Accounting for Partnership : Basic Concepts always appear on the liabilities side in the balance sheet, the partners’ current account’s balance shall be shown on the liabilities side, if they have credit balance and on the assets side, if they have debit balance. The partner’s capital account and the current account under the fixed capital method would appear as shown below: Partner’s Capital Account Dr. Cr. Date Particulars J.F. Amount (Rs.) Date Particulars J.F. Amount (Rs.) Bank (permanent xxx Balance b/d xxx withdrawal of capital) (opening balance) Balance c/d xxx Bank (fresh capital xxx (closing balance) introduced) xxx xxx Partner’s Current Account Dr. Cr. Date Particulars J.F. Amount (Rs.) Date Particulars J.F. Amount (Rs.) Balance b/d (in case of debit opening bal,) Drawings Interest on drawings Profit & Loss Appropriation (for share of loss) Balance c/d (in case of credit closing balance) xxx xxx xxx xxx xxx Balance b/d (in case of credit opening balance) Salary Commission Interest on capital Profit & Loss Appropriation (share of profit) Balance c/d (in case of debit closing balance) xxx xxx xxx xxx xxx xxxx xxxx Fig. 2.1: Proforma of Partner’s Capital and Current Account under Fixed Capital Method. (b) Fluctuating Capital Method: Under the fluctuating capital method, only one account, i.e. capital account is maintained for each partner. All the adjustments such as share of profit and loss, interest on capital, drawings, interest on drawings, salary or commission to partners, etc are recorded directly in the capital accounts of the partners. This makes the balance in the capital account to fluctuate from time to time. That’s the reason why this method is called fluctuating capital method. In the absence of Accountancy – Not-for-Profit Organisation and Partnership Accounts any instruction, the capital account should be prepared by this method. The proforma of capital accounts prepared under the fluctuating capital method is given below: Partner’s Capital Account Dr. Cr. Date Particulars J.F. Amount (Rs.) Date Particulars J.F. Amount (Rs.) Drawings xxx Balance b/d xxx Bank (fresh xxx Interest on drawings xxx capital introduced) Profit and Loss xxx Salaries xxx Appropriation Interest on capital xxx (for share of loss) Profit and Loss xxx Balance c/d Appropriation (for share of profit) xxxx xxxx Fig. 2.2:Proforma of Partner’s Capital Account under Fluctuating capital Method. 2.4.1 Distinction between Fixed and Fluctuating Capital Accounts The main points of differences between the fixed and fluctuating capital methods can be summed up as follows: Basis of Distinction Fixed Capital Account Fluctuating Capital Account (i) Number of accounts Under this method, two separate accounts are maintained for each partner viz. ‘capital account’ and ‘ current account’. Each partner has one account, i.e. capital account, under this method (ii) Adjustments All adjustments for drawings, salary, interest on capital, etc. are made in the current accounts and not in the capital accounts. All adjustments for drawings, salary interest on capital, etc., are made in the capital accounts, (iii) Fixed balance The capital account balance remain unchanged unless there is addition to or withdrawal of capital. The balance of the capital account fluctuates from year to year (iv) Credit balance The capital accounts always show a credit balance. The capital account may sometimes show a debit balance. Accounting for Partnership : Basic Concepts Solution Statement Showing Calculation of Interest on Capital For Saloni (Rs,) Rs. 2,00,000 × 8×1Interest on Rs. 2,00,000 for full year = = 16,000 100 Rs.50,000 ×9 ×8 3,000 Add: Interest on Rs. 50,000 for 9 months= = 12 ×100 19,000 Rs.30,000 ×8 ×6 Less: Interest on 30,000 for 6 months = = 1,20012 ×100 17,800 Alternatively interest can be calculated on Rs. 2 lakh for 3 months, on Rs. 2,50,000 for 3 months, and on Rs. 2,20,000, for 6 months (Rs. 4,000 + Rs. 5,000 + Rs. 8,800 = Rs. 17,800). For Srishti (Rs.) Rs.3,00,000 × 8×1 Interest on Rs. 3,00,000, for full year @8% = = 24,000 100 3,600 Rs.60,000 ×8 × 9Add: Interest on Rs. 60,000, for 9 months = = 27,600 100 ×12 Rs.15,000 ×8 ×3 Less: Interest on Rs. 15,000 for 3 months = = 300 100 ×12 (Money withdrawn) 27,300 Alternatively interest can be charged on Rs. 3,00,000 for 3 months on Rs. 3,60,000 for 6 months and on Rs. 3,45,000 for 3 months (Rs. 6,000 + Rs. 14,400 + Rs. 6,900 = Rs. 27,300). Accounting for Partnership : Basic Concepts their profit sharing ratio, which in this case is 2:3, Madhulika’s share in the deficiency comes to Rs.2,000 (2/5 of Rs. 5,000), and that of Rakshita Rs.3,000. The total profit of the firm will be distributed among the partners as follows Madhulika will get Rs.38,000 (her share 40,000 minus share in deficiency Rs.2,000); Rakshita Rs.57,000 (60,000–3,000) and Kanishka Rs. 25,000 (Rs. 20,000 + Rs. 2,000 + Rs. 3,000). If only one partner gives the guarantee, say in the above case, only Rakshita gives the guarantee, the whole amount of deficiency (Rs.5,000) will be borne by her only. In that case profit distribution will be Madhulika Rs.40,000, Rakshita Rs. 55,000 (60,000–5,000) and Kanishka Rs. 25,000 (Rs. 20,000 + Rs. 5,000). Illustration 9 Mohit and Rohan share profits and losses in the ratio of 2:1. They admit Rahul as partner with 1/4 share in profits with a guarantee that his share of profit shall be at least Rs. 50,000. The net profit of the firm for the year ending March 31, 2015 was Rs. 1,60,000. Prepare Profit and Loss Appropriation Account. Solution Profit and Loss Appropriation Account Dr. Cr. Particulars Amount (Rs.) Particulars Amount (Rs.) Mohit’s capital (share of profit) Less: Share indeficiency Rohan’s capital (share of profit) Less: Share indeficiency Rahul’s capital (share of profit) Add: Deficiency received from: Mohit Rohan 80,000 6,667 40,000 3,333 40,000 6,667 3,333 73,333 36,667 50,000 Net profit 1,60,000 1,60,000 1,60,000 Accounting for Partnership : Basic Concepts Prepare the final accounts for the year ended March 31, 2014 firm taking into consideration the following: (a) Stock on March 31, 2014 was Rs. 18,000; (b) Provision for doubtful debts is to be provided at 5% on debtors; (c) Outstanding salaries were Rs. 1,000; (d) Goods worth Rs. 8,000 were destroyed by fire on December 10, 2013. The Insurance Company agreed to pay Rs. 7,000 in full settlement of the claim; (e) Interest on capitals is allowed at 6% per annum and interest on drawings is also charged at 6% per annum; (f) Kapil is entitled to a Salary of Rs. 1,200 per annum; (g) Write-off Land and buildings at 5%, Furniture at 10% and Plant and Machinery at 15%. Solution Trading and Profit & Loss Account for the year ending March 31, 2014 Dr. Cr. Particulars Opening stock Purchases 54,000 Less: Returns 1,500 Wages Gross Profit c/d Salaries 4,000 Add: Outstanding 1,000 Printing and Stationery Rent and Rates Insurance Discount allowed Trade expenses Postage and Telegrams Bad debts 1,400 Add: Provision 1,800 Salesman’s commission Loss due to fire (Rs. 8000–Rs. 7000) Depreciation: Land and Buildings 1,200 Furniture 1,350 Plant and Machinery 3,000 Net Profit transferred to Profit and Loss Appropriation Amount (Rs.) 11,000 52,500 2,500 38,000 1,04,000 5,000 500 800 400 1,200 400 300 3,200 3,400 1,000 5,550 17,750 39,500 Particulars Amount (Rs.) Sales 80,000 Less: Returns 2,000 78,000 Closing stock 18,000 Goods destroyed by fire 8,000 1,04,000 Gross Profit b/d 38,000 Discount received 1,500 39,500 Accountancy – Not-for-Profit Organisation and Partnership Accounts Account Name Debit Amount (Rs.) Credit Amount (Rs.) Capital Dinker Ravinder Drawings Dinker Ravinder Opening Stock Purchases and Sales Carriage inward Returns Stationerry Wages Bills receivables and Bills payables Discount Salaries Rent and Taxes Insurance premium Postage Sundry expenses Commission Debtors and creditors Building Plant and machinery Investments Furniture and Fixture Bad Debts Bad debts provision Loan Legal Expenses Audit fee Cash in hand Cash at Bank 6,0005,000 35,100 2,85,000 2,200 3,000 1,200 12,500 45,000 900 12,000 18,000 2,400 300 1,100 95,000 1,20,000 80,000 1,00,000 26,000 2,000 200 1,800 13,500 23,000 2,35,0001,63,000 3,75,800 2,200 32,000 400 3,200 40,000 4,600 35,000 8,91,200 8,91,200 Prepare final accounts for the year ended December 31,2015, with following adjustment: (a) Stock on December 31,2015, was Rs. 42,500. (b) A Provision is to be made for bad debts at 5% on debtors. (c) Rent outstanding was Rs.1,600. (d) Wages outstanding were Rs.1,200. (e) Interest on capital to be allowed on capital @ 4% per annum and interest on drawings to be charged @ 6% per annum. (f) Dinker and Ravinder are entitled to a Salary of Rs.2,000 per annum (g) Ravinder is entitled to a commission Rs.1,500. (h) Depreciation is to be charged on Building @ 4%, Plant and Machinery, 6%, and furniture and fixture, 5%. (i) Outstanding interest on loan amounted to Rs. 350. Accounting for Partnership : Basic Concepts (Ans : Gross Profit Rs. 81,500, Net Profit Rs.32,200, Dinker ‘s Capital Rs. 2,47,627 Ravinder’s Capital Rs.1,71,573, Total of Balance Sheet Rs. 5,29,350) 45. Kajol and Sunny were partners sharing profits and losses in the ratio of 3:2. The following Balances were extracted from the books of account for the year ended March 31, 2015. Account Name Debit Amount (Rs.) Credit Amount (Rs.) Capital Kajol Sunny Current accounts [on 1-04-2005] Kajol Sunny Drawings Kajol Sunny Opening stock Purchases and Sales Freight inward Returns Printing and Stationery Wages Bills receivables and Bills payables Discount Salaries Rent Insurance premium Traveling expenses Sundry expenses Commission Debtors and Creditors Building Plant and Machinery Motor car Furniture and Fixtures Bad debts Provision for doubtful debts Loan Legal expenses Audit fee Cash in hand Cash at bank 3,200 6,0003,000 22,700 1,65,000 1,200 2,000 900 5,500 25,000 400 6,000 7,200 2,000 700 1,100 74,000 85,000 70,000 60,000 15,000 1,500 300 900 7,500 12,000 1,15,00091,000 4,5002,35,800 3,200 21,000 800 1,600 78,000 2,200 25,000 5,78,100 5,78,100

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