Introduction to Partnership Accounting Video Lecture - Commerce

deviously we had seen that mr. Daniel
one of our oldest clients wanted to
expand his business we told him the
different benefits and negatives of
stopping up different types of
organizations like partnership firms and
join stock companies so he called us up
and informed us that based on our
discussion he had finally decided to go
with a partnership form they set up a
firm called
Messrs jdj a partnership firm structure
will help him to bring in more hands
more capital and better supervision of
the business the different tasks can be
divided as per specialization of each
partner and their area of interest and
there would be also spreading of risks
in the business now after about six
months from the date of commencement of
his new partnerships he visited us in
our office along with mr. John and mr.
Jack his partners and we had a very
detailed talk he then showed us his
partnership agreement which is also
termed as a partnership deed or articles
of partnership let's take a look at it
these were some of their important terms
and conditions
it shows the profit and loss sharing
ratio five is to 3 is to 2 who will act
on activities of the firm who is
eligible for a salary they decided that
mr. Jack was entitled to receive 10,000
as salary because he will be responsible
for the day-to-day activities or affairs
of the firm and mr. John and mr. Daniel
decided to contribute for the increasing
sale and therefore each of them will
receive a commission on net sales
since the firm has a separate entity
from that of its owners the partnership
firm also pays an interest to partners
for their capital contribution or if the
partners lend anything over and above
the capital as loan to the business then
if a partner withdraws cash or kind from
the firm interest on joins charge would
be 10% per annum
apart from this many other things were
also mentioned like the contact
information of the firm and of each of
the partners how would they operate
their bank accounts who would have
authority for signing on checks all the
provisions of admission and retirement
of a partner the different methods of
valuing goodwill how will they wind up
or dissolve the firm if needed so
everything all these terms are already
stated on their partnership deed
now the partners wanted to know how
accounting is done for partnership firms
well actually it is nothing different
than accounting for sole proprietorship
if a basic accounting fundamentals are
strong there's no need to worry at all
the principles of accounting are the
same and the process of accounting
remains the same irrespective of the
organization structure of business at
the end we are going to prepare the same
trading account profit and loss account
and balance sheet the only thing new
that you would come across is maybe
transactions related to partners like
they may get interest on capital by firm
they may make drawings they may get
Commission or salary as agreed upon on
their partnership deed mr. Daniel wanted
to know how those entries are passed
the same accounting principle of debit
and credit needs to be followed and
there is no other complication you know
it may require a different kind of
calculation while distributing profit
amongst partners but again to emphasize
the accounting treatment and the
accounting rules will remain the same
mr. Daniel and his partners were so
relieved to hear this
okay now let's see some important
provisions pertaining to partnership
firms on the partnership deed of Messrs
J DJ we can see that the partners are
bringing in capital the entry is the
same that is cash account debit to
capital account so this is how they our
capital accounts would look like now as
we know partnership firm pays an
interest to partners for their capital
contribution so mr. Daniel will receive
7% on initial capital 90,000 that is six
thousand three hundred mr. John will
receive five thousand two hundred and
fifty and mr. Jack will receive an
interest of four thousand two hundred so
we debit interest on capital and credit
effect shows on the partners capital
account similarly is Commission or
salary is given to partners as decided
the effect would be the same
next suppose one of the partners during
the year say on the sixth month
according to the accounting year once do
we draw some of his capital in cash or
in the form of goods so say if mr. jack
has withdrawn cash of five thousand the
business would now charge the partner
and interest on drawings at the end of
the accounting year in the financial
statement the effect would show an
interest on drawings account credit and
partners capital debit so that comes up
to 250 now what about the profits and
the losses he asked they are calculated
as per the agreed profit sharing ratio
suppose the firm's profit for one
accounting year is twenty thousand now
their PSR ratio is five is to 3 is to 2
on the partnership deed which means it
is a total of ten parts five plus three
plus two
so one part profit is two thousand so
mr. Daniel gets five parts that is two
thousand to five ten thousand mr. John
gets six thousand and Jack four thousand
so these were their profits profit in
profit and loss account will be
transferred to partners capital if there
is a loss then that too is shared
amongst the partners that's pretty much
everything about the accounting there's
nothing difficult no change from our
accounting concepts or principles used
for proprietorship
he then wanted to know ways in which
partnership accounts is to be presented
in a systematic way so there are many
ways which are recommended or followed
as for general accepted standards
partnership firms are recommended to
make a profit and loss appropriation
account which is like an extension of
profit and loss account but the
difference is in profit and loss account
the firm's profit is calculated which
all the outside interested parties would
like to know it's an actual profit or
loss from normal business operation but
it does not consider the appropriation
of profit amongst partners that is how
profit is divided amongst partners who's
going to get the interest on capital etc
all that may be shown separately in the
appropriation account this account is
made especially for the partners to know
how business profits are used or
distributed and it is considered a
separate account
now let's talk about the presentation of
the capital account some business before
separating the capital account as
partners capital and partners current
account for presentation purpose they
present just the initial capitals
brought in by the partners and any
additional capital during the year in
the partners capital account whereas all
the other entries like withdrawals
interest salaries all that they record
in the partners current account this
makes it easier for the readers of
financial statements it is also easy to
monitor and maintain discipline amongst
partners to keep aside capital
introduced in the business and not to
mix it up with the several other
transactions this is called as fixed
capital method whereas some partnership
firms prefer to present all these
transactions in partners capital account
itself in that case partners capital
amount fluctuates each year because all
the adjustments are made in the same
account and the balance carries forward
is the new capital account for their
next accounting period and that's all
about presentation mr. Daniel and his
partners were so relieved to hear this
amazed to know that it was so simple
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