Accounting for Partnership Firm

APS ACADEMY
 Topics to Study
1. Basics of partnership

2. Interest on capital and drawings

3. Past Adjustment
 Partnership
 Partnership is the relation between people who have
agreed to share the profits of a business carried on by
all or any of them acting for all.
 The number of partners can be anything from 2 to 50.
Accounting and Legal Point of
View of Partnership firm
 As per accounting viewpoint, partnership firms are treated
as a separate business entity distinct from its partners.
 However, as per legal viewpoint, a partnership firm is not
a separate legal entity. In other words, it has no existence
separate from its partners. It means that in case of
bankruptcy of the partnership firm, private estates of the
partners would be liable to meet the firm’s debts.
 Features of Partnership
1. Two or more persons (maximum limit 50)

2. Agreement: the agreement between partners can be

written or oral. The written agreement is called
partnership deed.

3. Lawful business

4. Profit-sharing: the agreement must be to share profits

between the partners. However, it is not necessary
that they may share losses too.
 Features of Partnership
5. Business can be carried on by all or any of the
partners acting for all.
 Rights of Partners
1. Right to Participate in the management of business.

2. Right to be consulted about affairs of business.

3. Right to inspect the book of accounts and have a copy of it.

4. Right to share profits or losses with others in the agreed ratio.

5. Right to receive interest at an agreed rate of interest. If there is

no rate of interest agreed, interest (on loan) is paid at 6% p.a.
 Rights of Partners
6. Right to retire (after giving proper notice).

7. Right to not allow admission of a new partner.

 Partnership Deed
 It is better to have written agreement to avoid any
dispute.
 This written document is known as partnership deed.

Q. Is it essential to have partnership deed?

Answer: No, it is not essential, but desirable to have

partnership deed. In case partnership deed does not exist,
provisions of Indian Partnership Act, 1932 will apply.
 Partnership Deed
 Partnership deed has clauses on the following:

i. Description of the partners

ii. Description of the firm

iii. Principal place of business

iv. Nature of business

v. Commencement of partnership

vi. Capital contribution

 Partnership Deed
vii. Interest on capital

viii. Interest on drawings

ix. Profit-sharing ratio

x. Interest on loan

xi. Remuneration to partners

xii. Valuation of goodwill

xiii. Valuation of assets

Absence of Partnership Deed
 In the absence of partnership deed or if the partnership
deed is silent, i.e., it does not have a clause in respect of
the following matters, the following provisions of
Indian Partnership Act, 1932 apply:

1. Sharing of profit/loss: shared equally

2. Interest on capital: interest on capital not paid to

partners.

3. Interest on drawings: interest on drawings is not

charged from partners.
Absence of Partnership Deed
4. Interest on advance/loan by a partner: interest on
loan is paid at 6%. Interest on partner’s loan is a
charge against profit (i.e., interest is paid whether the
firm earns profit or incurs loss).

5. Remuneration to partners: remuneration (salary,

commission) is not paid to any partner.

6. Admission of partner: new partner can’t be admitted

unless all the partners agree.
 Example
 In the absence of partnership deed, what are the rules
relating to:

a. Salaries of partners

b. Interest on partner’s capitals

c. Interest on loan given to a partner

d. Profit sharing ratio

e. Interest on partner’s drawings

Example contd.
 Example
 Ajay (A), Binod (B) and Chandra (C) entered into partnership on 1st April 2019
with a capital of Rs. 3,00,000, Rs. 2,00,000 and Rs. 1,00,000 respectively. In addition
to capital C has advanced a loan of Rs. 1,00,000. Since they had no agreement to
guide them, they faced following issues during and at the end of the year.

1. A wanted interest on capital to be provided @8% pa but B and C did not agree.

2. C wanted that interest on loan be paid to him @ 10% pa but A and B wanted to
pay @ 5% pa.

3. A and B demanded to share profits in the ratio of their capital contribution, C is

not in agreement with this proposal.

4. Binod, being working partner, demands a lump sum payment of Rs. 40,000 as
remuneration for which other other partners are not in agreement.

You are required to suggest and help them resolve these issues.
 Example contd.
1. In the absence of Partnership deed, the provisions of partnership
act 1932 will apply & no interest on capital will be payable.

2. Provisions of partnership act 1932 will apply & interest on loan

by partner will be paid @6% pa.

3. Provisions of partnership act 1932 will apply according to which

profits will be shared equally.

4. Provisions of partnership act 1932 will be applicable according to

which no salary/remuneration is payable to any partner.
Example
Example contd.
Example
Example contd.
Example
Example contd.
 Special Cases of
Partnership Act
 Principal and Agent relationship:

 Suppose Rajesh uses Rs. 20000 belonging to firm

and made a profit of Rs. 3000, then has to return Rs.
23000 back to the firm.

As per Principal and Agent relationship, P is principal

as well as agent to the firm and to Q and R. As per this
rule, any profit earned by an agent (P) by using the
firm’s property is attributable to the firm.
 Special Cases of
Partnership Act
 As per the Partnership Act, 1932, every partner of a
partnership firm is liable to the firm for any loss
caused by his/her wilful negligence.

Suppose Ashish took Rs. 40000 belonging to the firm

and caused a loss of Rs. 5000, and he wants to return
35000 to the firm.

In this case, he has to return the entire amount of Rs.

40000 back to the firm.
Example
Example contd.
 Example
 Following differences have arisen among P,Q and R.
State who is correct in following case:

P and Q want to purchase goods from A Ltd., R does

not agree?
 Example contd.
 Partnership is relation between 2 or more persons
sharing profits of the business carried on by them. It is
based on a mutual relationship and understanding.

For every decision regarding the partnership business,

every partner need to give his/her consent to that effect. If
any of the partner disagrees ,then it cannot be enforced.

So, without the consent of R, P and Q, firm cannot

purchase goods from A Ltd.
P&L Appropriation Account
 A partnership firm prepares:

i. Trading Account  Gross Profit (direct expenses)

ii. P&L Account (net profit)  Net Profit (indirect

expenses)

iii. P&L Appropriation Account

iv. Balance Sheet

We have already studied the other three in class 11th, so

we shall now discuss the P&L Appropriation Account.
 P&L Account
Particulars Rs. Particulars Rs.
To expenses By Gross Profit
To depreciation By interest received
… By rent received
To Net Profit 100,000 …

P&L Appropriation Account

Particulars Rs. Particulars Rs.
To P&L A/c (net loss is transferred By P&L A/c (Net Profit 100,000
from P&L A/c) transferred)
To interest on capitals By interest on drawings
To partners’ salaries
To partners’ commissions
To reserve
Profit transferred to partners
 What is the purpose of
P&L Appropriation A/c?
 There are 2 or more partners, who will take their share of
the final profits.
 So, we take the net profits (which are derived from the
business) and subtract the partners’ fixed amounts such
as their commissions, salaries, interest etc.
 From final distributable profit, we transfer the profits to
the partners in the agreed ratio using the P&L
Appropriation A/c.
 Example
 A and B are partners. A’s capital is 100,000 and B’s
capital is 60,000. Interest on capital is payable at 6%
per annum.
 B is to get a salary of 3,000 per month.

 Net profit for the year is 80,000.

 Prepare the P&L Appropriation A/c.

 Example contd.
 Net profit is 80,000; B’s salary is 36,000 per annum and
IOC is 6% of 160,000, i.e., 9600.
Particulars (Expenses) Rs. Particulars (Incomes) Rs.
By P&L A/c (Net 80,000
Profit transferred)
To interest on capitals: 9600
A: 6000
B: 3600
To B’s salary 36000
Profit transferred to partners (1:1)
A 17200
B 17200 34400
 Example
 Asha and Lata are partners in the ratio of 1:2.

 Asha is entitled to a salary of Rs. 2,00,000 p.a. and a

commission of 8% of net profit before charging any
commission. Lata is entitled to a commission of 8% of net
profit after charging her commission.
 Net Profit for the year ended 31st March, 2021 amounted
to Rs. 5,40,000.
 Prepare Profit & Loss Appropriation Account.
Example contd.
 Interest on Capital vs.
Interest on Loan
 Interest on capital is only payable if it is mentioned in
the partnership deed.
 In case it is not mentioned, it is not payable.

 However, interest on loan is payable at 6% to the

partner if it is not mentioned otherwise in the
partnership deed.
 Students often credit the interest on loan to the capital
account. This is wrong. Interest on loan is credited to
the partner’s loan account.
 Example
 X, Y, Z are partners in a firm sharing profits in 2:2:1.
Fixed capitals of the partners were X: 500,000; Y:
500,000 and Z: 250,000 respectively.
 The partnership deed provides that interest on capital is
to be allowed @10% per annum.
 Z has a salary of 2,000 per month.

 Profit of the firm after debiting Z’s salary is 400,000.

 Prepare Profit and loss appropriation account.

 Example contd.
 Profit of the firm after debiting Z’s salary is 400,000

Since Z has a salary of 24,000 p.a., net profit = 424,000

Particulars (Expenses) Rs. Particulars (Incomes) Rs.
By P&L A/c (Net 424,000
Profit transferred)
To interest on capitals: 125000
To Z’s salary 24000
Profit transferred to partners (2:2:1)
X 110000
Y 110000
Z 55000 275000
Example
Example contd.
Example contd.
 Example
 Girish and Satish are partners in a firm.

 Their Capitals on April 1, 2018 were Rs. 5,60,000 and Rs.

4,75,000 respectively. On August 1, 2018 they decided
that their Capitals should be Rs. 5,00,000 each.
 The necessary adjustment in the Capitals were made by
introducing or withdrawing cash. Interest on Capital is
allowed at 6% p.a.
 You are required to compute interest on Capital for the
year ending March 31, 2019.
Example contd.
 Example
 On 1st April 2018, A and B commenced business with
Capital of Rs. 6,00,000 and Rs. 2,00,000 respectively. On
31st March, 2019 the trading profit (before taking into
account the provisions of deed) was Rs. 2,40,000. Interest
on capital is to be allowed at 6% p.a. B was entitled to a
salary of Rs. 60,000 p.a. The drawings of the partners A and
B were Rs. 60,000 and Rs. 40,000 respectively. The interest
on Drawings for A being Rs. 2,000 and B Rs. 1,000.
 If A and B are equal partners, prepare P&L Appropriation
A/c and Partner's Capital Accounts as at 31st March, 2019.
Example contd.
 Example
 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% pa. 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 P&L Appropriation A/c & partners capital A/c
Example contd.
 Example
 A and B started a partnership on 1/4/2018. They had Rs. 6,00,000 and Rs.

4,00,000 respectively, as capitals. The terms of agreement are as under:

(i) Interest on capital and drawings @ 6% per annum.

(ii) B is to get a monthly salary of ₹2,500.

(iii) Sharing of profit or loss will be in the ratio of their capital contribution.

The profit for the year ended 31st March, 2019, before making above appropriations

was 2,07,400. The drawings of A and B were 48,000 and 40,000 respectively. Interest

on drawings amounted to 1,500 for A and 1,100 for B.

Prepare profit and loss appropriation A/c and partner's capital A/c.
Example contd.
 Example
 X and Y are partners with capitals of Rs. 100,000 and
80,000 respectively on 1st April 2020 and their profit
sharing ratio is 2:1. Interest on capital is agreed at 12% p.a.
Y is allowed an annual salary of Rs. 6000.
 The profit for the year ended 31st March 2017 amounted to
Rs. 50,000.
 Manager is entitled to a commission of 10% of profits.

 Make P&L A/c, P&L Appropriation A/c and Partner’s

capital A/c.
Example contd.
Example
Example contd.
Example contd.
Example
Example contd.
Example contd.
Example
Example contd.
Example contd.
 Appropriations more than
Available Profit
 A and B are two partners sharing profits in 4:1.

 A’s commission is Rs. 30,000 and B’s salary is Rs.

90,000. However, the net profit is only Rs. 40,000.
 Prepare the P&L Appropriation Account.

The net profit is 40,000

The fixed payments to partners is 120,000 (30000+90000)

So, there would be a loss in P&L Appropriation A/c

 Appropriations more than
Available Profit
 We pay these fixed payments to partners in the respective
ratios of the fixed payments.
 Since A’s 30,000 and B’s 90,000 are in the ratio 1:3

Therefore, we distribute the available 40,000 in the ratio 1:3

Let A’s share be x and B’s share be 3x.

 x+3x = 40,000
 x = 10,000 and 3x = 30,000
So, A’s share = 10,000 and B’s share = 30,000
 Appropriations more than
Available Profit
 So, our P&L App. A/c would look like:

Particulars (Expenses) Rs. Particulars (Incomes) Rs.

To B’s salary 30,000 By P&L A/c 40,000

To A’s commission 10,000

Profits transferred to Nil

partners
 Example
 Ajay and Vijay are partners sharing profits in 3:2.

 Ajay is a non-working partner and contributes 2,000,000

as capital, while Vijay is a working partner.
 Partnership deed provides for interest on capital 8% p.a.
and salary to working partner at Rs. 8000/month.
 Profit before providing for interest on capital and
partner’s salary for the year was 80,000.
 How should the profit be distributed?
 Example contd.
 Ajay’s capital is 200,000 with interest on capital at 8%.

 Interest on capital = 160,000

 Vijay’s salary is 8000×12 = 96,000

i.e., the total distribution = 256,000

However, available profit = 80,000

So, we distribute their payment in the ratio 80000:256000

i.e., 1 : 3.2

 Ajay gets 160,000/3.2 = 50,000 and Vijay gets 96000/3.2 = 30,000

 Example
 Ajay and Vijay are partners sharing profits in 7:3.

 Ajay is a non-working partner and contributes 500,000

as capital, while Vijay is a working partner.
 Partnership deed provides for interest on capital 8% p.a.
and salary to working partner at Rs. 10000/month.
 Profit before providing for interest on capital and
partner’s salary for the year was 120,000.
 How should the profit be distributed?
 Example contd.
 Payment to Ajay = 40,000 (8% of 500,000)
 Payment to Vijay = 120,000 (salary of 10,000/month)

Total appropriation = 160,000

However, the profit is only 120,000
Ajay : Vijay = 1 : 3
Let Ajay’s payment be x and Vijay’s payment be 3x
 x+3x = 120,000
 4x = 120,000
 Example contd.
P&L Appropriation A/c

Particulars (Expenses) Rs. Particulars (Incomes) Rs.

To Ajay’s interest on 30,000 By P&L A/c 120,000

capital A/c
To Vijay’s salary 90,000

Profits transferred to Nil

partners
 Case of Net Loss in P&L
Account
 We do not make Profit and loss appropriation
account when there is a net loss in P&L A/c.
 This is because there is no money leftover for the
firm to distribute among the partners.
 However, there are certain charges against profit
(discussed next) that are needed to be paid even if
there is a loss.
 Charge against Profit vs.
Appropriation of Profit
 Charge against profit means deduction from revenue no matter
what. Some examples are:
i. Rent paid to partner
Done even in case of a loss
ii. Interest on partner’s loan

 Appropriation of profit means distribution of profit to partners,

and is done after accounting of all charges. Some examples are:
i. Salary/commission to partners
ii. Interest on capital Not done in case of loss
iii. Transfer of profit to general reserve
 Example
 A and B are partners sharing the profits in 2:3 with
capitals of 150,000 and 80,000 respectively. On 1st Oct
2018, A and B gave loans of 240,000 and 120,000
respectively to the firm at 6% p.a.
 A had allowed the firm to use his property for business
for a monthly rent for 5,000. The loss for the year ended
31st Mar 2019 before rent and interest amounted to Rs.
9000.
 Show distribution of profit/loss.
 Example contd.
 The loss is 9,000 before rent and interest. So, we can
consider it as Gross loss.
P&L Appropriation A/c

Particulars Rs. Particulars Rs.

To Net loss 9,000
To Rent paid to A 60,000
To interest paid on loan: Loss transfer (ratio 2:3)
A By A: 31920
7200 By B: 47880
B 3600 10800 79800
79800 79800
 Example
 A and B are partners sharing profits in 2:3.

 Their capitals are 400,000 and 200,000 respectively.

 Interest is to be allowed on capitals @6% p.a.

 Profit before allowing interest on capitals is 30,000.

 Prepare Profit and Loss Appropriation A/c to

distribute profit or loss, if interest on capital is a charge
against profit.
 Example contd.
 Since interest on capital is a charge against profit in this
question, it is debited straight to Profit & Loss A/c.
 Interest on capitals = 6% of 400,000 + 6% of 200,000

= 24000 + 12000 = 36000

 So, net profit = 30,000 – 36,000 = –6000

i.e., the firm incurred a loss of Rs. 6000.

Note: IOC is debited to P/L A/c only because it is a charge

against profit in this question. Otherwise, it is debited to P/L
 Example contd.
P&L Appropriation A/c

Particulars Rs. Particulars Rs.

To net loss 6000 By loss transferred:
A’s capital A/c 2400
B’s capital A/c 3600 6000

6000 6000
 Example
 Reema and Seema are partners sharing profits equally. The
partnership deed provides that both Reema and Seema
will get monthly salary of Rs. 15,000 each.
 Interest on drawings will be charged @10% each.

 Their capitals were 500,000 each (interest payable at 6%)

and drawings during the year were 60,000 each.
 The firm incurred a net loss of 100,000 during the year
ended 31st March 2019.

 Example contd.
 The firm incurred a net loss of 100,000.

 So, normally no P&L Appropriation A/c will be made

 However, the firm charges interest on drawings from

the partners: 60,000 × (10/100) × (6/12) = 3000 from
each partner.

i.e., the firm earns 6,000 as IOD from partners.

Therefore, the final loss would be 94,000, which will be

borne equally.
 Example contd.
P&L Appropriation Account
Particulars Rs. Particulars Rs.
To Gross loss 100,000 By interest on drawings 6,000
By Net Loss (ratio 1:1)
By Reema:
47000
By Seema: 47000 94000
100,000 100,000

Note: there will be no salary paid or interest on capital paid because the
firm incurred a loss
 Drawings and Withdrawal
of Capital are different
 Drawings are temporary, and business charges interest
on drawings.
 Withdrawal of capital is permanent, and business
charges interest on capital.

There is another term: drawings against profit

Drawings against profit means partner is taking money

from profits, which is then debited to P&L Account.
P&L Appropriation Account
 All expenses are debited, incomes are credited
P&L Appropriation Account
Particulars (Expenses) Rs. Particulars (Incomes) Rs.
To interest on capitals By P&L A/c (Net Profit
transferred)
To partners’ salaries By interest on drawings:
To partners’ commissions Raju: –––
Shyam: –––
To reserve
Profit transferred to partners:
Raju’s Capital A/c: –––– xxxx
Shyam’s Capital A/c: ––––
 Methods of maintaining
Capital Accounts
 Partner’s capital accounts may be maintained by
following any of these two methods:

i. Fixed capital account method: capital a/c & current a/c

ii. Fluctuating capital account method: capital a/c

 Partner’s Accounts
 As a recap, we can see two systems:

i. Fixed Capital

Each partner maintains two accounts: capital account

and current account.

ii. Fluctuating Capital

Each partner maintains one account: capital account

 Fixed Capital
 The amount of capital invested by the partner remains
fixed, unless a partner introduces additional capital or
withdraws his capital.
 There are two accounts maintained for each partner:

i. Capital account: it continues to show same balance

year after year. It is credited only if additional capital
is introduced and debited only if withdrawal is made
out of capital.
 Fixed Capital
ii. Current account: it is maintained to record
transactions other than transactions related to capital.

Such transactions include drawings against profit, interest

allowed on capital, interest charged on drawings, salary
or commission payable to partner, share of profits/losses.

So, balance of current account fluctuates with every

transaction with the partner.
 Fixed Capital
 Partner’s Capital A/c under fixed capital looks like:
X and Y’s Capital A/c

Particulars X Y Particulars X Y
To Bank A/c (drawings By balance b/d –– ––
–– ––
against capital) (opening capital)
To balance c/d (closing –– –– By Bank A/c –– ––
capital) (additional capital)

 Capital A/c will always have a credit balance in

fixed capital system.
 Fixed Capital
Current A/c debited Current A/c credited
1. His drawings against profit 1. Interest on capital

2. Interest on drawings 2. Salary or commission

3. Share of loss 3. Share of profit

4. Transfer of amount to 4. Transfer of amount from

capital account capital account
 Normally, partner’s current account has credit balance, but if
partner has withdrawn more amount than his share of profits, he
will have debit balance.
 Fixed Capital
 Partner’s Current A/c under fixed capital looks like:
Particulars X Y Particulars X Y
To balance b/d (if debit –– –– By balance b/d (if credit –– ––
balance) balance)
To drawings –– –– By interest on capital –– ––
To interest on drawings –– –– By salary –– ––
To P&L App. A/c (loss) –– –– By commission –– ––
By P&L App. A/c (profits) –– ––
To balance c/d By balance c/d
 Fixed Capital Method
Capital A/c Current A/c
 Always has a credit balance.  Mostly has credit balance,
(capital A/c can have debit but might have debit
balance only under balance in case the partner
fluctuating capital method) has withdrawn more than
his share of profits.
 Interest on Capital
 Interest on capital is paid only on the balance of
capital a/c (not current a/c).
 Fluctuating Capital
 Only capital account is maintained.

 All transactions of a partner: salary, commission,

interest on capital, drawings (against profit), interest
on drawings, share of profit and loss, etc. are recorded
in capital account.
 So, balance in fluctuating capital method fluctuates
with every transaction.
 Therefore, capital account in fluctuating system can
have either debit balance or credit balance.
 Fluctuating Capital
Particulars X Y Particulars X Y
To balance b/d (debit opening By balance b/d (credit
balance) opening balance)
By bank A/c (Additional
To bank A/c (withdrawal of capital)
capital) By interest on capital A/c
To drawings By commission A/c
By partner’s salary A/c
To interest on drawings A/c By P&L App. A/c (Profit)
To P&L Appro. A/c (Loss)
To balance c/d (closing credit To balance c/d (closing
balance) debit balance)
 Topics to Study
1. Basics of partnership

2. Interest on capital and drawings

3. Past adjustment
 Two types of Drawings
 There are two types of drawings:

1. Drawings against capital: means withdrawal by a

partner out of his or her capital.

2. Drawings against profit: means drawings by a partner

against his or her share of expected profit for the year.

Note: drawings against profit does not reduce capital,

hence, it is not considered for calculating interest on capital.
 Difference between types
of drawings
Basis Drawings against profit Drawings against capital

Where debited It is debited to drawings It is debited to capital

account. account.
Part It is a part of expected profit. It is a part of capital

Effect It does not reduce capital It reduces capital

Interest on drawings It is considered for calculating Not considered for

interest on drawings. calculating I.O.D.
Interest on capital Not considered for calculating Considered for calculating
interest on capital. I.O.C.
 Interest on Capital (IOC)
 IOC is calculated on starting capital, if nothing else is
mentioned.
 What if the opening capital is missing ?

We have to find the opening capital (how?)

 Finding Opening Capital
1. Fluctuating Capital:
 Credit side: opening balance + additional capital +
IOC + commission + salary + share of profit
 Debit side: drawings + interest on drawings + loss

Apart from this,

withdrawal of capital also
reduces the capital.
 Finding Opening Capital
Closing capital
Debit Side Credit Side
(+) drawings
+Drawings Opening balance
(+) withdrawal of capital
+ Withdrawal +Additional (+) interest on drawings
of capital capital
(+) share of loss
+Interest on +Share of profits
(–) additional capital
drawings
+Interest on (–) share of profits
+Share of loss capital
(–) interest on capital
Closing capital +Salary/ (–) salaries and commissions
commission
= Opening Capital
 Finding Opening Capital
2. Fixed capital:

Debit Credit Closing capital

Withdrawal Opening (+) withdrawal of capital

of capital balance
(–) additional capital
(+)Closing (+)Additional
balance capital = Opening Capital
Finding Opening Capital
Fixed Capital Fluctuating Capital
Closing capital Closing capital
(+) drawings
(+) withdrawal of capital
(+) withdrawal of capital
(–) additional capital (+) interest on drawings
(+) share of loss
= Opening Capital (–) additional capital
(–) share of profits
(–) interest on capital
(–) salaries and commissions
= Opening Capital
 Example
 A partner provides capital of Rs. 50,000 on 1st April 2010.

 Find the interest on capital credited to his capital

account on 31st March 2011, if rate is 12%.
 Example contd.
 IOC for 1 year = 12% of opening capital

= 6,000

So, the partner’s capital account will be credited by

6,000 at the end of the accounting year.
 Example
 Find the interest on capital for partner Raju:

i. Opening capital is 1,00,000 (1/4/18)

ii. Additional capital 20,000 (1/7/18)

iii. Additional capital 30,000 (1/10/18)

iv. Withdrawal of capital 70,000 (1/1/19)

Rate of interest is 12% p.a.

 Example contd.
 We can make the capital flowchart
1/4/18 1/7/18 1/10/18 1/1/19

100,000 120,000 150,000 80,000

 Interest = 12% on 100,000 for 3 months + 12% on

120,000 for 3 months + 12% on 150,000 for 3 months +
12% on 80,000 for 3 months

= 3,000 + 3,600 + 4,500 + 2,400 = 13,500

Drawings are not considered
for Interest on Capital
 Find the interest on capital for partner Raju:

i. Opening capital is 1,00,000 (1/4/18)

ii. Additional capital 20,000 (1/7/18)
iii. Additional capital 30,000 (1/10/18)
iv. Withdrawal of capital 70,000 (1/1/19)
v. Drawings of 20,000 (15/2/19)
Rate of interest is 12%

Note: The first four entries are same as the previous, only an
Drawings are not considered
for Interest on Capital
 We calculate the IOC ignoring the values of drawings.

 So, our answer would be the same as it was previously:

13,500.

Note: On drawings, we charge IOD (interest on drawings)

not IOC.
 Example
 Using fluctuating capital method, determine IOC @12%.

Closing capital on 31st March 2020 10,00,000

Additional capital on 1st Jan 2020 2,00,000
Share of profits 40,000
Drawings on 31st October 2019 20,000
Withdrawal of capital on 1st Aug 2019 60,000
Additional capital on 30th June 2019 70,000
Drawings on 1st May 2019 10,000
 Example contd.
 Using the formula, we can Closing capital 10,00,000
calculate the opening capital. (+) drawings 30,000
(+) withdrawal of capital 60,000
 We have included drawings for (–) additional capital 2,70,000
calculating opening balance, (–) share of profits 40,000
but we do not consider it for = Opening Capital 7,80,000

calculating interest on capital.

1/4/18 30/6/18 1/8/18 1/1/19

780,000 850,000 790,000 990,000

 Example contd.
 IOC = 12% on 780,000 for 3 months + 12% on 850,000 for
1 month + 12% on 790,000 for 5 months + 12% on
990,000 for 3 months

= 101,100

1/4/18 30/6/18 1/8/18 1/1/19

780,000 850,000 790,000 990,000

 Interest on Drawings
 We shall discuss different cases:

1. Same amount at regular intervals

2. Irregular drawings
 Interest on Drawings (IOD)
1. When drawings of same amount are made at regular
intervals.

IOD = total drawings × rate of interest × (average period/12)

Average Period = (months left after 1 st drawing + months left

after last drawing)/2

Note: if the average period is in days, in the IOD formula, we

take “average period/365” instead of average period/12.
 Example
 Find the average period if the partner withdraws 10,000 at
the beginning of every month.
 Also, find the IOD if rate of drawing is 6% p.a.

Months left after 1st drawing = 12 months

Months left after last drawing = 1 month

 Average period = (12+1)/2 = 6.5

So, IOD = 120,000 × (6/100) × (6.5/12)

= 3,900
 Example
 Calculate IOD if Raju withdrew Rs. 60,000 at the
beginning of each quarter. Rate of interest is 6% p.a.

Months left after 1st drawing = 12 months

Months left after last drawing = 3 months

 Average period = 7.5

So, IOD = 240,000 × (6/100) × (7.5/12)

= 9,000
 Example
 Calculate IOD if Raju withdrew Rs. 60,000 at the beginning
of each month for 6 months. Rate of interest is 6% p.a.

Total drawings = 360,000

Months left after 1st drawing = 12 months and months left

after last drawing = 7 months.
Average Period = (12+7)/2 = 9.5
 IOD = 360,000 × (6/100) × (9.5/12)
= 17,100
 Example
 Calculate IOD if Raju withdrew Rs. 60,000 at the beginning
of every 2nd month for 8 months. Then he withdrew Rs.
30,000 at the end of next 4 months. Rate of interest is 6% p.a.

For 8 months: average period = (11 + 5)/2 = 8

So, IOD for first 8 months = 240,000 × (6/100) × (8/12)

= 9,600

So, this is the IOD till from 1st April to 1st November.

Let’s calculate IOD for next 4 months:

 Example contd.
 Drawings will be on last date of Dec, Jan, Feb and Mar

Average period = (3+0)/2 = 1.5

 IOD = 120,000 × (6/100) × (1.5/12)

= 900

Therefore, interest on drawings = 9600 + 900

= 10,500
 Example
 Raju withdrew Rs. 10,000 at the beginning of every week
for the first 11 weeks.
 Find the IOD, if the rate of interest is 6%.

Weeks left after 1st drawing = 52

Weeks left after 11th drawing = 42

So, average period = (52+42)/2 = 47

 IOD = 110,000 × (6/100) × (47/52)
= Rs. 5965
 Note
 When only “total drawings” are given, we assume that
the drawings are made in the middle of every month.
 Drawings are made of Rs. 10,000 every month. Rate of
interest is 5%. Find the interest of drawings.

IOD = 120,000 * 5/100 * 6/12

= 3,000
 Interest on Drawings (IOD)
2. When drawings are irregular in nature:

IOD = total product × rate of interest × (1/12)

Note: if the calculation is in days, in the IOD formula, we

take “1/365” instead of 1/12.

If the calculation is in weeks, we take 1/52

 What is total product in the IOD formula?

We shall understand this with the help of an example

 Example
 Calculate IOD at 6% p.a. for the year ended 31/3/20.

i. 5000 withdrawn: 31st May 2019

ii. 10000 withdrawn: 30th September 2019

iii. 5000 withdrawn: 31st January 2019

 Example contd.
Date Amount Months left till 31/3/20 Product Total Product
31st May 5000 10 50,000
30th Sep 10000 6 60,000 120,000
31st Jan 5000 2 10,000

 IOD = 120,000 × (6/100) × (1/12)

= 600
 Example Contd.
Date Amount Months left till 31/3/20 IOD Total IOD
31st May 5000 10 250
30th Sep 10000 6 300 600
31st Jan 5000 2 50

 IOD: 5000 * (6/100) * 10/12 = 3000/12 = 250

 IOD: 10000 * (6/100) * 6/12 = 300

 IOD: 5000 * (6/100) * 2/12 = 50

 Example
 There are 3 drawings, calculate the interest on drawings:

i. 5000 on 1st Oct 2018

ii. 3000 on 1st Jan 2019

iii. 2000 on 1st Feb 2019

Rate of interest = 10%

 Example contd.
 Answer: 358
 Example
 Anita and Ankita are partners sharing profits equally.
Their capitals, maintained following fluctuating capital
accounts method, as on 31st March 2017 were Rs.
500,000 and 400,000 respectively.
 Partnership deed provided to allow interest on capital
@10% p.a.
 The firm earned net profit of Rs. 200,000.

 Pass the journal entry for interest on capital.

Example contd.
Journal entry:
Example
Example contd.
Example contd.
 Example
 A, B, C, and D are partners in a firm sharing profits as
4 : 3 : 2 : 1 respectively. It earned a profit of ₹ 1,80,000
for the year ended 31st March, 2018. As per the
Partnership Deed, they are to charge a commission @
20% of the profit after charging such commission
which they will share as 2 : 3 : 2 : 3.
 You are required to show appropriation of profits
among the partners.
Example contd.
Example contd.
 Example
 A and B are partners sharing profits and losses in the
ratio of 3 : 2 having capital of Rs 50,000 and Rs 40,000 on
1-4-2017.

On 1st July 2017, A introduced Rs 10,000 as his additional

capital whereas B introduced only Rs 1,000.

If the interest on capital is allowed to partners at 10% p.a.,

calculate interest on capital if the financial year closes on
31st March every year.
Example contd.
 Example
 Ram and Mohan are partners in a business. Their capitals at
the end of the year were ₹ 24,000 and ₹ 18,000 respectively.
 During the year, Ram's drawings and Mohan's drawings
were ₹ 4,000 and ₹ 6,000 respectively.
 Profit (Before charging interest on capital) during the year
was ₹ 16,000.
 Calculate interest on capital @ 5% p.a. for the year ended
31st March, 2018.
Example contd.
Example
Example contd.
 Example
 From the following balance sheet of Long and Short,
calculate IOC @ 8% p.a. for the year ended 31/3/2019.

During the year, Long withdrew Rs. 40,000 and Short

withdrew Rs. 50,000. Profit for the year was Rs. 150,000 out
of which Rs. 100,000 was transferred to General Reserve.
Example contd.
 Topics to Study
1. Basics of partnership

2. Interest on capital and drawings

3. Past adjustment
 Past Adjustment
 Sometimes after preparing the financial statements, some
errors or omissions in accounts of earlier years are noticed.
 Some examples of such errors and omissions are:

i. IOC or IOD is omitted or allowed at higher/lower rate.

ii. Profit and losses are distributed to the partners in the

wrong ratio.

To correct them, we pass adjustment entry (or entries) in the

capital accounts of affected partners.
 Debit and Credit of
Partner’s Capital Accounts
 Whenever business gives money to partner, it is
credited to his account. E.g. salary of partner, interest
on partner’s capital.
 Whenever business takes money from partner, it is
debited from his account. E.g. interest on drawings
 When only one adjustment
entry is passed
 When we pass only one adjustment entry as a net
effect for all the past adjustments, it is called single
adjustment entry.
 We shall understand this with the help of examples.
 Example
 A, B, C are three partners sharing profits in 5:2:1.

 Their interest on capitals are 6000, 5000, 5000. The firm

omits their interest on capital.
 Pass an adjusting entry to compensate for this
omission.
 Example contd.
 We need to credit their accounts by 6000, 5000, 5000.
So, the correct entries are:
A B C
Interest on capital (cr.) 6,000 5,000 5,000
 However, we had earlier distributed this 16,000 among
A, B, C in the ratio 5:2:1, i.e., 10000, 4000, 2000. So, we
have to take those amounts back from A, B, C.
A B C
Interest on capital (dr.) 10,000 4,000 2,000
 Example contd.
 The net effect is:

Dr. A B C Cr. A B C
IOC 4,000 IOC 1,000 3,000

 Therefore, the adjusting journal entry is:

A’s capital account 4,000

To B’s capital account 1,000

To C’s capital account 3,000

 Example
 P and Q were partners in a firm sharing profits and losses
equally. Their fixed capitals were Rs. 200,000 and 300,000
respectively. The partnership deed provided for interest
on capital @12% per annum.
 For the year ended 31st March 2016, the profits of the firm
were distributed without providing interest on capital.
 Pass necessary adjustment entry to rectify the error.
 Example contd.
 Statement showing adjustments
Particulars P Q Total
Amount to be credited 24,000 36,000 60,000
(what should be given to them)
Amount to be debited 30,000 30,000 60,000
(we gave 30,000 to each, so we take it from them)
Net effect

 Journal entry:
Current account is used
P’s current account 6,000 because of fixed capital

To Q’s current account 6,000

 Example
 X, Y, Z are partners in a firm sharing profits and losses
in 5:3:2. Their fixed capitals were 300,000; 200,000 and
100,000 respectively.
 For the year ended 31st March 2019, interest on capital
was credited to them @10% p.a. instead of 8% p.a.
 Pass necessary adjustment journal entry.
 Example contd.
 Statement of adjustment:
X Y Z Total
IOC at 10% (dr.) 30,000 20,000 10,000 60,000
IOC at 8% (cr.) 24,000 16,000 8,000 48,000
*Profit credited to partners in 5:3:2 (cr.) 6000 3600 2400
Net Effect 400 (dr.) 400 (cr.)

*Profit = 60,000 (firm took away) – 48,000 (firm distributed)

= 12,000
 Example contd.
 So, adjusting journal entry:

Y’s current A/c 400

To Z’s current A/c 400

 Example
 P, Q, R are partners in a firm. Their capital accounts stood at
30000; 15000 and 15000 respectively on 1/4/18.
 As per the partnership deed:
i. R was to be allowed remuneration of 3000 p.a.
ii. Interest @5% p.a. was to be allowed on capital
iii. Profit was to be distributed in 2:2:1

Ignoring the above terms, the profit of 18,000 for the year ending
31/3/19 was distributed equally.
 Example contd.
 Statement of Adjustment:

Particulars P Q R
Profit already distributed (dr.) 6000 6000 6000
Profit that should be distributed (cr.)
Remuneration to R (cr.) 3000
IOC (cr.) 1500 750 750
Net Profit distributed (cr.) 4800 4800 2400
Net Effect 300 (Cr.) 450 (Dr.) 150 (Cr.)
 Example contd.
 Adjusting journal entry:

Q’s capital A/c 450

To P’s capital A/c 300

To R’s capital A/c 150

 Example
 A, B, C are partners in a firm sharing profits in the ratio
of 2:2:1.
 Their capitals are 100,000; 80,000 and 70,000.

 For the year ended 31st March 2021, interest on capital

was credited to them at 9%p.a. instead of 12%.
 Give the adjustment journal entry.
 Example contd.
 B’s current A/c 600

To C’s current A/c 600

 Example
 A, B, C are partners in a firm sharing profits in 5:3:2.

 Their fixed capitals were 300,000; 200,000 and

100,000.
 IOC was credited to them at 6% instead of 8%.

 Pass adjusting entry.

 Example contd.
 C’s cap A/c 400

To B’s cap A/c 400

 Example
 A and B are partners in a firm sharing profits in the ratio
3:2. On 31st March their closing capitals are 60,000 and
20,000 respectively.
 Profits of Rs. 80,000 for the year ended 31st March 2014
was divided between the partners without allowing two
things: (a) interest on capital @12% p.a. and (b) salary to A
at Rs. 1,000 per month.
 During the year, A withdrew Rs. 10,000 and B withdrew
Rs. 20,000.

 Example contd.
 Calculation of opening capital and interest on capital

Particulars A B
Closing capitals 60,000 20,000
(+) drawings 10,000 20,000
(–) share of profit already credited (48,000) (32,000)
Opening capitals 22,000 8,000
Interest @12% 2,640 960

A: x + 48,000 – 10,000 = 60,000 B: y + 32000 – 20,000 = 20,000

 x = 60000 – 48000 + 10000 = 22000  y = 20,000 + 20,000 – 32,000 = 8000
 Example contd.
 Adjustment table:
Particulars A B Total
Amount already recorded (Dr.) 48,000 32,000 80,000
Amount which should have been recorded
Interest on capital (Cr.) 2,640 960 3,600
A’s salary (Cr.) 12,000 0 12,000
Share of profit (Cr.) 38,640 25,760 64,400
53,280 26,720 80,000
Net Effect 5,280 (Cr.) 5,280 (Dr.) Nil
 Example contd.
 Journal entry:

B’s capital A/c 5,280

To A’s capital A/c 5,280

 Example
 Praveen, Sahil and Riya are partners having fixed capitals of Rs.
200,000; 160,000 and 120,000 respectively. They share profits in
ratio 3:1:1.
 The firm did not record the following:
i. Interest on capital at 5% p.a.

ii. Salary to Praveen 1500 per month and to Riya 1000 per month.

iii. Transfer of profit to general reserve Rs. 10,000.

Net profit for the year ended 31st March 2015 was Rs. 100,000.

Pass the adjusting entry.

 Example contd.
 Adjustment table:
Praveen Sahil Riya Total
Amount already recorded (Dr.) 60,000 20,000 20,000 100,000
Amount that should have been recorded
Interest on capital (Cr.) 10,000 8,000 6,000 24,000
Salary (Cr.) 18,000 12,000 30,000
Transfer to General Reserve (Cr.) 10,000
Share of profit, i.e., 36000 in 3:1:1 (Cr.) 21,600 7,200 7,200 36,000
49,600 15,200 25,200 90,000
Net Effect 10,400 Dr. 4800 Dr. 5200 Cr. 10000 Cr.
 Profit = given profit – reserve – IOC – salary = 36,000
 Example contd.
 Journal entry:

Praveen’s Current A/c 10,400

Sahil’s Current A/c 4,800

To Riya’s Current A/c 5,200

To General Reserve A/c 10,000

 Example
 On 31st March 2014, balances in capital accounts of A,
B, C after making adjustments for profits and drawings
were 160,000; 120,000 and 80,000 respectively.
 Subsequently, it was discovered that the interest on
capital and drawings had been omitted.
 Some additional information is also provided:

i. Profits for 2013-14 was 40,000

Contd.
 Example contd.
ii. During the year, A and B each withdrew a total sum of
Rs. 24,000 in equal installments at the beginning of
each month and C withdrew a total sum of Rs. 48,000
in equal installments at the end of each month.

iii. The interest on drawings was to be charged at 5% p.a.

and interest on capital was to be allowed at 10% p.a.

iv. The profit sharing ratio among the partners was 2:1:1

Pass the adjusting entry.

 Example contd.
 Calculation of opening capital and interest on capital:
A B C
Closing capital 160,000 120,000 80,000
(+) drawings already debited 24,000 24,000 48,000
(–) profit already credited 20,000 10,000 10,000
Opening Capital 164,000 134,000 118,000
Interest on capital 16,400 13,400 11,800

 IOD for A, B, C are 650, 650, 1100 respectively.

 total IOD = 2,400 and total IOC = 41,600

 Example contd.
 Statement of adjustment:
Particulars A B C
IOC (credit) 16400 13400 11800
IOD (debit) 650 650 1100
Profit, 800 to be shared in 2:1:1 (credit) 400 200 200
Profit, 40000 distributed in 2:1:1 (debit) 20,000 10,000 10,000
Net Effect 3850 Dr. 2950 Cr. 900 Cr.

Profit is calculated: 40000 + 2400 (IOD) – 41600 (IOC) = 800

 Example contd.
 Journal entry:

A’s capital A/c 3,850

To B’s capital A/c 2,950

To C’s capital A/c 900

Example
 Example contd.

Working
Example
Example contd.
Example contd.
Example
Example contd.
Example contd.
Example
Example contd.
Example contd.
 Guarantee of Profit to a
new partner
 A new partner may be admitted in the firm with
minimum guaranteed profit from the business.
 The profit may be guaranteed by:

i. All the remaining partners in an agreed ratio.

ii. One or more of the existing partners.

 Example
 P, Q, and R are partners in a firm sharing profit and loss
in the ratio 2:2:1.
 P and Q have guaranteed that R’s profit in any year
shall not be less than Rs.20000.
 The Net profit for the year ended 31st March 2018 was
Rs.60,000.
 Prepare Profit and Loss Appropriation Account.
Example contd.
 Example
 P, Q, and R are partners in a firm sharing profit and loss
in the ratio 2:2:1.
 P has guaranteed that R’s profit in any year shall not be
less than Rs.20000.
 The Net profit for the year ended 31st March 2018 was
Rs. 60,000.
 Prepare Profit and Loss Appropriation Account.
Example contd.
 Example
 S. T, W & X are partners sharing profits ratio 4:3:2:1.

 X is given a guarantee that his share of profit in any year

would be Rs. 80000.
 Deficiency, if any, would be borne by others equally.

 The profits for year ended 31st March, 2021 amounted to

Rs. 650,000.
 The final share in the profit would be?​
Example contd.
 Example
 A, B, C are partners in a firm sharing profits in 4:2:1.

 It is provided that C’s share in profit would not be less

than 37,500.
 Profit for the year ended 31st March 2021 was Rs. 157,500.

 Show appropriation of profit.

 Example contd.
 C's share of profit is (1,57,500*1/7) 22,500.

So, the deficiency of (37,500-22,500) i.e., 15,000 is to be

borne by A and B in the ratio of 4:2.
 Journal Entries are:-

Profit and Loss A/c Dr. 1,57,500

To Profit and Loss appropriation A/c 1,57,500

(Being profit transferred to P&L appropriation account)

 Example contd.
 Profit and Loss Appropriation A/c Dr. 1,57,500

To A's capital A/c 90,000

To B's capital A/c 45,000

To C's capital A/c 22,500

(Being actual distribution of profit)

A's capital A/c Dr. 10,000

B's capital A/c Dr. 5000

To C's capital A/c 15,000

 Example contd.
Profit and Loss Appropriation Account

Particulars Rs. Particulars Rs.

To A’s Capital A/c 80000 By P&L Account 157,500
To B’s Capital A/c 40,000
To C’s capital A/c 37,500
 Example
 P and Q are partners in a firm sharing profits in the ratio 5:3.

 On 1st April 2014, they admitted R as new partner for 1/8th

share in the profits with a guaranteed profit of Rs. 75,000.
 The new PSR between P and Q will remain the same, but
they will bear any deficiency to R in 3:2.
 The profit for the year ended 31/3/2015 was Rs. 400,000.

 Prepare P&L Appropriation A/c.

 Example contd.
 Step 1: we calculate the new PSR

New PSR = 35:21:8

So, out of this profit of 400,000

P’s share = 35/64 × 400,000 = 218,750

Q’s share = 21/64 × 400,000 = 121,750

R’s share = 1/8 × 400,000 = 50,000

 Example contd.
 R should receive Rs. 75,000

However, his share of profit = 1/8 × 400,000 = 50,000

 There is a deficiency of Rs. 25,000

P and Q will bear this deficiency in the ratio 3:2.

i.e., P will pay 15,000 and Q will pay 10,000

Therefore, P’s final share = 218,750 – 15,000 = 203,750

Q’s final share = 131,250 – 10,000 = 121,250

 Example contd.
Profit and Loss Appropriation Account

Particulars Rs. Particulars Rs.

To P’s Capital A/c 203,750 By P&L Account 400,000
To Q’s Capital A/c 121,250
To R’s capital A/c 75,000 400,000
 Example
 P, Q, R are partners sharing profits in 5:4:1.

 R is guaranteed that his share of profit will be at least

50,000.
 Profit for the year ended 31st March, 2021 is Rs. 350,000.

 Amount of shortfall in the profits of R is to be met by P

and Q in 3:2.
 Pass necessary journal entry regarding deficiency met by
P and Q.
 Example contd.
 PSR = 5:4:1.

Therefore, the share of profits will be P: 175,000; Q:

140,000 and R: 35000

However, R is guaranteed a minimum share of 50,000

So, there is a deficiency of 15,000.

P and Q will pay R 9,000 and 6,000 respectively.

 Example contd.
 Therefore, journal entry:

P’s capital A/c 9,000

Q’s capital A/c 6,000

To R’s capital A/c 15,000

 Example
 M, B, K are partners sharing profits in 6:4:1.

 K is guaranteed a minimum profit of 200,000.

 The firm incurred a loss of Rs. 22,00,000 for the year.

 Prepare P&L Appropriation A/c.

 Example contd.
 Total loss = 22,00,000

So, K’s share of profit = –200,000

However, K needs to be given +200,000

Therefore, M and B will together pay K Rs. 400,000.

Now, M’s share in loss = 6/11 × 22,00,000 = 13,20,000

B’s share in loss = 4/11 × 22,00,000 = 8,80,000

Also, M and B have to pay 400,000 to K in 6:4.

 Example contd.
 M will pay 6/10 × 400,000 = 240,000

 B will pay 4/10 × 400,000 = 160,000

Hence, M’s share of loss = 13,20,000 + 240,000 = 15,60,000

B’s share of loss = 8,80,000 + 160,000 = 10,40,000

 Example contd.

 Journal Entry:

M’s capital A/c 2,40,000

B’s capital A/c 160,000

To K’s capital A/c 400,000

 Example contd.

Profit and Loss Appropriation A/c

Particulars Rs. Particulars Rs.

To Net Loss 22,00,000 By Loss transferred:
To K’s Capital A/c 200,000 M’s Capital A/c 14,40,000
B’s Capital A/c 9,60,000 24,00,000
 Example
 A and B are partners sharing profits in 2:1. They admitted C,
their manager as a partner from 1st April 2018 for 1/5th share of
profit.
 C, while being manager, was getting salary of Rs. 50,000 p.a.
plus commission of 10% of net profit after charging such salary
and commission.
 It was agreed that any excess amount which C receives as
partner (over his salary and commission) will be borne by A.
 Profit for 2018-19 was 644,000 before payment of salary and
commission. Prepare P & L Appropriation Account.
 Example contd.
 We have to compare the amount that C receives as
manager and as a partner.
 Remuneration of C as manager (104,000):

i. Salary: 50000

ii. Commission: (10/110) × (644000 – 50000) = 54000

 Remuneration of C as partner:

1/5th of 644,000 = 128,800

So, A will have to pay the difference of 24,800 to C

 Example contd.
 Profit and Loss Appropriation Account
Particulars Rs. Particulars Rs.
To profits transferred to 644,000 By P&L Account 644,000
partner’s capital A/c
A xx
B xx
C xx

 From 644,000 firm has to pay 104,000 to C, which leaves

firm with 540,000 to distribute among A and B.
 Now, additional Rs. 24,800 to C will be paid by A.
 Example contd.
 540,000 is distributed in the ratio 2:1 to A and B.

So, A gets 360,000 and B gets 180,000

A has to distribute 24,800 to C

So, A will get 360,000 – 24,800 = 335,200

B will get 180,000

C will get 128,800

 Example contd.
 Profit and Loss Appropriation Account

Particulars Rs. Particulars Rs.

To profits transferred to 644,000 By P&L Account 644,000
partner’s capital A/c
A 335,200
B 180,000
C 128,800
Manager admitted as Partner
with retrospective effect
 Sometimes, partners decide to admit the manager as a
partner with retrospective effect.
 In that case, profits for those years, interest paid on loan,
etc. is adjusted.
 We pass a single entry for the net effect.

Suppose a partner Raju, working since 2018 as an

employee. He was getting salary, commission etc.

In 2021 it has been decided with retrospective effect that he

Manager admitted as Partner
with retrospective effect
 How to obtain the net effect:

Step 1: compute the amount paid as remuneration to

manager.

Step 2: compute the amount which should be allowed to the

manager on becoming a partner.

Step 3: determine the difference, and if the amount in step 2 is

more, it is credited to his account and debited to old partners
in old profit-sharing ratio. In case, amount in step 1 is more, it
is debited to manager’s a/c and credited to old partner’s
capital accounts, in their old profit sharing ratio.
 Example
 A and B are partners, sharing profits and losses in the
ratio 3:2. At the end of the year, i.e., on 31st March 2018,
they decided to take C into partnership with effect
from 1st April 2015.
 As C was getting annual salary of 45,000, he had also
advanced Rs. 300,000 to the firm by way of a loan on
which he is getting interest @10% p.a.
 Record necessary entries using this and the additional
information given next:
 Example contd.
 During the three financial years, firm’s profits after
adjusting salary to C, interest on loan and interest on the
capital of the partners were: Year Profit Loss
ended
 According to the new agreement, 31/3/2016C is to be
400,000
given annual salary of Rs. 35,000
31/3/2017 200,000
and 1/5th share in the profits of the
firm. 31/3/2018 600,000

 C’s loan shall be treated as his capital from the

beginning and similar to other partners, his capital
 Example contd.
 2015-16: C’s expenses are 45,000 + 30,000 = 75000

Profit = 400,000

Profits after removing C’s expenses = 475,000

Firm would have had some revenue – 75,000 = 400,000

 firm’s actual profits = 475,000

Now C is a partner: C’s expenses = 35,000 + 18,000 = 53,000

475,000 – 53,000 = 422,000 (new profit)

C’s share of profit = 1/5th of 422,000 = 84,400

 Example contd.
 2016-17: Loss of 200,000

C’s expenses = 75,000

Actual loss = 125,000

New C’s expenses = 0 (salary + IOC)

Now, C has to share 1/5th of the losses = 1/5 * 125,000

= –25,000
 Example contd.
 2017-18:

Profits = 600,000

C’s expenses = 75,000

Profits (after removing C as employee) = 675,000

C’s new expenses = 35,000 + 18,000 = 53,000

Actual profits = 675,000 – 53,000 = 622,000

 C’s share = 124,400

 Example contd.
 C’s profits as partner: 84,400 + 124,400 – 25,000

= 183,800

C’s salary + IOC = 35,000 + 18,000 + 35,000 + 18,000

= 106,000

The firm has to pay C as partner = 183,800 + 106,000 = 289,800

C has to return (employee) = 75,000*3 = 225,000

 C should get 64,800 from A and B (in 3:2)

 Example contd.
1 2 3 4 5 6 7 (2+3+4–5–6)
Year Profit/ Int. on Salary as Int. on capital Salary as Adjusted
(Loss) loan manager as partner partner profit
2015-16 400,000 30,000 45,000 18,000 35,000 422,000
2016-17 (200,000) 30,000 45,000 –– (loss) –– (loss) (125000)
2017-18 600,000 30,000 45,000 18,000 35,000 622000

 No IOC or salary as partner in 2016-17, because of net loss

 Adjusted profit = original profit + amount he got as manager

– amount he should have got as a partner
 Let us understand adjusted profit for one year: 2015-16
 Example contd.
 If C was not a manager, the P&L Account for 2015-
salary and interest on loan would Particulars
16
Rs. Particulars Rs.
be shifted to P&L App. A/c from
Salary 45000 ––– –
P&L A/c.
Int. on loan 30000 ––– –
 45000 as salary is changed to Profit X
35000, and IOC is 18000 instead
of 30000 as loan on interest. P&L App. Account for 2015-
16
Particular Rs. Particular Rs.
 So, 45000, 30000 are added to IOC -–– By P&L A/c X
credit side of P&L App. A/c and Salary ––– ––– –
18000 and 35000 are on the debit Profit 400000
side.
 Example contd.
 Last thing we saw that with P&L Account for 2015-
net profit = X, P&L App. A/c 16
Particular Rs. Particular Rs.
has profit = 400000. Salary - ––– –

 After removing salary and int. Int on loan - ––– –

on loan, net profit = X+75000 Profit X+7500

0
 So, after giving IOC = 18000 P&L App. Account for 2015-
16
and salary = 35000, the profit Particular Rs. Particular Rs.
to be distributed is 22000 IOC 18000 By P&L A/c X+7500
more than last time. 0
Salary 35000 ––– –
 So, Adjusted profit = 422000 Profit
 Example contd.
 C’s share as a partner: 1/5th of 919000 + interest on
capital (36000) + salary as partner (70000) = 289,800
 C’s share as manager: 90000 + 135000 = 225000
1 2 3 4 5 6 7 (2+3+4–5–6)
Year Profit/ Int. on Salary as Int. on capital Salary as Adjusted
(Loss) loan manager as partner par. profit
2015-16 400,000 30,000 45,000 18,000 35,000 422,000
2016-17 (200,000) 30,000 45,000 –– (loss) –– (loss) (125000)
2017-18 600,000 30,000 45,000 18,000 35,000 622000
800,000 90,000 135,000 36,000 70,000 919000
 Example contd.
 C’s share as manager: 90000 + 135000 = 225000
 C’s share as a partner: 289,800

This difference of 64,800 will be credited to C’s account by

A and B in the old profit sharing ratio 3:2.

So, journal entry:

A’s capital A/c 38,880

B’s capital A/c 25,920