NCERT Solution - Chapter - 1 : Accounting for Partnership : Basic Concepts - 1, Class 12, Accounts | EduRev Notes

Accountancy Class 12

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Commerce : NCERT Solution - Chapter - 1 : Accounting for Partnership : Basic Concepts - 1, Class 12, Accounts | EduRev Notes

The document NCERT Solution - Chapter - 1 : Accounting for Partnership : Basic Concepts - 1, Class 12, Accounts | EduRev Notes is a part of the Commerce Course Accountancy Class 12.
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Short Answers:
Question 1: Define Partnership Deed.
Answer: Partnership Deed is a written agreement among the partners of a partnership firm. It includes agreement on profit sharing ratio, salaries, commission of partners, interest provided on partner's capital and drawings and interest on loan given or taken by the partners, etc. Generally following details are included in a partnership deed.
1. Objective of business of the firm
2. Name and address of the firm
3. Name and address of all partners
4. Profit and loss sharing ratio
5. Contribution to capital by each partner
6. Rights, types of roles and duties of partners
7. Duration of partnership
8. Rate of interest on capital, drawings and loans
9. Salaries, commission, if payable to partners.
10. Rules regarding admission, retirement, death and dissolution of the firm, etc.

Question 2: Why is it desirable to make the partnership agreement in writing.
Explain in 50 words.
Answer: Partnership agreement may be oral or written. It is not compulsory to form partnership agreement in writing under the Partnership Act, 1932. However, written partnership deed is desirable than oral agreement as it helps in avoiding disputes and misunderstandings among the partners. Also, it helps in settling disputes (as the case may be) among the partners, as written partnership deed can be referred to anytime. If written partnership deed is duly signed and registered under Partnership Act, then it can be used as evidence in the court of law.

Question 3: List the items which may be debited or credited in the capital accounts of the partners when:
 (i) Capitals are fixed
 (ii) Capitals are fluctuating

Answer:
(i) When Capitals are fixed
The following items are credited in the Partner's Capital Account when capital accounts are fixed.
(a) Opening balance of capital
(b) Additional capital introduced during an accounting year
The following items are debited in the Partner's Capital Account when capital accounts are fixed.
(a) Part of capital withdrawn
(b) Closing balance of capital
(ii) When Capitals are fluctuating
The following items are credited in the Partner's Capital Account when capital accounts are fluctuating.
(a) Opening balance of capital.
(b) Additional capital introduced during an accounting year
(c) Salaries to the partners
(d) Interest on capital
(e) Share of profit
(f) Commission and bonus to the partners
The following items are debited in the Partner's Capital Account when capital accounts are fluctuating.
(a) Drawings made during the accounting period
(b) Interest on drawings.
(c) Share of loss.
(d) Closing balance of capital.

Question 4: Why is Profit and Loss Adjustment Account prepared? Explain.
Answer: The Profit and Loss Adjustment Account is prepared because of the following two reasons.
1. To record omitted items and rectify errors if any- After the preparation of Profit and Loss Account and Balance Sheet, if any error or omission is noticed, then these errors or omissions are adjusted by opening Profit and Loss Adjustment Account in the subsequent accounting period without altering old Profit and Loss Account.
2. To distribute profit or loss between the partners- Sometimes, besides adjusting the items and rectifying errors, this account is also used for distribution of profit (or loss) among the partners. In this situation, this account acts as a substitute for Profit and Loss Appropriation Account. The main rationale to prepare the Profit and Loss Adjustment Account is to ascertain true profit or loss.

Question 5: Give two circumstances under which the fixed capitals of partners may change.
Answer:
The following are the two circumstances under which the fixed capitals of partner may change.
(i) If any additional capital is introduced by the partner during the year.
(ii) If any part of capital is permanently withdrawn by the partner from the firm.

Question 6: If a fixed amount is withdrawn on the first day of every quarter, for what period the interest on total amount withdrawn will be calculated?
Answer: 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 NCERT Solution - Chapter - 1 : Accounting for Partnership : Basic Concepts - 1, Class 12, Accounts | EduRev Notesmonths.

Example: If a partner withdraws Rs 5,000 in the beginning of each quarter and the interest is charged @ 10% on the drawings, then interest on drawings is calculated as:
Total drawings made by the partner during the whole year are Rs 20,000, i.e. Rs 5000× 4.
Interest on drawings =  NCERT Solution - Chapter - 1 : Accounting for Partnership : Basic Concepts - 1, Class 12, Accounts | EduRev Notes

Question 7: In the absence of partnership deed, specify the rules relating to the following:
(i) Sharing of profits and losses.
(ii) Interest on partner’s capital.
(iii) Interest on Partner’s drawings.
(iv) Interest on Partner’s loan
(v) Salary to a partner.
Answer: 
(i) Sharing of profits and lossesIf the partnership deed is silent on sharing of profit or losses among the partners of a firm, then according to the Partnership Act of 1932, profits and losses are to be shared equally by all the partners of the firm.

(ii) Interest on partner’s capital: If the partnership deed is silent on interest on partner’s capital, then according to the Partnership Act of 1932, no interest on capital should be given to the partners of the firm.

(iii) Interest on partner’s drawings: If the partnership deed is silent on interest on partner’s drawings, then according to the Partnership Act of 1932, no interest on drawing should be charged from the partners of the firm for the amount of capital withdrawn in form of drawings.

(iv) Interest on partner’s loan: If the partnership deed is silent on interest on partner’s loan, then according to the Partnership Act of 1932, the partners are entitled for 6% p.a. interest on the loan forwarded by them to the firm.

(v) Salary to a partner: If the partnership deed is silent on salary to a partner, then according to the Partnership Act of 1932, no salary should be given to any partner.

Page No 101:
Numerical Question:
Question 1: Triphati and Chauhan are partners in a firm sharing profits and losses in the ratio of 3:2. Their capitals were Rs 60,000 and Rs 40,000 as on January 01, 2005. During the year they earned a profit of Rs 30,000. According to the partnership deed both the partners are entitled to Rs 1,000 per month as Salary and 5% interest on their capital. They are also to be charged an interest of 5% on their drawings, irrespective of the period, which is Rs 12,000 for Tripathi, Rs 8,000 for Chauhan. Prepare Partner’s Accounts when, capitals are fixed.
Answer: a) If interest on Capital and Partners’ salaries and interest on drawings is charged against profit, the solution will be as: 

Profit and Loss Appropriation Account

Dr.

 

 

 

 

Cr.

Particulars

Amount

Rs

Particulars

Amount

Rs

Profit transferred to

 

 

Profit and Loss

 

30,000

Triphati’s Current Account

 

18,000

 

 

 

Chauhan’s Current Account

 

12,000

 

 

 

 

 

30,000

 

 

30,000

 

Partners’ Capital Account

Dr.

 

 

 

 

Cr.

Particulars

Tripathi

Chauhan

Particulars

Tripathi

Chauhan

 

 

 

Balance b/d

60,000

40,000

Balance c/d

60,000

40,000

 

 

 

 

60,000

40,000

 

60,000

40,000

 

Partners’ Current Account

Dr.

 

 

 

 

Cr.

Particulars

Tripathi

Chauhan

Particulars

Tripathi

Chauhan

Drawings

12,000

8,000

Interest on Capital

3,000

2,000

Interest on Drawings

600

400

Partners’ Salaries

12,000

12,000

Balance c/d

20,400

17,600

Profit & Loss Appropriation

18,000

12,000

 

33,000

26,000

 

33,000

26,000

 

b) If interest on Capital and Partners’ salaries and interest on drawings is distributed out of  profit, the solution will be as:

Profit and Loss Appropriation Account

Dr.

 

 

 

 

Cr.

Particulars

Amount

Rs

Particulars

Amount

Rs

Partners’ Salary

 

 

Profit and Loss (Profit)

 

30,000

Tripathi 1,000 × 12 =

12,000

 

Interest on Drawings

 

 

Chauhan 1,000 × 12 =

12,000

24,000

Tripathi

600

 

 

 

 

Chauhan

400

1,000

Interest on Capital

 

 

 

 

 

Tripathi

3,000

 

 

 

 

Chauhan

2,000

5,000

 

 

 

Profit Transferred to

 

 

 

 

 

Tripathi’s Current

1,200

 

 

 

 

Chauhan’s Current

800

2,000

 

 

 

 

 

31,000

 

 

31,000

 

Partners’ Capital Account

Dr.

 

 

 

 

Cr.

Particulars

Tripathi

Chauhan

Particulars

Tripathi

Chauhan

 

 

 

Balance b/d

60,000

40,000

Balance c/d

60,000

40,000

 

 

 

 

60,000

40,000

 

60,000

40,000

 

Partners’ Current Account

Dr.

 

 

 

 

Cr.

Particulars

Tripathi

Chauhan

Particulars

Tripathi

Chauhan

Drawings

12,000

8,000

Partners’ Salaries

12,000

12,000

Interest on Drawings

600

400

Interest on Capital

3,000

2,000

Balance c/d

3,600

6,400

Profit and Loss Appropriation

1,200

800

 

16,200

14,800

 

16,200

14,800

As the question is silent about the treatment of Interest on Capitals, Salary, Interest on Drawings, so we have prepared the solution by following two methods, namely:

  1. Charge against Profits
  2. Out of Profits

This was done deliberately so as to make students aware-off the two above mentioned methods and also to match the answer with that of given in the NCERT. The appropriate answer to the question following Out of Profit Method should be as:
Tripathi's Current A/c balance Rs 3,600 and
Chauhan's Current A/c balance Rs 6,400.
In case no information regarding the treatment of above items is mentioned in the question, then we usually follow the Out of Profits Method.

Question 2: Anubha and Kajal are partners of a firm sharing profits and losses in the ratio of 2:1. Their capital, were Rs 90,000 and Rs 60,000. The profit during the year were Rs 45,000. According to partnership deed, both partners are allowed salary, Rs 700 per month to Anubha and Rs 500 per month to Kajal. Interest allowed on capital @ 5% p.a. The drawings at the end of the period were Rs 8,500 for Anubha and Rs 6,500 for Kajal. Interest is to be charged @ 5% p.a. on drawings. Prepare partners capital accounts, assuming that the capital account are fluctuating.
Answer:
a) Note: If Partners’ Salaries, Interest on capital and Interest on Drawing are treated as these have already adjusted in Profit and Loss Account. The Solution will be as

Profit and Loss Appropriation Account

Dr.

 

 

 

 

Cr.

Particulars

Amount

Rs

Particulars

Amount

Rs

Profit Transferred to Current  A/c

 

 

Profit and Loss

 

45,000

Anubha’s Capital

30,000

 

 

 

 

Kajal’s Capital

15,000

45,000

 

 

 

 

 

45,000

 

 

45,000

 

Partners’ Capital Account

Dr.

 

 

 

 

Cr.

Particulars

Anubha

Kajal

Particulars

Anubha

Kajal

Drawings

8,500

6,500

Balance b/d

90,000

60,000

Interest on Drawings

425

325

Partners’ Salaries

8,400

6,000

 

 

 

Interest on Capital

4,500

3,000

Balance c/d

1,23,975

77,175

Profit and Loss Appropriation

30,000

15,000

 

1,32,900

84,000

 

1,32,900

84,000

b) Alternative
Note: If Partners’ salaries, interest on capital and interest on drawings adjusted in Profit and Loss Appropriation Account. The solution will be as.

Profit and Loss Appropriation Account

Dr.

 

 

 

 

Cr.

Particulars

Amount

Rs

Particulars

Amount

Rs

Partners’ Salaries:

 

 

Profit and Loss Account

 

45,000

Anubha

8,400

 

Interest on Drawings

 

 

Kajal

6,000

14,400

Anubha

425

 

 

 

 

Kajal

325

750

Interest on Capital:

 

 

 

 

 

Anubha

4,500

 

 

 

 

Kajal

3,000

7,500

 

 

 

Profit transferred to

 

 

 

 

 

Anubha’s Capital

15,900

 

 

 

 

Kajal’s Capital

7,950

23,850

 

 

 

 

 

 

 

 

 

 

 

45,750

 

 

45,750

 

Partners’ Capital Account

Dr.

 

 

 

 

Cr.

Particulars

Anubha

Kajal

Particulars

Anubha

Kajal

Drawings

8,500

6,500

Balance b/d

90,000

60,000

Interest on Drawings

425

325

Partners’ Salaries

8,400

6,000

 

 

 

Interest on Capital

4,500

3,000

Balance c/d

1,09,875

70,125

Profit and Loss Appropriation

15,900

7,950

 

1,18,800

76,950

 

1,18,800

76,950

 Page No 101:
Long Answer: 
Question 1: What is partnership? What are its chief characteristics? Explain.
Answer: According to the Section 4 of the Partnership Act, 1932, partnership is an agreement between two or more persons who have agreed to share profits or losses of a business that will be carried by all or any one of them acting for all.
Person who joined their hands to set up the business are called ‘partners’ individually and ‘firm’ collectively and the name under which they carry out their business is termed as ‘firm name’.

Important Characteristics of Partnership
The following are the important characteristics of partnership.
1.Two or more persons: Partnership is an agreement between two or more persons coming together for a common goal. There should be at least two persons to form a partnership. Although as per the Partnership Act of 1932, there is no maximum limit on the number of partners in a partnership firm, but as per the Rule (10) of the Companies (Miscellaneous) Rules Act 2014, the maximum number of partners permissible is 50. Therefore, in case the number of partners exceeds the aforesaid limit, then the concerned partnership is considered to be illegal. In this regards it must be noted that Section 464 of Companies Act 2013, the maximum number of partners permissible is one humdred. However, it must be noted that the maximum number of partners is not limited in case an association or partnership is formed by professionals such as chartered accountants, lawyers, company secretaries, etc. These professionals are governed by their the special laws as formed by their respective professional institutions. Prior to the enforcement of Companies Act of 2013, the earlier act of 1956, imposed restrictions on the maximum number of partners to 10 in case of banking business and 20 in case of any other kind of business. However, with effect from April 01, 2014, Companies Act of 1956 has been replaced by Companies Act of 2013.
2.Partnership Deed: The partnership among the partners should be backed up by a partnership deed. A partnership deed is an agreement among the partners governing them in carrying out the proposed business. The deed may be oral or written.
3.Business: A partnership is formed to carry out a legal business. Partnerships in smuggling, black marketing etc. are illegal business activities and hence, the partnership is also illegal.
4. Sharing of profit: The profit or loss earned by a partnership firm must be distributed as per the partnership deed or equally among the partners (in absence of partnership deed). It is a very important feature of partnership. If a group is formed for charitable purpose, not to earn profit then this group will not be regarded as a partnership.
5.Liability: Liability of a partnership firm is unlimited and each partner is liable for firm’s liabilities whether individually and jointly with other partners to the third party. Moreover, each partner along with his/her co-partners is responsible for all the acts of the partnership firm.
6. Mutual agency: Partnership may be carried on by all or any one of them acting on behalf of all. It means all the partners of a firm are equally entitled to participate in the activities of the business or any one of them who is acting on behalf of all. Every partner acts as an agent for others and binds others by his/her act and in turn is bound by others by their act.
Note: In case of any question regarding the permissible limit on the maximum number of partners in a partnership firm, the students shall take the limit as 50.

Question 2: Discuss the main provisions of the Indian Partnership Act, 1932 that are relevant to partnership accounts if there is no partnership deed.
Answer: The following are the main provisions of the Indian partnership Act, 1932 that are relevant to the partnership accounts in absence of partnership deed.
1. Profit Sharing Ratio: If the partnership deed is silent on sharing of profit or losses among the partners of a firm, then according to the Partnership Act of 1932, profits and losses are to be shared equally by all the partners of the firm.
2. Interest on Capital: If the partnership deed is silent on interest on partner’s capital, then according to the Partnership Act of 1932, no interest on capital should be given to the partners of the firm. However, interest on capital is given only out of the profits, if mutually agreed by all the partners.
3. Interest on Drawings: If the partnership deed is silent on interest on partner’s drawings, then according to the Partnership Act of 1932, no interest on drawing should be charged from the partners of the firm for the amount of capital withdrawn in the form of drawings.
4. Interest on Partner’s Loan: If the partnership deed is silent on interest on partner’s loan, then according to the Partnership Act of 1932, the partners are entitled for 6% p.a. interest on the loan forwarded by them to the firm.
5. Salary to Partner: If the partnership deed is silent on salary to a partner, then according to the Partnership Act of 1932, no salary should be given to any partner.

Question 3: Explain why it is considered better to make a partnership agreement in writing.
Answer: A partnership deed forms the basis of a partnership firm. A partnership deed consists of all the pre-determined terms and conditions that are agreed to by all the partners while forming the partnership. Generally the following details are included in a partnership deed.
1. Objective of business of the firm
2. Name and address of the firm
3. Name and address of all partners
4. Profit and loss sharing ratio
5. Contribution to capital by each partner
6. Rights, types of roles and duties of partners
7. Duration of partnership
8. Rate of interest on capital, drawings and loans
9. Salaries, commission, if payable to partners.
10. Rules regarding admission, retiring, death and dissolution of the firm, etc. It ensures the
A partnership deed can both be oral or written. Although, it is not compulsory to form partnership agreement in writing under the Partnership Act of 1932, however, written partnership deed is more desirable than the oral agreements. This is because it ensures the smooth functioning of the business of the partnership firm. It helps in avoiding disputes and misunderstandings among the partners. Also, it helps in settling t the disputes (as the case may be) among the partners, as written partnership deed can be referred to anytime. If written partnership deed is duly signed and registered under Partnership Act, then it can be used as evidence in the court of law. Moreover, any changes (if needed) in the partnership deed cannot be made without the consent of all the partners of the firm. Therefore, it is desirable to form partnership deed in writing because of the merits associated with written documents over its oral counterparts.

Question 4: Illustrate how interest on drawings will be calculated under various situations.
Answer: When a partner withdraws any amount, either in cash or in any other form, from the firm for his/her personal use, then it is termed as drawings. The interest charged by the firm on the amount of drawings is termed as interest on drawings. The method of calculating interest on drawings depends on the information available for time and frequency of the drawings made by the partner. The following different situations of drawings made illustrate the calculation of interest charged on drawings.
Situation 1: When information regarding Amount, Date and Rate of Interest on drawings are given.
If a partner withdrew Rs 10,000 on May 01 and interest on drawing is charged at 10% p.a. and the firm closes its books on December 31 every year then interest of drawings amounts to Rs 667.

Interest on drawings =  NCERT Solution - Chapter - 1 : Accounting for Partnership : Basic Concepts - 1, Class 12, Accounts | EduRev Notes

Interest on drawings =  NCERT Solution - Chapter - 1 : Accounting for Partnership : Basic Concepts - 1, Class 12, Accounts | EduRev Notes

Situation 2: When information regarding Amount, Rate of Interest on drawings is given
Case I: If the Amount and Rate of Interest on drawings (per annumn) is given but date is not mentioned
If the details regarding the amount of drawings and rate of interest of drawings (p.a.) is given but the date of drawings is not mentioned then interest is charged on average basis and the period of drawings is taken as 6 months.

Example- If a partner withdrew Rs 10,000 and rate of interest on drawings is 10% p.a. then the interest of drawings amounts to Rs 500
Interest on drawings =  NCERT Solution - Chapter - 1 : Accounting for Partnership : Basic Concepts - 1, Class 12, Accounts | EduRev Notes

Case II: If the Amount and Rate of Interest on drawings is given but the date and per annumn rate of interest is not mentioned
If the date and the rate of interest are given but per annum is not specified, then annual interest is charged.

Example- If a partner withdrew Rs 20,000 and interest rate is 10% , then the interest on drawings amounts to Rs 2,000.

Interest on drawings =  NCERT Solution - Chapter - 1 : Accounting for Partnership : Basic Concepts - 1, Class 12, Accounts | EduRev Notes

Situation 3: When a fixed amount is withdrawn at regular interval
Case I: If a fixed amount is withdrawn at the beginning of each month, then the interest is calculated for 6.5 months.
Example- If a partner withdraws Rs 1,000 in the beginning of every month and the rate of interest is 10% p.a., then the interest on drawings amount to Rs 650.
Interest on drawings =  NCERT Solution - Chapter - 1 : Accounting for Partnership : Basic Concepts - 1, Class 12, Accounts | EduRev Notes
Case II: If a fixed amount is withdrawn at the end of each month, then the interest is calculated for 5.5 months
Example- If a partner withdraws Rs 1,000 at the end of each month and rate of interest is 10% p.a., then the interest on drawings amount to Rs 550.

Interest on drawings =  NCERT Solution - Chapter - 1 : Accounting for Partnership : Basic Concepts - 1, Class 12, Accounts | EduRev Notes

Case III: If a fixed amount is withdrawn in the middle of every month then assuming that the drawings are made on15th of every month then interest on drawings is calculated for 6 months
Example- If a partner withdraws Rs 1,000 on 15th of every month and the rate of interest is 10% p.a., then the interest on drawings amount to Rs 600.
Interest on drawings =  NCERT Solution - Chapter - 1 : Accounting for Partnership : Basic Concepts - 1, Class 12, Accounts | EduRev Notes
Case IV: If a fixed amount is withdrawn in the beginning of every quarter then the interest is calculated for 7.5 months
Example- If a partner withdraws Rs 3,000 in the beginning of every quarter and the rate of interest is 10% p.a. then the interest on drawings amount to Rs 750
Interest on drawings =  NCERT Solution - Chapter - 1 : Accounting for Partnership : Basic Concepts - 1, Class 12, Accounts | EduRev Notes
Case V: If a fixed amount is withdrawn at the end of every quarter, then the interest is calculated for 4.5 months
Example- If a partner withdraws Rs 3,000 at the end of every quarter and the rate of interest is 10% p.a., then the interest on drawings amounts to Rs 450.

Interest on drawings =  NCERT Solution - Chapter - 1 : Accounting for Partnership : Basic Concepts - 1, Class 12, Accounts | EduRev Notes

Situation 4: When different amount is at different intervals
If different amount is withdrawn by a partner at different points of time then the interest is calculated by Product Method. The period of drawings is calculated from the date of withdrawal to the last date of the accounting year.
Example- A partner withdraws Rs 5,000 on Feb 01, Rs 3000 on May 01, Rs 5,000 on Sep. 30 and Rs 1000 on Dec. 31 and the rate of interest on drawings is 10% p.a. The firm closes its book on December 31.
Calculation of Interest on Drawings by Product Method

Interest on Drawings

Date

Amount

Rs

Outstanding Period

Product

Feb. 01

5,000

11

5,000 ´ 11

=

55,000

May. 01

3,000

8

3,000 ´ 8

=

24,000

Sep. 30

5,000

3

5,000 ´ 3

=

15,000

Dec. 31

1,000

0

1,000 ´ 0

=

0

 

 

 

 

 

94,000

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