Accountancy: CUET Mock Test - 8

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. 

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.

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 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.

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.

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

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.

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

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.

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.

Section 4 of the Indian Partnership Act, 1932 defines partnership as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

When there is no partnership deed or partnership deed is prepared but it is silent on profit sharing ratio, in such a case rules of Partnership Act, 1932 will be applicable. According to which, profits or losses will be shared by the partners equally irrespective of their capitals.

Partnership deed plays important role in regulating the duties and responsibilities of each partner. A written partnership deed is useful to resolve disputes and misunderstanding among partners because every thing is in written form.

The beginning of partnership is always because of an agreement. There should be an agreement among the partners to start a partnership business. Agreement can be written or oral that does not matter.

A person who joins a partnership business, individually called a partner. The group of partners is called Firm and the name under which all business activities going on is known as firm’s name

In India, Partnership Act, 1932 is followed by all the partnership firms. Specially in the absence of partnership deed, all provisions of Partnership Act, 1932 will be applicable.

Partners are entitled to interest on capital only if rate of interest is mentioned in the partnership deed. But in this case business is continued without partnership deed. As per the Partnership Act, 1932, partners are enttiled to interest on capital only when there is partnership deed and rate of interest is mentioned in it.

A person who joins a partnership business, individually called a partner. The group of partners is called Firm and the name under which all business activities going on is known as firm’s name.

Interest on bank loan will be fixed by the bank and not by the partners or partnership deed. A partnership deed can show only those contents which are concerned with partners or firm. Interest on bank loan is a charge against the profit. It means it will be paid in all conditions whether there is profit or loss in the business.

Registration of a partnership firm is optional. It means there is no need for the registration of a partnership firm. As per the Partnership Act, 1932, it is an option for a partnership firm to get registered or not. But it is always advisable to get registered.

Interest paid on debentures is a charge against the profit. Partnership Deed is mainly concerned with the appropriations and some charge. Main contents of partnership deed are interest on capital, interest on drawings, name of the firm, partners, their names and address etc.

Members of the firm are called partners. Proprietor word is mainly used in case of sole proprietorship. But in case of partnership persons join hands together to run a business are called partners. They contribute capitals individually and responsible for all profits or losses.

Fixed capitals of the partners will remain fixed but there are two situations when fixed capitals of the partners may change:
1. When additional capital is introduced by the partners
2. When capital is withdrawn permanently under an agreement.

The business of partnership can be carried on by all the partners or any one of them acting for all. Thus, every partner is principal as well as agent of other partners and of the firm. Thus,
(i) Each partner is liable for acts performed by other partners, 
(ii) Each partner can bind other partners and the firm by his acts done in the ordinary course of business.

When rate of interest on capital is not mentioned in partnership deed, partners cannot claim for interest on capital. Interest on capital will be allowed to the partners only if rate of interest is mentioned in the partnership deed.

Calculation of Interest on loan:
Interest on A’s Loan = 40,000 × 5/100 × 6/12 = 1,000
Interest on B’s Loan = 20,000 × 5/100 × 6/12 = 500

Rent paid to a partner is a charge against the profit. It means it will reduce the profit. That’s why it is shown in Profit and Loss Account instead of Profit and Loss Appropriation Account.

Interest due to X and Y is ?3,000 and ?2,000 (total Rs.5,000) but profit is only ?1,500. In this case Ratio of appropriation will be 3 : 2 (3,000 : 2,000). Now divide profit ?1,500 in Ratio of appropriation i.e. 3:2.

Salary paid to partner is an appropriation of profit. All appropriation items are shown in the Profit and loss appropriation account.

When accounts are prepared under fluctuating capital method, only one account is prepared for the partners i.e. partners capital account. All items related to partners i.e. capital, interest on capital, interest on drawings, salary, commission etc. are shown in partners capital account.

There are two main views. One is from the accounting point of view, according to that, status of partnership is different i.e. it has a separate business entity. From the point of view of law, it has no separate business entity. Partners and firm are one.

Sharing of profits is must for a partnership business. Profits earned by a partnership firm should be divided amongst partners in the agreed profit sharing ratio. If profit sharing ratio is not mentioned in the partnership deed or partnership deed is silent on the distribution of profits, in such a case profits will be shared equally.

Mostly, the liability of the partners of a firm is unlimited. Their personal properties can be disposed off to pay the debts of the firm if required. The creditors can claim their dues from any one of the partner or from all of them, meaning partners are liable:
• Individually
• Collectively

The partners has taken a decision to provide employment to the women of economically backward section of the society. By this decision, partners are communicating the valued to the society i.e. financial security to the weaker section of society and social responsibility.

Loan interest to be provided @ 6% p.a.

Loan Amount = ₹ 20,000

Time (from 1st July to 31st March) = 9 months

A’s loan interest = 20,000 * 6/100 * 9/12

= 900

A Revaluation Account is prepared in order to ascertain net gain or loss on revaluation of assets and liabilities and bringing unrecorded items into books. The Revaluation profit or loss is transferred to the capital account of all partners including retiring or deceased partners in their old profit sharing ratio.

If a fixed amount is withdrawn on the first day of every quarter, then the interest is calculated on the amount withdrawn for a period of seven and half months.

Total drawings made by the partner during the whole year is 4000 * 4 = 16000

Interest on drawings = 16000 * 6/100 * 7.5/12

= 600

Salary paid to manager is a charge against the profit. It means this transaction will reduce the profit of the firm. All charge items are shown in profit and loss account only. That’s why salary paid to manager is shown in profit and loss account.

When a partner draws a fixed amount in the beginning of each quarter for his personal use then average period will be calculated as : Time after first drawing 12 months + Time after last drawing 3 months, and average period will be = 15/2 = 7.5.