NCERT Solution (Part - 2) - Accounting for Partnership : Basic Concepts

# NCERT Solution (Part - 2) - Accounting for Partnership : Basic Concepts | Additional Study Material for Commerce PDF Download

Q5:

How will you deal with a change in the profit sharing ratio among existing partners?

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.

 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.

(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.

DISTRIBUTION OF PROFITS

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.

 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.

If interest on capital and Partners’ salaries will be provided even if firm involves in loss.

 Profit and Loss Appropriation Account Dr. Cr. Particulars AmountRs Particulars AmountRs 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 AmountRs Particulars AmountRs 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.

 Profit and Loss Adjustment Account Dr. Cr. Particulars AmountRs Particulars AmountRs 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 forManager’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.

 Profit and Loss Appropriation Account Dr. Cr. Particulars AmountRs Particulars AmountRs 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.

 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.

 Profit and Loss Appropriation Account for the year 2012 Dr. Cr. Particulars AmountRs Particulars AmountRs 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 AmountRs Particulars AmountRs 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.

 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 AmountRs Particulars AmountRs 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

 Profit and Loss Appropriation Account Dr. Cr. Particulars AmountRs Particulars AmountRs 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

 Profit and Loss Appropriation Account Dr. Cr. Particulars AmountRs Particulars AmountRs 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
The document NCERT Solution (Part - 2) - Accounting for Partnership : Basic Concepts | Additional Study Material for Commerce is a part of the Commerce Course Additional Study Material for Commerce.
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## FAQs on NCERT Solution (Part - 2) - Accounting for Partnership : Basic Concepts - Additional Study Material for Commerce

 1. What are the basic concepts of accounting for partnership?
Ans. The basic concepts of accounting for partnership include understanding the concept of partnership, the importance of partnership agreement, capital accounts, drawing accounts, profit and loss appropriation account, and the concept of goodwill.
 2. How is the partnership agreement important in accounting for partnership?
Ans. The partnership agreement is crucial in accounting for partnership as it outlines the rights, responsibilities, and obligations of each partner. It helps in determining the profit-sharing ratio, capital contribution, and the rules for admission, retirement, or death of a partner. The partnership agreement acts as a guiding document for the partners and ensures smooth operations and financial transparency.
 3. What are capital accounts in partnership accounting?
Ans. Capital accounts in partnership accounting represent the investment made by each partner in the business. It is recorded under the owner's equity section and reflects the initial capital contribution, additional investments, and withdrawals made by partners. The capital accounts are essential to calculate the profit-sharing ratio and determine each partner's share of profits or losses.
 4. How are drawing accounts different from capital accounts in partnership accounting?
Ans. Drawing accounts in partnership accounting are used to record the withdrawals made by partners for personal use. These withdrawals are not considered as business expenses and are deducted from the partner's capital account. Drawing accounts help in tracking the personal withdrawals made by each partner and ensure that the partner's capital remains unaffected.
 5. What is the concept of goodwill in partnership accounting?
Ans. Goodwill in partnership accounting refers to the reputation, customer loyalty, and brand value of a business. It is an intangible asset that arises when the business has a strong customer base, a positive market image, and a competitive advantage. Goodwill represents the value of the business beyond its tangible assets and is usually calculated as the difference between the purchase price of the partnership and the net assets acquired. Goodwill is recorded as an asset in the partnership's balance sheet.

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