Accounting For A Partnership Firm

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ACCOUNTING FOR A PARTNERSHIP FIRM

by : DR. T.K. JAINAFTERSCHOOL centre for social entrepreneurship sivakamu veterinary hospital roadbikaner 334001 rajasthan, indiawww.afterschoool.tkmobile : 91+9414430763

WHAT IS PARTNERSHIP ?

DOING BUSINESS TOGETHER, FOR PROFIT IS CALLED PARTNERSHIP JOINT VENTURE IS NOT PARTNERSHIP CO-OWNERSHIP IS NOT PARTNERSHIP

TYPES OF PARTNERSHIP

UNLIMITED where each partner has unlimited liability limited liaiblity where each partner has limited liaiblity (as per new partnership act 2006) sleeping parner not active partnership in profit only (for example minor)

Types of capital accounts

Fixed capital account or fluctuating capital account in fixed capital account, capital is kept in the ratio of profit sharing and all entries are transferred to partnership capital current account

Some rules...

No interest on capital unless provided in agreementNo interest on drawings unless provided in agreement No salary unless provided in agreement

Sacrificing and gaining ratio

When a new partner enters, old partners sacrifice, we calculate their sacrificing ratio (difference between their old profit sharing ratio and new profit sharing ratio)when a partner quits / leaves, other partners benefit, we calculate their gaining ratio (difference between old and new ratio)

RULES OF PARTNERSHIP

Every partner has a right to take part in the conduct of the business of the firm and also the right of free access to all records, books and accounts of the firm. Partners share profits and losses equally. It is so, even when partners contribute capital unequally. Partners are not entitled to any interest on capital contributed by them nor can they claim any salary for the work done by them for the firm. In case a partnership deed provides for payment of interest on capital or salary, it is payable only if there is a profit. On amounts advanced by a partner to the firm in excess of his agreed share of capital, the partner is entitled to receive interest on such excess at the rate of 6% per annum.

What is debit and credit

Every transaction has two aspects debit and credit. Basic accounting equation : assets = liabilities + equity debit denotes assets and credit denotes liabilityevery transaction has some impact on asset / liability or on both.

QUESTION...

On 1st April, 2008 P and Q started business in partnership agreeing to share profits and losses equally, P contributed Rs. 30,000 while Q contributed Rs. 20,000 by way of capital. It was agreed that interest be allowed on capital @6% per annum and charged on drawing @ 8% per annum. P withdrew Rs. 200 at the end of every months whereas Q withdrew Rs. 450 in the middle of every month. Profits before the above noted adjustments for the year ended 31st March, 2009 amounted to Rs.10000

SOLUTION...

WHEN INTEREST IS PAID AT THE END OF THE MONTH, WE MULTIPLY TOTAL AMOUNT BY 11/12 * TOTAL AMOUNT = 200*12INTEREST RATE = 8/100 INTEREST = 2400*11/12*1/2*8/100 =88

CONTINUED..

WHEN INTEREST IS PAID IN THE MIDDLE OF THE MONTH, WE HAVE TO MULTIPLY IT BY RATE = 8/12, AMOUNT=450*12=5400INTEREST=5400*1/2*8/12 = 216

INTEREST ON CAPITAL

P = 30000*6/100 = 1800Q=20000*6/100 = 1200 REMAINING PROFIT WILL BE DISTRIBUTED EQUALLY (AS NOTHING IS MENTIONED ABOUT THEIR PROFIT SHARING RATIO)

EXAMPLE

On 1st April, 2007 the capital accounts of A, B and C stood at Rs. 30,000, Rs. 20,000 and Rs. 10,000 respectively. They shared profits and losses equally. Profit and Loss account for the year ended 31 March, 2007 revealed a net profit of Rs.9,000 which was transferred to capital accounts of the partners equally. It was decided in April 2007 that profits should be distributed equally after allowing interests on capital @ 6% per annum with effect from 1st April, 2006. While going through the books of account for 2006-07 it was discovered that repair charges for As personal scooter amounting to Rs. 90 had been charged to Repairs Account.

SOLUTION...

DEBIT A'S CAPITAL ACCOUNT AND CREDIT P& L APPROPRIATION ACCOUNT BY 90 NOW CHARGE INTEREST ON CAPITAL . :1800,1200,600DISTRIBUTE REMAINIG PROFIT EQUALLY, EACH PARTNER GETS 1830 OF PROFIT.

EXAMPLE

C and D were sharing profits in the ratio of 3:1. Profits as per books for 2006-07 amounted to Rs. 40,000. In April 2007, they agreed to change the profit sharing ratio to 5:3 with retrospective effect from 1st April, 2006. It was found that outstanding expenses of Rs. 4,000 as on 31st March, 2006 and outstanding expenses of Rs. 3,000 as on 31st March, 2007 had not been taken into account while drawing up the final accounts for 2005-06 and 2006-07. Also by mistake interest on drawings had been ignored while preparing the accounts for 2006-07 such interest being Rs. 600 on Cs drawings and Rs. 300 on Ds drawings.

SOLUTION...

C GOT 30000 AND D GOT 10000 AS SHARE OF PROFIT. NEW PROFIT : 40000 (3000) + (600+300) = 37900SHARE OF C 5/8*37900 = 23687D = 3/8 * 37900 = 14212THUS C'S ACCOUNT HAS TO BE DEBITED BY (30000-23687-600)D ACCOUNT TO BE CREDITED (4212-300)

D5

EXAMPLE

With effect from 1st April, 2006, D, the manager in the firm of A,B, and C who were sharing profits and losses in the ratio of 5:3:2 respectively was admitted as a partner in the firm with 1/11th share of profit. It was agreed that should D share of profits exceed his remuneration as the manager, A will bear the burden of such an excess. As the manager D was entitled to a salary of Rs. 10,000 p.m. plus a commission of 2% of net profit remaining after charging his salary but before charging his commission. Profit for the year was 11,00,000 or 22,00,000

solution...

New share of D = 100000 or 200000old share : 120000+ (2/102*980000) = 19215= 139215 in first case old share : 120000+ (2/102*20,80,000) = 40784 = 160784 in second caseA will will bear (200000-160784)=39216

THANKS....

GIVE YOUR SUGGESTIONS AND JOIN AFTERSCHOOOL NETWORK / START AFTERSCHOOOL NETWORK IN YOUR CITY AFTERSCHOOOL@IN.COMPGPSE WORLD'S MOST COMPREHENSIVE PROGRAMME IN SOCIAL ENTREPRENEURSHIP

example...

X and Y are carrying on business in partnership. Z is admitted as a new partner who brings in Rs.8, 000 in cash and trade marks and patents valued at Rs. 2,000. Pass the journal entry.

Answer ...

Cash ac dr. 8000patents and trademark dr. 2000Z's capital account credit 10000

5 DECEMBER 09

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