Test: Introduction To Partnership Accounts - 1

A Partner is an Agent of the Firm (Section 18).

A partnership is a relationship between partners who agree to share the profits of the business.

The business can be carried on by all of them or any of them acting for all. This definition suggests that a partner can be an agent of the others.

As per the question, interest on Capital should be 2500 (10% of 25000) & 1500 (10% of 15000).
So, the interest will be distributed in their capital ratio i. e 5:3 so you will get 1500 & 900.

.Interest on drawings is gain for the business. Interest on drawings is an income to the firm, and hence it is credited to the profit and loss appropriation account. On the other hand, interest on drawings is an expense to the partners, and hence it is debited to their capital accounts.

Fluctuating Capital Method
Under this method as is apparent from the name, capital of each partner goes on changing from time to time. Each partner will have his separate capital account, which will be credited by his initial investment and any additional capital introduced during the year will also be credited to his capital account.

All the adjustments, which result decrease in capital will be debited to partner’s capital, such as drawing made by each partner, interest on drawings and share of loss. On the other hand, adjustments resulting increase in capital will be credited to partner’s capital, like interest on capital, partners salary if any, partner’s share of profit etc.

Balance of each partner’s capital account will be shown in the balance sheet. Debit balance of partner’s capital account is shown on the asset side and credit balance is shown on the liability side.

Explanatory Note: It should be noted that where nothing is specifically mentioned the capital method to be adopted will be the fluctuating capital method.

Because it is not related to the admission or retirement of the partners. At the time of admission or retirement goodwill will be calculated.

As per the partnership act, if the partnership deed is silent about the things mentioned above so in that case the partners are not entitled for any salary or interest on capital , but as per the provision even if the partnership deed is silent the partner is entitled for an interest @6% on loan or any advance given by him to the firm.

There is a formula for calculating interest on drawings at the end of every month.

= amount * 12 * rate * (11/24)
= 1000 * 12 * (5/100) * (11/24)
= Rs. 275

Interest on capital will be paid to the partners if provided for in the agreement but only from profits. Interest on capital is an appropriation and not a charge against profit hence, is provided only to the extent of profits. 

As per section 37 of the Indian Partnership Act 1932, the executors would be entitled at their choice to the interest calculated from the date of death till the date of payment on the final amount due to the deceased partner at 6% p.a. The loan of the deceased partner is treated as a third party loan. 

In case of partnership type of ownership in a business, partner current account is prepared when capital is fixed. Transactions such as drawings, salary, and interest on capital and drawings are recorded. The balance of this account fluctuates every year. The balance can be both credit or debit

According to partnership act 1932, No interest on capital will be allowed in the absence of partnership deed.

The essential elements of partnership firm are at least two persons, there is an agreement between all partners and partnership agreement is for some business. But its not necessary to that the partners have equal share of profits. They may have any profit sharing ratio as agreed or in the deed. 

Profit after interest and remuneration :
= Profit before interest and remuneration - Interest - remuneration

= Rs 8,000 - (600 + 360) - (3,600)
= Rs 3,440.

Distributing profit is equal ratio among partners

= Rs 3,440 / 2
= Rs 1,720 to each partner.

It is a definition given by Partnership act 1932 in sec 4
It contains 3 three parameters
1) Agreement
2) sharing of profit and losses
3) carried on by all any of them acting for all means mutual agency
above three things required to form a partnership.

Interest on capital = 2500 And 3000
but profit = 4600
so, 50000 / 60000 = 5:6
amount is divided into 5: 6
A= 4600 ÷ 11 × 5 = 2091
B = 4600 ÷ 11 × 6 = 2509

Every partner is bound to attend diligently to his duties in the conduct of the business. Every partner is an agent of the partnership firm. The business in the partnership firm can be carred on by all the partners or any one of them acting for all.

Profit after charging interest = Profit before charging interest - Interest on loan

= Rs 79,200 - 1,200
= Rs - 78,000.

Profit distribution among partners

= Rs - 78,000 / 3
= Rs - 26,000.

Profit for B and C = Rs - 26,000

Profit for A = Rs - 26,000 + Rs - 1,200

= Rs - 27,200. 

Note:-. 

1) When there is no mention about the profit sharing ratio among partners its assumed to be equal.

2) If there is no agreement or no provision regarding interest on loan in the agreement then the interest will be charged @ 6% p.a. 

Profit and loss appropriation account is an account where we record all transactions related to the partners like for example their salary, interest on capital, intrest on darawing etc so salary to partner will also appear on debit side of p & l appropriation account.

Profit and loss appropriation account facilitates sharing of the profits earned by the partnership firm. When there is only one proprietor in proprietorship firm there is no need of preparing p&l appropriation account.

Interest on drawing is treated as revenue for the firm because interest is paid by the proprietor for withdrawal from the business and it will became revenue for the firm.

Guarantee means the surety of a particular amount of profits by one or more partners and in some cases by the firm, where the burden of guarantee is borne by the party providing such a guarantee. In other words, it is a minimum fixed amount for the partner who is given such a guarantee.

Suppose C's capital = x then

B's capital = 4x (Since B's Capital is four times C's capital)

A's capital = 6x ( Since twice A's capital is equal to thrice B's capital)

A:B:C =6 x : 4x : x

= 6 : 4 : 1

B's share = 16500 * (4/11) = 1500*4 = 6000

Interest on capital is a financial charge that is paid to the owner(s) of a business in recognition of the use of their capital. It is typically paid out of the profits of the business and is calculated as a percentage of the capital invested by the owner(s).

The amount of interest on capital that is paid and the timing of the payments are typically specified in an agreement between the owner(s) and the business. This agreement may be a written document, such as a partnership agreement or a shareholder agreement, or it may be an informal understanding between the parties.

Interest on capital is an important consideration for businesses because it represents a cost that must be accounted for in the financial statements. It is also an important consideration for the owner(s) of the business, as it represents a return on their investment in the business. In the absence of an agreement, the amount of interest on capital that is paid may be determined by the business entity assumption, which states that the business is separate and distinguishable from its owner(s) and other stakeholders.

According to the partnership act the partners are to share profits equally unless anything else is agreed by the partners or is in the agreement.

Profit = closing capital -opening capital +drawings -interest on capital + interst on drawings
= 200000 - 100000 + 20000 -10000 + 2000 = 112000

The amount of rent would be seen as this partner's capital contribution instead of needing it paid from the venture.

Interest on drawings will be shown on the credit side of the profit and loss appropriation account. Interest on drawings is the interest charged by the firm on the drawings made by the partners. It is a source of income for the firm and hence, it is to be credited to profit and loss appropriation account.

Correct Answer :- c

Explanation : When the partners decide to treat the premium on Joint Life Policy as an expense, then they debit the Premium A/c to the Profit and Loss A/c every year to close it. In this situation, the full amount of policy received from the Insurance Company becomes a gain.

In the absence of any agreement interest on advances by a partner is allowed at 6 percent p.a. and is allowed whether there is profit or no. Interest on loan is a charge and will be provided regardless of profits earned. 

The correct option is Option A.

Fixed capital system of accounting states that the capital of partners will remain the same as in the beginning.

To record any entry related to capital introduction or withdrawal, partners' capital account is prepared and to record any appropriation in the profit like interest on drawing, capital and salaries of partners, partners' current account is prepared so that there is no change in capitals of partners.

The account is debited with capital withdrawn, drawings, interest on drawings and share of loss of the partner. As a result, the balance in this account goes on fluctuating periodically. Under this method, the partner's capital account may show either credit balance or debit balance.