Financial Accounting

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Lecture – 35

Mark up on Capital

A partner may be given markup on the capital invested by him.

Markup can be calculated on the whole amount or an amount exceeding a specific limit depending upon the terms of the agreement.

Financial Accounting

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Lecture – 35

Mark up on Drawings

Markup may also be charged on drawings, depending upon the partnership agreement.

Financial Accounting

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Lecture – 35

Markup on capital and drawing do not become part of Profit and Loss Account. They are treated in the appropriation account.

Financial Accounting

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Lecture – 35

Recording

• Mark up on Capital

Debit Profit and Loss Appropriation Account

Credit Partner A’s Current Account

Credit Partner B’s Current Account

Credit Partner C’s Current Account

Financial Accounting

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Lecture – 35

Recording

• Mark up on Drawings

Debit Partner A’s Current Account

Debit Partner B’s Current Account

Debit Partner C’s Current Account

Credit Profit and Loss Appropriation Account

Financial Accounting

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Lecture – 35

Calculation – Mark up on Capital

EXAMPLE

• Mr. Ali is a partner in AB Partnership.

• He is given mark up on capital @ 5 % on the proportionate amount of capital invested during the year.

• The details of his capital account are as follows: Opening balance as on July 01, Rs. 150,000 Further capital invested on December 01, Rs. 75,000

• Calculate the markup on his capital.

Financial Accounting

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Lecture – 35

Calculation – Mark up on Capital

SOLUTION

• From July 1 to November 30 capital was Rs. 150,000 and From December 1 to June 30 it increased to Rs. 225,000.

• Markup will be calculated as follows:

150,000 x 5% = 7,500 x 5 / 12 = 3,125.00

225,000 x 5% = 11,250 x 7 / 12 = 6,562.50

TOTAL 9,687.50

Financial Accounting

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Lecture – 35

Calculation – Mark up on Drawings

EXAMPLE

• Mr. Umer is a partner in a partnership firm. He drew following amounts during the year: August 1 Rs. 2000 October 1 Rs. 2500 November 1 Rs. 1500 March 1 Rs. 2000 June 1 Rs. 3000

• Calculate the markup on his drawing if the rate is 5%.

• Consider a financial year from July to June.

Financial Accounting

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Lecture – 35

Calculation – Mark up on Drawings

SOLUTION

Aug 1 Rs. 2,000 x 5% = 100 x 11 / 12 = 91.67

Oct 1 Rs. 2,500 x 5% = 125 x 9 / 12 = 93.75

Nov 1 Rs. 1,500 x 5% = 75 x 8 / 12 = 50.00

Mar 1 Rs. 2,000 x 5% = 100 x 4 / 12 = 33.33

Jun 1 Rs. 3,000 x 5% = 150 x 1 / 12 = 12.50

TOTAL 281.25

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Lecture – 35

QUESTION

• A, B and C are three partners sharing profits in the ratio 40%, 30% and 30% respectively.

• You are required to prepare profit and loss appropriation account and extract from balance sheet, showing partners capital and current accounts from the following information:

Financial Accounting

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Lecture – 35

Net profit for the year Rs. 667,700 Opening balance of Capital accounts A Rs. 880,000, B

Rs. 660,000, C Rs. 396,000 Opening balance of Current Account A Rs. 40,920, B Rs.

20,812, C Rs. 15,774 Drawings during the year A Rs. 202,400, B Rs. 156,200,

C Rs. 151,800 Salaries to be credited B Rs. 44,000, C Rs. 77,000 Mark up on Capital @ 5% and drawings A Rs. 5,280, B

Rs. 3,960 and C Rs. 2,860

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Lecture – 35

SolutionA, B, C Partnership

Profit and Loss Appropriation Account

Particulars Note Rs. Rs.

Net Profit 667,700

Less: Partners Salaries – BC

44,00077,000 121,000

Less: Mark up on capital – A 1B 1C 1

44,00033,00019,800 96,800

Add: Mark up on drawing – ABC

5,2803,9602,860 12,100

Profit distributable among partnersLess: Partners Share – A 2

B 2C 2

184,800138,600138,600

462,000

462,000

Profit Carried to Balance Sheet 0

This slide will be

split in 2 parts

Financial Accounting

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Lecture – 35

A, B, C Partnership

Profit and Loss Appropriation Account

Particulars Note Rs. Rs.

Net Profit 667,700

Less: Partners Salaries – BC

44,00077,000 121,000

Less: Mark up on capital – A 1B 1C 1

44,00033,00019,800 96,800

Parts 1

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Lecture – 35

Add: Mark up on drawing – ABC

5,2803,9602,860 12,100

Profit distributable among partnersLess: Partners Share – A 2

B 2C 2

184,800138,600138,600

462,000

462,000

Profit Carried to Balance Sheet 0

Part 2

Financial Accounting

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Lecture – 35

Solution

A, B, C Partnership

Balance Sheet As At June 30, -----

Particulars Note Amount Rs. Amount Rs.

Financed By:

Capital – A B

C

880,000660,000396,000 1,936,000

Current Account – A 3 B 4

C 5

62,04076,25296,514 234,806

Partners’ Equity 2,170,806

Extract from Balance Sheet

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Lecture – 35

Notes

• (1) Interest on Capital

o A = 880,000 x 5% = 44,000

o B = 660,000 x 5% = 33,000

o C = 396,000 x 5% = 19,800

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Lecture – 35

Notes

• (2) Partners Share in Profit

o A = 462,000 x 40% = 184,800

o B = 462,000 x 30% = 138,600

o C = 462,000 x 30% = 138,600

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Lecture – 35

Notes

• (3) A’s current Account

A’s Current A/c

Debit side.

Drawing 202,400 Mark up on Drawing 5,280

Balance C/F 62,040

Credit side.

Balance B/F 40,920 Salary 0 Markup on Capital 44,000 Profit 184,800

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Lecture – 35

Notes

(4) B’s Current Account

B’s Current A/c

Debit side.

Drawing 156,200 Mark up on Drawing 3,960

Balance C/F 76,252

Credit side.

Balance B/F 20,812 Salary 44,000 Markup on Capital 33,000 Profit 138,600

Financial Accounting

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Lecture – 35

Notes

• (5) C’s current Account

C’s Current A/c

Debit side.

Drawing 151,800 Mark up on Drawing 2,860

Balance C/F 96,514

Credit side.

Balance B/F 15,774 Salary 77,000 Markup on Capital 19,800 Profit 138,600

Financial Accounting

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Lecture – 35

Admission Of A Partner

• At the time of admission of a partner: Assets and liabilities are revalued. Value of Goodwill is determined.

• The value (in monetary terms) of the reputation of the business is called GOODWILL. It is an intangible asset.

Financial Accounting

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Lecture – 35

Dissolution Of A Firm

• When a partnership firm is dissolved, first of all, liabilities of the partnership are paid.

• The remaining amount (if available) is distributed among the partners in their profit/loss sharing ratios.