Dear students,
Before you get started with chapter 3, Accounts of Partnership Firms – Fundamentals, do a quick revision of all the important formulas. Also be thorough with the format of the different accounts. Then, when you start working out the problems, you will do it with confidence and also do it easily. Here are the Important Formulas and Formats: Accounts of Partnership Firms – Fundamentals you must remember.
Provisions of the Indian Partnership Act, 1932: In the absence of partnership deed
If there is no partnership deed or when there is no express statement in the partnership deed, then the following provisions of the Act will apply:
| Provisions of the Indian Partnership Act, 1932 | |
|---|---|
| (i) Remuneration to partners | No salary or remuneration is allowed to any partner. [Section 13(a)] |
| (ii) Profit sharing ratio | Profits and losses are to be shared by the partners equally. [Section 13(b)] |
| (iii) Interest on capital | No interest is allowed on the capital. Where a partner is entitled to interest on capital contributed as per partnership deed, such interest on capital will be payable only out of profits. [Section 13(c)] |
| (iv) Interest on loans advanced by partners to the firm | Interest on loan is to be allowed at the rate of 6 per cent per annum. [Section 13(d)] |
| (v) Interest on drawings | No interest is charged on the drawings of the partners. |
Methods of Maintaining Capital accounts
There are two methods of maintaining capital accounts:
- Fixed capital method
- Fluctuating capital method
Fixed Capital Method
Under fixed capital method, two accounts are maintained for each partner namely (a) Capital account and (b) Current account.
Capital account – The transactions relating to initial capital introduced, additional capital introduced and capital permanently withdrawn are entered here.
Current account: All other transactions are recorded in the current account.
Format of partners’ capital account under fixed capital method
| Partners’ capital account | |||||||
|---|---|---|---|---|---|---|---|
| Date | Particulars | A (Rs.) | B (Rs.) | Date | Particulars | A (Rs.) | B (Rs.) |
| To Cash/Bank A/c | xxx | xxx | By Balance b/d | xxx | xxx | ||
| (permanent withdrawal of capital) | By Cash/Bank A/c | xxx | xxx | ||||
| To Balance c/d | xxx | xxx | (additional capital introduced) | ||||
| Total | xxx | xxx | Total | xxx | xxx | ||
Format of partners’ Current account under fixed capital method
| Partners’ current account | |||||||
|---|---|---|---|---|---|---|---|
| Date | Particulars | A (Rs.) | B (Rs.) | Date | Particulars | A (Rs.) | B (Rs.) |
| To Balance b/d | xxx | xxx | By Balance b/d | xxx | xxx | ||
| To Drawings a/c | xxx | xxx | By Interest on capital A/c | xxx | xxx | ||
| To interest on drawings | xxx | xxx | By Salary A/c | xxx | xxx | ||
| To P&L appropriation a/c | xxx | xxx | By Commission A/c | xxx | xxx | ||
| (share of loss) | By Profit and loss appropriation A/c | xxx | xxx | ||||
| To Balance c/d | (share of profit) | ||||||
| By Balance c/d | xxx | xxx | |||||
| Total | xxx | xxx | Total | xxx | xxx | ||
| The opening balance may be either credit balance or debit balance for a partner. | |||||||
| The closing balance may be either credit balance or debit balance for a partner | |||||||
Format of capital account under fluctuating capital method
| Partners’ current account | |||||||
|---|---|---|---|---|---|---|---|
| Date | Particulars | A (Rs.) | B (Rs.) | Date | Particulars | A (Rs.) | B (Rs.) |
| To Cash / Bank A/c | xxx | xxx | By Balance b/d | xxx | xxx | ||
| (capital withdrawn) | By Cash / Bank A/c | xxx | xxx | ||||
| To Drawings A/c | xxx | xxx | additional capital introduced) | ||||
| To Interest on drawings | xxx | xxx | By Interest on capital A/c | xxx | xxx | ||
| To Profit and loss appropriation A/c | xxx | xxx | By Salary A/c | xxx | xxx | ||
| (share of loss) | By Commission A/c | xxx | xxx | ||||
| By Profit and loss appropriation A/c | xxx | xxx | |||||
| To Balance c/d | xxx | xxx | (share of profit) | xxx | xxx | ||
| Total | xxx | xxx | Total | xxx | xxx | ||
Interest on capital
| Date | Particulars | LF | Debit | Credit |
| Interest on capital A/c Dr. | xxx | |||
| To Partner’s capital / current A/c | xxx | |||
| (For providing interest on capital) | ||||
| Profit and loss appropriation A/c Dr. | xxx | |||
| To Interest on capital A/c | xxx | |||
| (For closing interest on capital account) |
Formula to calculate Interest on capital:
Interest on capital = Amount of capital x Rate of interest per annum x Period of interest
Interest on Drawings
| Date | Particulars | L.F. | Debit | Credit |
|---|---|---|---|---|
| Partner’s capital/ current A/c Dr. | xxx | |||
| To Interest on drawings A/c | xxx | |||
| (interest on drawings charged) | ||||
| Interest on drawings A/c Dr. | xxx | |||
| To Profit and loss appropriation A/ | xxx | |||
| (interest on drawings closed) |
Formula to calculate Interest on drawings:
Direct Method:
Interest on drawings = Amount of drawings × Rate of interest × Period of interest
Product method: Interest on drawings
Average period method:
| Frequency of withdrawal | Average period (in months) | ||
| Time of withdrawal | |||
| At the beginning | In the middle | At the end | |
| Monthly | 6.5 | 6 | 5.5 |
| Quarterly | 7.5 | 6 | 4.5 |
| Half-yearly | 9 | 6 | 3 |
Salary and commission to partners
| Date | Particulars | L.F. | Debit | Credit |
|---|---|---|---|---|
| Partner’s salary A/c Dr. | xxx | |||
| Partner’s commission A/c Dr. | xxx | |||
| To Partner’s capital / current A/c | ||||
| (partners’ salary and commission due) | ||||
| Profit and loss appropriation A/c Dr. | xxx | |||
| To Partner’s salary A/c | xxx | |||
| To Partner’s commission A/c | ||||
| (salary and commission account closed) |
Commission as a percentage of net profit before charging such commission
Commission as a percentage of net profit after charging such commission
Interest on loan from partners
| Date | Particulars | L.F. | Debit | Credit |
|---|---|---|---|---|
| Interest on partner’s loan A/c Dr. | xxx | |||
| To Partner’s loan A/c | xxx | |||
| (interest on partner’s loan due) | ||||
| Profit and loss A/c Dr. | xxx | |||
| To Interest on partner’s loan A/c | xxx | |||
| (interest on partner’s loan account closed) |
Division of profits among partners
| Date | Particulars | L.F. | Debit | Credit |
|---|---|---|---|---|
| Profit and loss appropriation A/c Dr. | xxx | |||
| To Partner’s capital/current A/c | xxx | |||
| (Division of profits among partners) | ||||
| Note: If there is a loss, the reverse entry is made. |
Format of Profit and loss appropriation account
| Profit and loss appropriation account | |||
|---|---|---|---|
| Particulars | Rs. | Particulars | Rs. |
| To Interest on partners' capital A/c | xxx | By Profit and loss A/c * | xxx |
| To Partners’ salary A/c | xxx | By Interest on partners’ drawings A/c | xxx |
| To Partners’ commission A/c | xxx | ||
| To Partners’ capital/current A/c (Profit) | xxx | ||
| Total | xxx | Total | xxx |
Click here for the text book solutions to Chapter 3: Accounts of Partnership Firms-Fundamentals.
Leave a Reply