment entry recorded for change in
(i) There is no agreement except for interest on capitals.
profit sharing ratio with retrospective effect)
(ii) There is a clear agreement that the interest on capitals will be allowed even if
it involves the firm in loss.
Illustration-15: A, B and C were partners in a firm sharing profits in the ratio of
[(i): Interest on capitals: A- Rs.2,500; B- Rs.1,500;
1 : 2 : 2. After the division of the profits for the year ended 31.03.2012 their capitals
(ii): Interest on capitals: A- Rs.3,000; B- Rs.1,800; Loss: A- Rs.480; B Rs.320]
were:
A: Rs.75,000; B: Rs.90,000; C: Rs.1,05,000
Q-15: A, B and C are partners sharing profits and losses equally. As per partnership
During the year 2012-11 they withdrew Rs.10,000 each and the profit of the year
deed, C is entitled to a commission of 10% on net profit after charging such
was Rs.30,000. The Partnership Deed provided that interest on capital will be
commission. Net profit before charging commission is Rs.66,000. Show Profit and
allowed @ 10% p.a. and a salary of Rs.5,000 p.a. to each partner. While preparing
Loss Appropriation A/c.
the final accounts, interest on Partner’s Capital and salary was not allowed. You
[C’s Commission: Rs.6,000; Divisible Profit: Rs.60,000]
are required to pass the necessary adjustment entry for providing interest on capitals.
Show your working clearly.
Q-16: A and B are partners in a firm. A is entitled to a salary of Rs.2,40,000 per
Solution:
annum together with a commission of 10% of Net Profit after partners salaries but
As we are given closing capital of partner for the year 2012-11, therefore to calculate
before charging any commission. B in entitled to a salary of Rs.12,500 per quarter
interest on capital first of all we will have to determine Opening Capitals of partners:
24 Fundamentals of Partnership Practice in Accountancy 17

Rs.3,000 respectively. They are also allowed interest on capital @ 6% p.a. Remaining
profits is to be distributed in the ratio of 3 : 2. CA. Naresh Aggarwal’s
You are required to distribute the total profit of Rs.38,000 which is earned during
the current financial year. Show proper accounts.
ACADEMY of ACCOUNTS
[Divisible Profit: Rs.25,000] Accounting • Costing • Taxation • Financial Management
West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
Q-8: A and B are partners with capital of Rs.30,000 and Rs.20,000 respectively.
The terms of partnership deed is as follows: Calculations for Opening Capital :
(i) Interest on capital is allowed at the rate of 6% p.a. Particulars A B C
(ii) Salary is allowed to A at Rs.1,000 p.a. Capital at the end (as on 31.03.2012) 75,000 90,000 1,05,000
(iii) Commission to B at the rate of 10% on net profit. Add : Drawings 10,000 10,000 10,000
(iv) Remaining profits is to be shared by A and B in the ratio of 3 : 2. 85,000 1,00,000 1,15,000
During the year they earned a profit of Rs.14,000 after charging A’s salary but Less : Profit 6,000 12,000 12,000
before making other adjustments. Capital at the beginning (as on 01.04.2011) 79,000 88,000 1,03,000
Prepare an account showing distribution of profits. Show calculations clearly. Interest on Capital @ 10% p.a. 7,900 8,800 10,300
[B’s Commission: Rs.1,500; Divisible Profit: Rs.9,500]
Calculations for Adjustment Entry :

AoA
Q-9: P and Q are partners sharing profits in proportion of 3 : 2 with capitals of Particulars A B C Firm
Rs.40,000 and Rs.30,000 respectively. Interest on capital is agreed at 5% p.a. Q is Interest on capital + 7,900 + 8,800 + 10,300 - 27,000
to allowed an annual salary of Rs.3,000 which has not been withdrawn. During Salary to partners +5,000 +5,000 +5,000 -15,000
2012 the profits for the year prior to calculation of interest on capital but after Total +12,900 +13,800 +15,300 -42,000
charging Q’s salary amounted to Rs.12,000. A provision of 5% of this amount is to Loss Adjustment (1 : 2 : 2) - 8,400 - 16,800 - 16,800 + 42,000
be made in respect of the manager’s commission. Balance + 4,500 - 3,000 - 1,500 Nil
Prepare an account showing the allocation of profits.
[Adopted CBSE (Delhi)] Journal Entry :
[Manager’s Commission: Rs.600; Divisible Profit: Rs.7,900]
Date Particulars L.F. Debit Credit
____________________________________________________________________
Q-10: A and B are partners in a firm. A’s capital is Rs.10,000 and B’s capital is B’s Capital A/c Dr. 3,000
Rs.6,000. Interest is payable @ 6% p.a. B is entitled to a salary of Rs.300 p.m. Profit C’s Capital A/c Dr. 1,500
for the current year before interest and salary to B is Rs.8,000. Distribute the profit To A’s Capital A/c 4,500
between A and B. (Being adjustment entry recorded for omission
[CBSE (Delhi)] [Divisible Profit: Rs.3,440; A’s Share: Rs.1,720; B’s Share: Rs.1,720] of interest on capital and salary)

Q-11: X, Y and Z are partners in a firm sharing profits in the ratio of 2 : 2 : 1. The fixed Illustration-16: A and B are partners sharing profits and losses in the ratio of
capitals of the partners were: X Rs.4,00,000; Y Rs.3,00,000; and Z Rs.2,00,000. 3 : 2. At the end of the year on 31.12.2012 they decided to take their manager C
The partnership deed provides that interest on capital should be allowed at the into partnership for past three years. As a manager C was getting an annual salary
rate of 5% p.a. and that Z should be allowed a salary of Rs.2,500 p.m. The profit of of Rs.4,500. He had also advanced Rs.30,000 to the firm by way of a loan on
the firm for the year ended 31.03.2012 after debiting Z’s salary were Rs.2,95,000. which he was getting interest @ 10% p.a. During the three years, firm’s profits after
Prepare Profit & Loss Appropriation A/c. adjusting salary to C, interest on loan and interest on capital of partners were :
[Divisible profit: Rs.2,50,000] 2010 Profit 40,000
2011 Loss 20,000
Q-12: Amit and Vijay started a partnership business on 01.04.2011. Their capital 2012 Profit 60,000
contributions were Rs.2,00,000 and Rs.1,50,000 respectively. The partnership According to the new agreement, C is to be given annual salary of Rs.3,500 and
deed provided that : 1/5th share in the profits of the firm. C’s loan shall be treated as his capital from the
18 Fundamentals of Partnership Practice in Accountancy 23

beginning and similar to other partners, his capital will carry interest @ 6% p.a.
Record the necessary Journal Entries to give effect to the above arrangement. CA. Naresh Aggarwal’s

Solution:
[Adapted SSC (Delhi)]
ACADEMY of ACCOUNTS
C’s total remunerations as a manager : Accounting • Costing • Taxation • Financial Management
Interest on loan @ 10% on Rs. 30,000 for 3 years (3,000 x 3) 9,000 West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
Salary Rs. 4,500 p.a. for 3 years 13,500
Total (a) 22,500
Dr. Profit and Loss Appropriation Account Cr.
C’s total remunerations (except share in profits) as a partner :
Interest on Capital @ 6% on Rs. 30,000 for 3 years (1,800 x 3) 5,400 Particulars Amount Particulars Amount
Salary Rs. 3,500 p.a. for 3 years 10,500
To Salary to A 6,000 By Profit & Loss A/c 96,000
Total (b) 15,900
To Interest on Capital to : (Net Profit)
Total profits of the firm of 3 years when C was manager :
A 3,500 By Interest on Drawings:
Year 2010 40,000
B 1,500 5,000 A 2,000
Year 2011 - 20,000
To Interest on A’s Loan 8,000 B 1,000 3,000
Year 2012 60,000
(At the rate of 8% p.a.)
Total (c) 80,000
To Profit transferred to:

AoA
Revised Total profits of the firm for last 3 years after C is admitted as a partner with
A (5/8) 50,000
retrospective effect = c + a - b
B (3/8) 30,000 80,000
= 80,000 + 22,500 - 15,900
= Rs. 86,600 99,000 99,000
C’s Share in profit i.e. 1/5 = 86,600 x 1 . You are required to point out any contravention of the law, found in above account
5
and draw it in proper manner.
= Rs.17,320 (d)
[Correct Interest on Loan: Rs.6,000; Correct Profit: A- Rs.45,000; B- Rs.45,000]
Net increase in C’s profit = b+d-a
= 15,900 + 17,320 - 22,500
Q-5: X and Y started business on 1st January 2012 with capital of Rs.40,000 and
= Rs.10,720
Rs.30,000 respectively. Due to further need of money Y gave a loan of Rs.20,000
As C’s profit has been increased by Rs.10,720 therefore it will be sacrificed by old
to the firm on 1st July 2012. At the end of year 2012 they earned a net profit of
partners A and B in their profit sharing ratio i.e. 3 : 2.
Rs.8,000. You are to draw their Profit and Loss Appropriation Account to show
Therefore, allocation of the profit.
A’s sacrifice = 10,720 x 3 = Rs.6,432
[Interest on Y’s Loan Rs.600; Divisible Profit: Rs.7,400]
5
B’s sacrifice = 10,720 x 2 = Rs.4,288
Q-6: Ram and Mohan start business on 01.04.2011 with capital of Rs.50,000 and
5
Rs.20,000 respectively. According to the deed Ram is entitled to salary of Rs.500
Date Particulars L.F. Debit Credit p.m. and Mohan is to be allowed a commission at the rate of 10% of net profit.
____________________________________________________________________
Interest on capital is also allowed @ 5% p.a. During the first year of partnership
A’s Capital A/c Dr. 6,432
they earn a net profit of Rs.25,000. You are to show a Profit and Loss Appropriation
B’s Capital A/c Dr. 4,288
Account to allocate the profit for the year ended 31.03.2012.
To C’s Capital A/c 10,720
[Mohan’s Commission: Rs.2,500; Divisible Profit: Rs.13,000]
(Being adjustment entry for change in agreement)
Q-7: A and B are partners in a business for last three years. The balance in their
capital accounts at he beginning of current year was Rs.60,000 and Rs.40,000
respectively. A and B are allowed an annual remuneration of Rs.4,000 and
22 Fundamentals of Partnership Practice in Accountancy 19

Q-2: X, Y and Z are in partnership where no partnership agreement is made. You are
required to draw a correct Profit and Loss Appropriation Account form the wrong Profit CA. Naresh Aggarwal’s
and Loss Appropriation Account given as :
Dr. Profit and Loss Appropriation Account Cr.
ACADEMY of ACCOUNTS
Accounting • Costing • Taxation • Financial Management
Particulars Amount Particulars Amount
West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
To Profit & Loss A/c (Profit) 10,500 By Loss transferred to:
To Interest on Capital X (3/6) 11,850
X 2,500 Y (2/6) 7,900 GUARANTEE IN PARTNERSHIP
Y 2,000 Z ( 1/ 6) 3,950 23700 Sometimes a partner is admitted in a firm with a guarantee of a minimum amount of
Z 1,500 6,000 profit. In such case if the partner gets less than minimum amount then other partners
To Commission to X 1,200 have to contribute for him as per the guarantee agreement. Guarantee may be of
To Interest on Z’s Loan 3,000 following types:
(At the rate of 6% p.a.) 1. Partner to Firm (when a partner promise to earn a minimum amount for firm)
To Salary to Y 3,000 2. Firm to Partner (when all remaining partners give guarantee to a partner)
3. Partner to partner (when one partner gives guarantee to another partner)
23700 23700 If more than one type of guarantee are involved in a partnership deed then they all
are done in the same sequence as stated above.

AoA
[Divisible Profit: Rs.7,500]

Q-3: Kapil and Dev are partners in a firm without any agreement. After the end of Illustration-17: X, Y and Z were in partnership sharing profit and losses in the ratio
first year of partnership Kapil presents the following Profit and Loss Appropriation of 4 : 2 : 1 respectively. It was provided that in no case Z’s share in profit should be
Account to his partner Dev : less than Rs.15,000. The profits for the year 2012 amounted to Rs.63,000. You are
Dr. Profit and Loss Appropriation Account Cr. required to show the appropriation amongst the partners.
Solution:
Particulars Amount Particulars Amount Dr. Profit and Loss Appropriation Account Cr.
To Remunerations to: By Profit & Loss A/c 6,800 Particulars Amount Particulars Amount
Kapil 2,000 (Net Profit)
Dev 1,500 3,500 By Interest on Drawings: To X : 36,000 By Profit & Loss A/c 63,000
To Interest on Dev’s Loan 900 Kapil 200 less: for Z 4,000 32,000 (Net Profit)
(At the rate of 9% p.a.) Dev 100 300 To Y : 18,000
To Profit transferred to: less: for Z 2,000 16,000
Kapil (2/3) 1,800 To Z : 9,000
Dev (1/3) 900 2,700 Add: from X 4,000
Add: from Y 2,000 15,000
7,100 7,100
63,000 63,000
You are required to point out any contravention of the law, found in above account
and draw it in proper manner. Illustration-18: A, B and C are partners sharing profit and losses in the ratio of
[Correct Interest on Loan: Rs.600; Divisible Profit: Rs.6,200] 5 : 4 : 1. C is guaranteed that his share of profit will not be less than Rs. 5,000 in any
year. It is further decided that any loss arising from the guarantee will be borne by
Q-4: A and B are partners in a firm without any agreement. A presents the following A only.
Profit and Loss Appropriation Account to his partner B. You are required to allocate the profit though proper accounts for the two years :
(i) The profit for the year 2011 amounted to Rs.40,000.
(ii) The profit for the year 2012 amounted to Rs.60,000.
Solution:
20 Fundamentals of Partnership Practice in Accountancy 21

(i) For the year 2011

Dr. Profit and Loss Appropriation Account Cr. CA. Naresh Aggarwal’s
Particulars Amount Particulars Amount ACADEMY of ACCOUNTS
To A : 20,000 By Profit & Loss A/c 40,000 Accounting • Costing • Taxation • Financial Management
less: for C 1,000 19,000 (Net Profit) West Patel Nagar, New Delhi. Ph:8800215448. Website: www.academyofaccounts.org
To B : 16,000
To C : 4,000 Note: B has been given a composite guarantee of Rs.40,000 including his salary and
Add: from A 1,000 5,000 interest on capital, therefore we will have to determine his only profit guarantee.
40,000 40,000 This may be calculated by following way :
B’s Profit + Salary + Interest on Capital = 40,000
(ii) For the year 2012 Therefore, B’s Profit = 40,000 - Salary - Interest on Capital
Dr. Profit and Loss Appropriation Account Cr. = 40,000 - 2,400 - 1,600
Particulars Amount Particulars Amount = Rs.36,000

To Profit transferred to : By Profit & Loss A/c 60,000

A: 30,000 (Net Profit)

AoA
B: 24,000
C: 6,000 Excercise
60,000 60,000
PREPARATION OF PROFIT AND LOSS APPROPRIATION ACCOUNT
Illustration-19: A, B and C are partners in the ratio of 3 : 2 : 1. A gives guarantee
Q-1: A and B form a partnership without any partnership agreement. After the end
to the firm that his contribution in firm’s profit would not be less than Rs.48,000 in
of first year of partnership A draw the following Profit and Loss Appropriation A/c :
any year. The partnership deed also provides that C’s share of profit will not be
Dr. Profit and Loss Appropriation Account Cr.
less than Rs.20,000. Further, A has personally guaranteed B that his share of profit
including his salary and interest on capital will not be less that Rs.40,000. Terms of Particulars Amount Particulars Amount
the deed provides for Rs.200 p.m. to each partner as salary and interest on capital
was calculated as Rs.2,400 for A; Rs.1,600 for B and Rs.1,200 for C. To Salary to: By Profit & Loss A/c 14,000
The profit after charging partner’s salary and interest on capital is determined as A 2,400 (Net Profit)
Rs.84,000 in which A contributed to extent of Rs.36,000 only. B 1,500 3,900 By Interest on Drawings:
Solution: To Interest on Capital @ 6% A 125
Dr. Profit and Loss Appropriation Account Cr. A 1,200 B 75 200
B 600 1,800
Particulars Amount Particulars Amount
To Interest on B’s Loan 2,000
To A : 48,000 By Balance b/d 84,000 (At the rate of 6% p.a.)
less: for C 2,400 (Divisible Profit) To Commission to A 1,500
less: for B 5,600 40,000 By A’s Capital A/c 12,000 To Profit transferred to:
To B : 32,000 (Deficiency) A 3,000
less: for C 1,600
B 2,000 5,000
30,400
Add: from A 5,600 36,000 14,200 14,200
To C : 16,000
Add: from A 2,400 You are required to point out any contravention of the law found in above account
Add: from B 1,600 20,000 and draw it in proper manner.
[Divisible Profit: Rs.12,000]
96,000 96,000