Q5:
How will you deal with a change in the profit sharing ratio among existing partners?
Take imaginary figures to illustrate your answer?
Answer :
Usually due to the admission, retirement or death of a partner or sometimes due to the general agreement among the partners, they may decide to change the profit sharing ratio. Various adjustments that should be considered during the change in the profit sharing ratio are , goodwill, reserves and accumulated profits, profit or loss on the revaluation of assets and liabilities and adjustment of capitals, etc. The general reserves and accumulated profits (if any) and profit (or loss) on revaluation on assets and liabilities should be credited (debited) in the Partner's Capital Account in their old profit sharing ratio.
But if the existing partners decide to change the profit sharing ratio then some partners gain (gaining partners) at the cost of other partners (sacrificing partners). Thus, the former should compensate the latter. Therefore, the gaining Partners’ Capital Account s are debited to the extent of their gain and sacrificing Partners' Capital Accounts are credited to extent of their sacrifice. The following Journal entry is passed.
Gaining Partner's Capital A/c | Dr. |
To Sacrificing Partner's Capital A/c | |
(Adjustment entry passed) |
Example:
A, B, C are partners in a firm sharing profit and loss in 3:2:1 ratio. They decide to share profit and loss equally in future. On that date, the books of the firm shows Rs 1,20,000 as general reserve, profit due to revaluation of building Rs 30,000. The following adjustment entry is passed through the capital accounts without affecting the books of accounts.
Particulars | A | B | C |
Share of profit as per 3:2:1 | 60000 | 40000 | 20000 |
Profit on revaluation of building | 15000 | 10000 | 5000 |
75000 | 50000 | 25000 | |
Share of profit as per 1:1:1 | 50000 | 50000 | 5000 |
Difference (Gain or Loss) | 25000 | - | 25000 |
(Loss) | (Gain) |
Hence, in this example, C gains at the cost of A, so the partner A needs to be compensated by C with the amount of Rs 25,000. The following adjustment entry is passed.
Adjustment entry:
C's Capital A/c | Dr. | 25000 | |
To A's Capital A/c | 25000 | ||
( Adjustment entry passed) |
Numerical Questions : Page No 102:
Q 1:
Harshad and Dhiman are in partnership since April 01, 2013. No Partnership agreement was made. They contributed Rs 4,00,000 and 1,00,000 respectively as capital. In addition, Harshad advanced an amount of Rs 1,00,000 to the firm, on October 01, 2013. Due to long illness, Harshad could not participate in business activities from August 1, to September 30, 2013. The profits for the year ended March 31, 2013 amounted to Rs 1,80,000. Dispute has arisen between Harshad and Dhiman.
Harshad Claims:
(i) He should be given interest @ 10% per annum on capital and loan;
(ii) Profit should be distributed in proportion of capital;
Dhiman Claims:
(i) Profits should be distributed equally;
(ii) He should be allowed Rs 2,000 p.m. as remuneration for the period he managed the business, in the absence of Harshad;
(iii) Interest on Capital and loan should be allowed @ 6% p.a.
You are required to settle the dispute between Harshad and Dhiman. Also prepare Profit and Loss Appropriation Account.
Answer :
DISTRIBUTION OF PROFITS
Harshad Claims:
Decisions
(i) If there is no agreement on interest on partner’s capital, according to Indian partnership act 1932, no interest will be allowed to partners.
(ii) If there is no agreement on the matter of profit sharing, according to partnership act 1932, profit shall be distributed equally.
Dhiman Claims:
Decisions
(i) Dhiman claim is justified, according partnership act 1932 if there is no agreement on the matter of profit distribution, profit shall be distributed equally.
(ii) No salary will be allowed to any partner because there is no agreement on matter of remuneration.
(iii) Dhiman’s claim is not justified on the matter of interest on capital but justified on the matter of interest on loan. If there is no agreement on interest on partner’s loan, Interest shall be provided at 6% p.a.
Profit and Loss Adjustment Account | |||
Dr. | Cr. | ||
Particulars | Amount Rs | Particulars | Amount Rs. |
Interest on Partner’s Loan | Profit and Loss | 180000 | |
Harshad 1,00,000 × (6/100) × (6/12) | 3000 | ||
Profit and Loss Appropriation | 177000 | ||
180000 | 180000 |
Profit and Loss Account | ||||
Dr. | Cr. | |||
Particulars | Amount Rs | Particulars | Amount Rs | |
Profit transferred to | Profit and Loss Adjustment | 177000 | ||
Harshad’s Capital | 88500 | |||
Sharma’s Capital | 88500 | |||
177000 | 177000 |
Q 2:
Aakriti and Bindu entered into partnership for making garment on April 01, 2013 without any Partnership agreement. They introduced Capitals of Rs 5,00,000 and Rs 3,00,000 respectively on October 01, 2013. Aakriti Advanced. Rs 20,000 by way of loan to the firm without any agreement as to interest. Profit and Loss account for the year ended March 2014 showed profit of Rs 43,000. Partners could not agree upon the question of interest and the basis of division of profit. You are required to divide the profits between them giving reason for your solution.
Answer :
Profit and Loss Adjustment Account | ||||||
Dr. | Cr. | |||||
Particulars | Amount | Particulars | Amount Rs | |||
Interest on Partner’s Loan | Profit and Loss | 43000 | ||||
Aakriti 20,000 × (6/100) × (6/12) | 600 | |||||
Profit transferred to | ||||||
Aakriti’s Capital | 21200 | |||||
Bindu’s Capital | 21200 | 42400 | ||||
43000 | 43000 |
Reason
a) Interest on partners loan shall be allowed at 6% p.a. because there is no partnership agreement.
b) Interest on capital shall not be allowed because there is no agreement on interest on capital.
c) Profit shall be distributed equally because profit sharing ratio has not been given.
Q3:
Rakhi and Shikha are partners in a firm, with capitals of Rs 2,00,000 and Rs 3,00,000 respectively. The profit of the firm, for the year ended 2013-14 is Rs 23,200. As per the Partnership agreement, they share the profit in their capital ratio, after allowing a salary of Rs 5,000 per month to Shikha and interest on Partner’s capital at the rate of 10% p.a. During the year Rakhi withdrew Rs 7,000 and Shikha Rs 10,000 for their personal use. You are required to prepare Profit and Loss Appropriation Account and Partner’s Capital Accounts.
Answer :
If interest on capital and Partners’ salaries will be provided even if firm involves in loss.
Profit and Loss Appropriation Account | |||||||||
Dr. | Cr. | ||||||||
Particulars | Amount Rs | Particulars | Amount Rs | ||||||
Partner’s Salaries |
|
| Profit and Loss |
| 23,200 | ||||
Shikha |
| 60,000 | Loss transferred to |
|
| ||||
|
|
|
| Rakhi Capital | 34,720 |
| |||
Interest on Capital |
|
| Shikha’s Capital | 52,080 | 86,800 | ||||
Rakhi | 20,000 |
|
| ||||||
Shikha | 30,000 | 50,000 |
|
| |||||
| 1,10,000 |
| 1,10,000 | ||||||
|
|
|
|
Partners’ Capital Account | |||||
Dr. | Cr. | ||||
Particulars | Rakhi | Shikha | Particulars | Rakhi | Shikha |
Drawings | 7,000 | 10,000 | Balance b/d | 2,00,000 | 3,00,000 |
Profit & Loss Appropriation | 34,720 | 52,080 | Partner’s Salaries |
| 60,000 |
Balance c/d | 1,78,280 | 3,27,920 | Interest on Capital | 20,000 | 30,000 |
|
|
|
|
|
|
| 2,20,000 | 3,90,000 |
| 2,20,000 | 3,90,000 |
|
|
|
|
|
|
If interest on capital and salaries will be provided out of profit
Profit and Loss Appropriation Account | |||||||
Dr. |
|
|
|
| Cr. | ||
Particulars | Amount Rs | Particulars | Amount Rs | ||||
Partner’s Salaries |
|
| Profit and Loss | 23,200 | |||
Shikha {23,200 × (6/11)} |
| 12,655 |
|
| |||
Interest on Capital |
|
|
|
| |||
Rakhi {23,200 × (2/11)} | 4,218 |
|
| ||||
Shikha {23,200 × (3/11)} | 6,327 |
|
|
| |||
| 23,200 |
| 23,200 | ||||
|
|
|
|
If profit is less than the sum of distributable items, distribution shall be in proportion of items for distribution.
Partners Salaries | Ratio |
|
|
Shikhar (Rs 60,000) | 6 | 23,200 × (6/11) | 12,655 |
Interest on Capital |
|
|
|
Rakhi (Rs 20,000) | 2 | 23,200 × (2/11) | 4,218 |
Shikhar (Rs 30,000) | 3 | 23,200 × (3/11) | 6,327 |
| 11 |
| 23,200 |
Partners’ Capital Account | |||||
Dr. |
|
|
|
| Cr. |
Particulars | Rakhi | Shikha | Particulars | Rakhi | Shikha |
Drawings | 7,000 | 10,000 | Balance b/d | 2,00,000 | 3,00,000 |
|
|
| Partner’s Salaries |
| 12,655 |
Balance c/d | 1,97,218 | 3,08,972 | Interest on Capital | 4,218 | 6,327 |
|
|
|
|
|
|
| 2,04,218 | 3,18,972 |
| 2,04,218 | 3,18,972 |
Question 4:
Lokesh and Azad are partners sharing profits in the ratio 3:2, with capitals of Rs 50,000 and Rs 30,000, respectively. Interest on capital is agreed to be paid @ 6% p.a. Azad is allowed a salary of Rs 2,500 p.a. During 2013, the profits prior to the calculation of interest on capital but after charging Azad’s salary amounted to Rs 12,500. A provision of 5% of profits is to be made in respect of manager’s commission. Prepare accounts showing the allocation of profits and partner’s capital accounts.
Answer :
Profit and Loss Adjustment Account | ||||||
Dr. |
|
|
|
| Cr. | |
Particulars | Amount Rs | Particulars | Amount Rs | |||
Interest on Capital |
|
| By Profit and Loss (12,500 + 2,500) | 15,000 | ||
Lokesh | 3,000 |
|
|
|
| |
Azad | 1,800 | 4,800 |
|
|
| |
|
|
|
|
|
| |
Partner’s Salaries |
|
|
|
|
| |
Azad |
| 2,500 |
|
|
| |
|
|
|
|
|
|
|
Provision for Manager’s Commission 15,000 × (5/100) | 750 |
|
|
| ||
Profit transferred to |
|
|
|
| ||
Lokesh Capital | 4,170 |
|
|
|
| |
Azad Capital | 2,780 | 6,950 |
|
|
| |
|
| 15,000 |
|
| 15,000 | |
|
|
|
|
|
|
Partners’ Capital Account | |||||
Dr. |
|
|
|
| Cr. |
Particulars | Lokesh | Azad | Particulars | Lokesh | Azad |
|
|
| Balance b/d | 50,000 | 30,000 |
|
|
| Interest on Capital | 3,000 | 1,800 |
Balance c/d | 57,170 | 37,080 | Partner’s Salaries |
| 2,500 |
|
|
| Profit and Appropriation | 4,170 | 2,780 |
| 57,170 | 37,080 |
| 57,170 | 37,080 |
Q5:
The partnership agreement between Maneesh and Girish provides that:
(i) Profits will be shared equally;
(ii) Maneesh will be allowed a salary of Rs 400 p.m;
(iii) Girish who manages the sales department will be allowed a commission equal to 10% of the net profits, after allowing Maneesh’s salary;
(iv) 7% interest will be allowed on partner’s fixed capital;
(v) 5% interest will be charged on partner’s annual drawings;
(vi) The fixed capitals of Maneesh and Girish are Rs 1,00,000 and Rs 80,000, respectively. Their annual drawings were Rs 16,000 and 14,000, respectively. The net profit for the year ending March 31, 2013 amounted to Rs 40,000;
Prepare firm’s Profit and Loss Appropriation Account.
Answer :
Profit and Loss Appropriation Account | |||||||
Dr. |
|
|
|
| Cr. | ||
Particulars | Amount Rs | Particulars | Amount Rs | ||||
Partner’s Salary |
|
| Profit and Loss | 40,000 | |||
Maneesh |
| 4,800 | Interest on Drawings |
| |||
|
|
|
| Maneesh | 800 |
| |
Partner’s commission |
|
| Girish | 700 | 1,500 | ||
Girish {(40,000 – 4,800) × (10/100)} | 3,520 |
|
|
| |||
Interest on Capital |
|
|
|
| |||
Mannesh | 7,000 |
|
|
|
| ||
Girish | 5,600 | 12,600 |
|
|
| ||
|
|
|
|
| |||
Profit transferred to |
|
|
|
| |||
Maneesh’s Current | 10,290 |
|
|
|
| ||
Girish’s Current | 10,290 | 20,580 |
|
|
| ||
| 41,500 |
|
| 41,500 |
Q 6:
Ram, Raj and George are partners sharing profits in the ratio 5 : 3 : 2. According to the partnership agreement George is to get a minimum amount of Rs 10,000 as his share of profits every year. The net profit for the year 2013 amounted to Rs 40,000. Prepare the Profit and Loss Appropriation Account.
Answer :
Profit and Loss Appropriation Account | |||
Dr. | Cr. | ||
Particulars | Amount Rs | Particulars | Amount Rs |
Profit transferred to | Profit and Loss | 40000 | |
Ram’s Capital (20,000 – 1,250) | 18750 | ||
Raj’s Capital (12,000 – 750) | 11250 | ||
George’s Capital (8,000 + 1,250 + 750) | 10000 | ||
40000 | 40000 |
Q7:
Amann, Babita and Suresh are partners in a firm. Their profit sharing ratio is 2:2:1. Suresh is guaranteed a minimum amount of Rs 10,000 as share of profit, every year. Any deficiency on that account shall be met by Babita. The profits for two years ending December 31, 2012 and December 31, 2013 were Rs 40,000 and Rs 60,000, respectively. Prepare the Profit and Loss Appropriation Account for the two years.
Answer :
Profit and Loss Appropriation Account for the year 2012 | |||||
Dr. | Cr. | ||||
Particulars | Amount Rs | Particulars | Amount Rs | ||
Profit transferred to |
| Profit and Loss | 40,000 | ||
Amann’s Capital 16,000 | 16,000 |
|
| ||
Babita’s Capital (16,000 – 2,000) | 14,000 |
|
| ||
Suresh’s Capital (8,000 + 2,000) | 10,000 |
|
| ||
|
|
|
| ||
| 40,000 |
| 40,000 | ||
|
|
|
|
Profit and Loss Appropriation Account for the year 2013 | |||||
Dr. | Cr. | ||||
Particulars | Amount Rs | Particulars | Amount Rs | ||
Profit transferred to |
| Profit and Loss | 60,000 | ||
Amann’s Capital | 24,000 |
|
| ||
Babita’s Capital | 24,000 |
|
| ||
Suresh’s Capital | 12,000 |
|
| ||
|
|
|
| ||
| 60,000 |
| 60,000 |
Question 8:
Simmi and Sonu are partners in a firm, sharing profits and losses in the ratio of 3:1. The profit and loss account of the firm for the year ending March 31, 2013 shows a net profit of Rs 1,50,000. Prepare the Profit and Loss Appropriation Account by taking into consideration the following information:
(i) Partners capital on April 1, 2012;
Simmi, Rs 30,000; Sonu, Rs 60,000;
(ii) Current accounts balances on April 1, 2012;
Simmi, Rs 30,000 (cr.); Sonu, Rs 15,000 (cr.);
(iii) Partners drawings during the year amounted to
Simmi, Rs 20,000; Sonu, Rs 15,000;
(iv) Interest on capital was allowed @ 5% p.a.;
(v) Interest on drawing was to be charged @ 6% p.a. at an average of six months;
(vi) Partners’ salaries : Simmi Rs 12,000 and Sonu Rs 9,000. Also show the partners’ current accounts.
Answer :
Profit and Loss Appropriation Account | |||||||
Dr. | Cr. | ||||||
Particulars | Amount Rs | Particulars | Amount Rs | ||||
Interest on Capital | Profit and Loss Account | 150000 | |||||
Simmi | 1500 | Interest on Drawings | |||||
Sonu | 3000 | 4500 | Simmi | 600 | |||
Sonu | 450 | 1050 | |||||
Partners’ Salaries | |||||||
Simmi | 12000 | ||||||
Sonu | 9000 | 21000 | |||||
Profit transferred to | |||||||
Simmi’s Current | 94162 | ||||||
Sonu’s Current | 31388 | 125550 | |||||
151050 | 151050 |
Profit and Loss Appropriation Account | |||||||
Dr. |
|
|
|
| Cr. | ||
Particulars | Amount Rs | Particulars | Amount Rs | ||||
Interest on Capital |
|
| Profit and Loss Account | 1,50,000 | |||
Simmi | 1,500 |
| Interest on Drawings |
| |||
Sonu | 3,000 | 4,500 | Simmi | 600 |
| ||
|
|
| Sonu | 450 | 1,050 | ||
Partners’ Salaries |
|
|
|
|
| ||
Simmi | 12,000 |
|
|
|
| ||
Sonu | 9,000 | 21,000 |
|
|
| ||
|
|
|
|
|
| ||
Profit transferred to |
|
|
|
| |||
Simmi’s Current | 94,162 |
|
|
|
| ||
Sonu’s Current | 31,388 | 1,25,550 |
|
|
| ||
|
|
|
|
|
| ||
|
| 1,51,050 |
|
| 1,51,050 | ||
|
|
|
|
|
|
Partners’ Capital Account | |||||
Dr. |
|
|
|
| Cr. |
Particulars | Simmi | Sonu | Particulars | Simmi | Sonu |
|
|
| Balance b/d | 30,000 | 60,000 |
Balance c/d | 30,000 | 60,000 |
|
|
|
|
|
|
|
|
|
| 30,000 | 60,000 |
| 30,000 | 60,000 |
|
|
|
|
|
|
Partners’ Current Account | |||||
Dr. |
|
|
|
| Cr. |
Particulars | Simmi | Sonu | Particulars | Simmi | Sonu |
Drawings | 20,000 | 15,000 | Balance b/d | 30,000 | 15,000 |
Interest on Drawings | 600 | 450 | Interest on Capital | 1,500 | 3,000 |
|
|
| Partners’ Salaries | 12,000 | 9,000 |
Balance c/d | 1,17,662 | 43,388 | Profit and Loss Appropriation | 94,162 | 31,388 |
| 1,37,662 | 58,388 |
| 1,37,662 | 58,388 |
|
|
|
|
|
|
Note: As per solution the amount transferred to Simmi's Current Account is Rs 94,162 and Sonu's Current Account is Rs 31,388, however, the answer provided in book is profit transferred to Simmi's Account is Rs 92,587 and Sonu's Account is Rs 30,863.
Numerical Questions : Page No 104:
Question 9:
Ramesh and Suresh were partners in a firm sharing profits in the ratio of their capitals contributed on commencement of business which were Rs 80,000 and Rs 60,000 respectively. The firm started business on April 1, 2013. According to the partnership agreement, interest on capital and drawings are 12% and 10% p.a., respectively. Ramesh and Suresh are to get a monthly salary of Rs 2,000 and Rs 3,000, respectively.
The profits for year ended March 31, 2013* before making above appropriations was Rs 1,00,300. The drawings of Ramesh and Suresh were Rs 40,000 and Rs 50,000, respectively. Interest on drawings amounted to Rs 2,000 for Ramesh and Rs 2,500 for Suresh. Prepare Profit and Loss Appropriation Account and partners’ capital accounts, assuming that their capitals are fluctuating.
*This date should be March 31, 2014
Answer :
Profit and Loss Appropriation Account | |||||||
Dr. |
|
|
|
| Cr. | ||
Particulars | Amount Rs | Particulars | Amount Rs | ||||
Interest on Capital |
|
| Profit and Loss |
| 1,00,300 | ||
Ramesh | 9,600 |
| Interest on Drawings |
|
| ||
Suresh | 7,200 | 16,800 | Ramesh | 2,000 |
| ||
|
|
|
| Suresh | 2,500 | 4,500 | |
Partners’ Salaries |
|
|
|
| |||
Ramesh | 24,000 |
|
|
|
| ||
Suresh | 36,000 | 60,000 |
|
|
| ||
|
|
|
|
|
| ||
Profit Transferred to |
|
|
|
|
| ||
Ramesh’s Capital {28,000 × (4/7)} | 16,000 |
|
|
| |||
Suresh’s Capital {28,000 × (3/7)} | 12,000 |
|
|
| |||
|
| 1,04,800 |
|
| 1,04,800 | ||
|
|
|
|
|
|
Partners’ Capital Account | |||||
Dr. |
|
|
|
| Cr. |
Particulars | Ramesh | Suresh | Particulars | Ramesh | Suresh |
Drawings | 40,000 | 50,000 | Cash | 80,000 | 60,000 |
Interest on Drawings | 2,000 | 2,500 | Interest on Capital | 9,600 | 7,200 |
Balance c/d | 87,600 | 62,700 | Partners’ Salaries | 24,000 | 36,000 |
|
|
| Profit & Loss Appropriation | 16,000 | 12,000 |
| 1,29,600 | 1,15,200 |
| 1,29,600 | 1,15,200 |
|
|
|
|
|
|
Capital Ratio | = | Ramesh | : | Suresh |
|
| 80,000 | : | 60,000 |
|
| 4 | : | 3 |
Question 10:
Sukesh and Vanita were partners in a firm. Their partnership agreement provides that:
(i) Profits would be shared by Sukesh and Vanita in the ratio of 3:2;
(ii) 5% interest is to be allowed on capital;
(iii) Vanita should be paid a monthly salary of Rs 600.
The following balances are extracted from the books of the firm, on December 31, 2013.
| Sukesh | Verma* |
| Rs | Rs |
Capital Accounts | 40,000 | 40,000 |
Current Accounts | (Cr.) 7,200 | (Cr.) 2,800 |
Drawings | 10,850 | 8,150 |
Net profit for the year, before charging interest on capital and after charging partner’s salary was Rs 9,500. Prepare the Profit and Loss Appropriation Account and the Partner’s Current Accounts.
*As per the question, it should be Vanita instead of Verma
Answer :
Profit and Loss Appropriation Account | ||||||
Dr. |
|
|
| Cr. | ||
Particulars | Amount Rs | Particulars | Amount Rs | |||
Interest on Capital |
|
| Profit and Loss | 9,500 | ||
Sukesh | 2,000 |
|
|
| ||
Vanita | 2,000 | 4,000 |
|
|
| |
|
|
|
|
|
|
|
Profit transferred to |
|
|
|
| ||
Sukesh’s Current {5,500 × (3/5)} | 3,300 |
|
| |||
Vanita’s Current {28,000 × (2/5)} | 2,200 |
|
| |||
|
| 9,500 |
| 9,500 | ||
|
|
|
|
| ||
|
|
|
|
|
|
|
Partner’s Capital Account | |||||
Dr. |
|
|
|
| Cr. |
Particulars | Sukesh | Vanita | Particulars | Sukesh | Vanita |
|
|
| Balance b/d | 40,000 | 40,000 |
Balance c/d | 40,000 | 40,000 |
|
|
|
| 40,000 | 40,000 |
| 40,000 | 40,000 |
|
|
|
|
|
|
Partner’s Current Account | |||||
Dr. |
|
|
|
| Cr. |
Particulars | Sukesh | Vanita | Particulars | Sukesh | Vanita |
Drawings | 10,850 | 8,150 | Balance b/d | 7,200 | 2,800 |
|
|
| Partner’s Salaries |
| 7,200 |
|
|
| Profit and Loss Appropriation | 3,300 | 2,200 |
Balance c/d | 1,650 | 6,050 | Interest on capital | 2,000 | 2,000 |
| 12,500 | 14,200 |
| 12,500 | 14,200 |
4 videos|168 docs
|
1. What are the basic concepts of accounting for partnership? |
2. How is the partnership agreement important in accounting for partnership? |
3. What are capital accounts in partnership accounting? |
4. How are drawing accounts different from capital accounts in partnership accounting? |
5. What is the concept of goodwill in partnership accounting? |
|
Explore Courses for Commerce exam
|