1. Fundamentals of Partnership Firms
Partnership: An agreement between persons to share profits of a business carried on by all or any
acting for all (Indian Partnership Act, 1932, Sec 4).
Key Features:
- Mutual agency
- Profit-loss sharing
- Unlimited liability
- Not a separate legal entity
Partnership Deed includes:
- Profit-sharing ratio
- Interest on capital/drawings
- Salary/commission
- Loan interest
- Accounting period
- Goodwill treatment
Capital Account Formats:
1. Fixed Capital Method
2. Fluctuating Capital Method
Profit & Loss Appropriation Account:
[ Format ]
Dr. side: Salary, Commission, Interest on Drawings
Cr. side: Net Profit, Interest on Capital, Salary, Commission
Example Question:
Q: State any four provisions when no partnership deed exists.
,2. Profit & Loss Appropriation Account
Used to distribute net profit among partners after accounting for:
- Interest on Capital
- Salary/Commission to partners
- Interest on Drawings
- Guarantee adjustments
Example Format:
Profit & Loss Appropriation A/c
Dr. Side Cr. Side
Interest on Drawings Net Profit b/f
Salary to Partner A Interest on Capital
Commission to Partner B Salary/Commission
Example Question:
Q: A and B share profits 3:2; interest on capital @10%, salary to A ■1,000 p.m. Net profit
■1,20,000. Prepare P&L; appropriation account.
,3. Interest on Capital and Drawings; Partner’s Loan
Interest on Capital:
- Allowed only if deed specifies.
- Not allowed in absence of deed.
Interest on Drawings:
- Charged as per deed.
- Not charged if deed is silent.
Partner’s Loan:
- Interest allowed @6% p.a. (if deed silent)
Example Question:
Q: X and Y are partners with capital ■1,00,000 and ■50,000; interest on capital @12%; drawings:
X ■10,000 mid-year, Y ■5,000 quarterly. Net profit ■60,000. Prepare appropriation account.
, 4. Guarantee of Minimum Profit
When a partner is guaranteed a minimum amount of profit:
- Shortfall is borne by other partners in agreed ratio.
- Excess is shared in normal ratio.
Example:
A, B, C share profits 2:2:1. C guaranteed ■50,000. Profit for the year ■1,20,000.
Calculation:
C’s share = ■24,000 (1/5)
Shortfall = ■26,000
To be borne by A & B equally
Example Question:
Q: Explain how guarantee of profit is adjusted in profit distribution among partners.
Partnership: An agreement between persons to share profits of a business carried on by all or any
acting for all (Indian Partnership Act, 1932, Sec 4).
Key Features:
- Mutual agency
- Profit-loss sharing
- Unlimited liability
- Not a separate legal entity
Partnership Deed includes:
- Profit-sharing ratio
- Interest on capital/drawings
- Salary/commission
- Loan interest
- Accounting period
- Goodwill treatment
Capital Account Formats:
1. Fixed Capital Method
2. Fluctuating Capital Method
Profit & Loss Appropriation Account:
[ Format ]
Dr. side: Salary, Commission, Interest on Drawings
Cr. side: Net Profit, Interest on Capital, Salary, Commission
Example Question:
Q: State any four provisions when no partnership deed exists.
,2. Profit & Loss Appropriation Account
Used to distribute net profit among partners after accounting for:
- Interest on Capital
- Salary/Commission to partners
- Interest on Drawings
- Guarantee adjustments
Example Format:
Profit & Loss Appropriation A/c
Dr. Side Cr. Side
Interest on Drawings Net Profit b/f
Salary to Partner A Interest on Capital
Commission to Partner B Salary/Commission
Example Question:
Q: A and B share profits 3:2; interest on capital @10%, salary to A ■1,000 p.m. Net profit
■1,20,000. Prepare P&L; appropriation account.
,3. Interest on Capital and Drawings; Partner’s Loan
Interest on Capital:
- Allowed only if deed specifies.
- Not allowed in absence of deed.
Interest on Drawings:
- Charged as per deed.
- Not charged if deed is silent.
Partner’s Loan:
- Interest allowed @6% p.a. (if deed silent)
Example Question:
Q: X and Y are partners with capital ■1,00,000 and ■50,000; interest on capital @12%; drawings:
X ■10,000 mid-year, Y ■5,000 quarterly. Net profit ■60,000. Prepare appropriation account.
, 4. Guarantee of Minimum Profit
When a partner is guaranteed a minimum amount of profit:
- Shortfall is borne by other partners in agreed ratio.
- Excess is shared in normal ratio.
Example:
A, B, C share profits 2:2:1. C guaranteed ■50,000. Profit for the year ■1,20,000.
Calculation:
C’s share = ■24,000 (1/5)
Shortfall = ■26,000
To be borne by A & B equally
Example Question:
Q: Explain how guarantee of profit is adjusted in profit distribution among partners.
