Accounting for Partnership: Basic ConceptsClass 12 Accountancy Part 1 NCERT Solutions
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Q1Do it Yourself
Soumya and Bimal are partners in a firm Sharing profits and losses in the ratio of 3:2. The balance in their capital and current accounts as on April 01, 2019 were as under:
Soumya (Rs.) Bimal (Rs.) Capital Accounts 3,00,000 2,00,000 Current Accounts (Cr.) 1,00,000 80,000
The partnership deed provides that Soumya is to be paid salary @ Rs, 500 per month where as Bimal is to get a commission of Rs. 40,000 for the year. Interest on capital is to be credited at 6% p.a. The drawings of Soumya and Bimal for the year were Rs. 30,000 and Rs. 10,000 respectively. The net profit of the firm before making these adjustments was Rs, 2,49,000. Interest on Soumya's drawings was Rs. 750 and Bimal's drawings, Rs. 250. Prepare Profit and Loss Appropriation Account and Partner's Capital and Current Accounts.
Solution
1. Profit and Loss Appropriation Account
for the year ended March 31, 2020
| Dr. | | Cr. |
|---|---|---|---|---|---|---|---|
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
| To Soumya's Salary (500 x 12) | 6,000 | By Profit and Loss A/c (Net Profit) | 2,49,000 |
| To Bimal's Commission | 40,000 | By Interest on Drawings: | |
| To Interest on Capital: | | Soumya | 750 | |
| Soumya (3,00,000 x 6%) | 18,000 | | Bimal | 250 | 1,000 |
| Bimal (2,00,000 x 6%) | 12,000 | 30,000 | | |
| To Profit transferred to Current A/cs:| | | |
| Soumya (1,74,000 x 3/5) | 1,04,400 | | | |
| Bimal (1,74,000 x 2/5) | 69,600 | 1,74,000 | | |
| Total | 2,50,000 | Total | 2,50,000 |
Working Note: Calculation of Distributable Profit
- Total Credits = 2,49,000 (Profit) + 1,000 (Interest on Drawings) = 2,50,000
- Total Debits (Appropriations) = 6,000 (Salary) + 40,000 (Commission) + 30,000 (Interest on Capital) = 76,000
- Distributable Profit = 2,50,000 - 76,000 = 1,74,000
2. Partners' Capital Accounts
| Dr. | | Cr. |
|---|---|---|---|---|---|---|---|
| Particulars | Soumya (Rs.) | Bimal (Rs.) | Particulars | Soumya (Rs.) | Bimal (Rs.) |
| To Balance c/d | 3,00,000 | 2,00,000 | By Balance b/d | 3,00,000 | 2,00,000 |
| Total | 3,00,000 | 2,00,000 | Total | 3,00,000 | 2,00,000 |
(Note: As Current Accounts are maintained, the Capital Accounts are fixed and will not change unless there is additional capital introduced or capital withdrawn permanently.)
3. Partners' Current Accounts
| Dr. | | Cr. |
|---|---|---|---|---|---|---|---|
| Particulars | Soumya (Rs.) | Bimal (Rs.) | Particulars | Soumya (Rs.) | Bimal (Rs.) |
| To Drawings | 30,000 | 10,000 | By Balance b/d | 1,00,000 | 80,000 |
| To Interest on Drawings | 750 | 250 | By Salary | 6,000 | - |
| To Balance c/d | 1,97,650 | 1,79,350 | By Commission | - | 40,000 |
| | | | By Interest on Capital | 18,000 | 12,000 |
| | | | By P&L Appropriation A/c (Profit) | 1,04,400 | 69,600 |
| Total | 2,28,400 | 1,89,600 | Total | 2,28,400 | 1,89,600 |
Q2Do it Yourself
Soniya, Charu and Smita started a partnership firm on April 1, 2019. They contributed Rs, 5,00,000, Rs. 4,00,000 and Rs. 3,00,000 respectively as their capitals and decided to share profits and losses in the ratio of 3:2:1. The partnership deed provides that Soniya is to be paid a salary of Rs. 10,000 per month and Charu a commission of Rs. 50,000. It also provides that interest on capital be allowed @ 6% p.a. The drawings for the year were Soniya Rs. 60,000, Charu Rs. 40,000 and Smita Rs. 20,000. Interest on drawings was charged as Rs. 2,700 on Soniya's drawings, Rs. 1,800 on Charu's drawings and Rs. 900 on Smita's drawings. The net amount of profit as per Profit and Loss Account for the year 2019-2020 is Rs. 3,56,600.
(i)
Record necessary journal entries.
(ii)
Prepare profit and loss appropriation account
(iii)
Show capital accounts of the partners.
Solution
(i) Journal Entries
| Date | Particulars | L.F. | Debit (Rs.) | Credit (Rs.) |
|---|---|---|---|---|
| 2020 Mar 31 | Profit and Loss A/c Dr. | |||
| To Profit and Loss Appropriation A/c | ||||
| (Being net profit transferred) | 3,56,600 | 3,56,600 | ||
| Mar 31 | Interest on Capital A/c Dr. | |||
| To Soniya's Capital A/c | ||||
| To Charu's Capital A/c | ||||
| To Smita's Capital A/c | ||||
| (Being interest on capital allowed @ 6% p.a.) | 72,000 | 30,000 | ||
| 24,000 | ||||
| 18,000 | ||||
| Mar 31 | Profit and Loss Appropriation A/c Dr. | |||
| To Interest on Capital A/c | ||||
| (Being interest on capital transferred) | 72,000 | 72,000 | ||
| Mar 31 | Soniya's Salary A/c Dr. | |||
| To Soniya's Capital A/c | ||||
| (Being salary payable to Soniya) | 1,20,000 | 1,20,000 | ||
| Mar 31 | Profit and Loss Appropriation A/c Dr. | |||
| To Soniya's Salary A/c | ||||
| (Being salary transferred) | 1,20,000 | 1,20,000 | ||
| Mar 31 | Charu's Commission A/c Dr. | |||
| To Charu's Capital A/c | ||||
| *(Being commission pa |
Q1Test your Understanding - I
Mohan and Shyam are partners in a firm. State whether the claim is valid if the partnership agreement is silent in the following matters:
(i)
Mohan is an active partner. He wants a salary of Rs. 10,000 per year;
(ii)
Shyam had advanced a loan to the firm. He claims interest @ 10% per annum;
(iii)
Mohan has contributed Rs. 20,000 and Shyam Rs. 50,000 as capital. Mohan wants equal share in profits.
(iv)
Shyam wants interest on capital to be credited @ 6% per annum.
Solution
In the absence of a partnership agreement, the provisions of the Indian Partnership Act, 1932 are applicable. Based on these provisions, the validity of the claims is as follows:
(i)
Invalid: Mohan's claim for a salary of Rs. 10,000 per year is not valid. According to the Partnership Act, no partner is entitled to any salary or remuneration for taking part in the conduct of the business unless it is expressly provided for in the partnership deed.
(ii)
Invalid: Shyam's claim for interest at 10% per annum on the loan is not valid. He is entitled to interest on his loan, but the rate will be 6% per annum, as specified by the Partnership Act, 1932, when the agreement is silent on the rate.
(iii)
Valid: Mohan's claim for an equal share in profits is valid. If the partnership deed is silent about the profit-sharing ratio, profits and losses are to be shared equally by all partners, irrespective of their capital contributions.
(iv)
Invalid: Shyam's claim for interest on capital at 6% per annum is not valid. According to the Partnership Act, no interest is payable on the capital contributed by partners if the partnership deed is silent on this issue.
Q2Test your Understanding - I
State whether the following statements are true or false:
(i)
Valid partnership can be formulated even without a written agreement between the partners;
(ii)
Each partner carrying on the business is the principal as well as the agent for all the other partners;
(iii)
Maximum number of partners can be 50;
(iv)
Methods of settlement of dispute among the partners can't be part of the partnership deed;
(v)
If the deed is silent, interest at the rate of 6% p.a. would be charged on the drawings made by the partner;
(vi)
Interest on partner's loan is to be given @ 12% p.a., if the deed is silent about the rate.
Solution
(i)
True: A partnership is formed by an agreement, which can be either oral or written. A written agreement (Partnership Deed) is preferred to avoid disputes, but an oral agreement is equally valid.
(ii)
True: This statement reflects the principle of mutual agency, which is an essential feature of a partnership. Each partner acts as a principal in their own right and as an agent for the other partners, capable of binding the firm by their actions.
(iii)
True: As per Section 464 of the Companies Act 2013, the Central Government has prescribed the maximum number of partners in a firm to be 50.
(iv)
False: The Partnership Deed is a document that contains the terms of the agreement between partners. It can, and preferably should, include clauses regarding the method of settlement of disputes to avoid future conflicts.
(v)
False: If the partnership deed is silent, no interest is to be charged on the drawings made by the partners.
(vi)
False: If the partnership deed is silent about the rate of interest on a partner's loan to the firm, interest is allowed at the rate of 6% per annum, not 12%.
Q1Test your Understanding - II
Raju and Jai commenced business in partnership on April 1, 2019. No partnership agreement was made whether oral or written. They contributed Rs. 4,00,000 and Rs. 1,00,000 respectively as capitals. In addtion, Raju advanced Rs. 2,00,000 as loan to the firm on October 1, 2019. Raju had met with an accident on July 1, 2017 and could not attend the business up to september 30, 2017. The profit for the year ended March 31, 2020 amounted to Rs, 50,600. Disputes have arisen between them on sharing the profits of the firm. Raju Claims:
(i)
He should be given interest at 10% p.a. on capital and so also on loan.
(ii)
Profit should be distributed in the proportion of capitals. Jai Claims:
(i)
Net profit should be shared equally.
(ii)
He should be allowed remuneration of Rs, 1,000 p.a. during the period of Raju's illness.
(iii)
Interest on capital and loan should be given @ 6% p.a. State the correct position on each issue as per the provisions of the Partnership Act. 1932.
Solution
Since there is no partnership agreement, the dispute will be settled according to the provisions of the Indian Partnership Act, 1932.
Analysis of Claims:
Raju's Claims:
(i)
Interest on capital and loan @ 10% p.a.: This claim is not valid.
* No interest is allowed on capital in the absence of an agreement.
* Interest on his loan of Rs. 2,00,000 is allowed, but at the rate of 6% p.a., not 10% p.a. The interest will be for the period from October 1, 2019, to March 31, 2020 (6 months).
(ii)
Profit distribution in proportion of capital: This claim is not valid. In the absence of an agreement, profits must be shared equally, irrespective of the capital contributed.
Jai's Claims:
(i)
Net profit should be shared equally: This claim is valid. The Partnership Act, 1932 states that profits are to be shared equally if the deed is silent on the profit-sharing ratio.
(ii)
Remuneration of Rs. 1,000 p.a.: This claim is not valid. No partner is entitled to any salary or remuneration for managing the business unless specified in the agreement.
(iii)
Interest on capital and loan @ 6% p.a.: This claim is partially valid.
* Interest on capital is not allowed.
* Interest on loan is allowed at 6% p.a., so this part of his claim is correct.
Settlement of Profits:
The profit of Rs. 50,600 is before any appropriations. First, interest on Raju's loan, which is a charge against profit, must be calculated and deducted.
- Interest on Raju's Loan = Rs. 2,00,000 × 6/100 × 6/12 = Rs. 6,000
- Net Distributable Profit = Total Profit - Interest on Loan = Rs. 50,600 - Rs. 6,000 = Rs. 44,600
This distributable profit of Rs. 44,600 will be shared equally between Raju and Jai.
- Raju's Share of Profit = Rs. 44,600 / 2 = Rs. 22,300
- Jai's Share of Profit = Rs. 44,600 / 2 = Rs. 22,300
Conclusion: Raju will get Rs. 6,000 as interest on his loan and Rs. 22,300 as his share of profit. Jai will get Rs. 22,300 as his share of profit.
Q2Test your Understanding - II
Reena and Raman are partners with capitals of Rs. 3,00,000 and Rs. 1,00,000 respectively. The profit for the year ended March 31, 2020 was Rs. 1,80,000, before paying rent for her personal building to be used as godown for firm to Reena payable at Rs. 5000 per month. Interest on capital is to be allowed at 6% p.a. Raman was entitled to a salary of Rs. 30,000 p.a. The drawings of partners were Rs. 30,000 and 20,000. The interest on drawings to be charged to Reena was Rs. 1,000 and to Raman, Rs. 500. Assuming that Reena and Raman are equal partners. State their share of profit after necessary appropriations.
Solution
To determine the share of profit for Reena and Raman, we need to prepare the Profit and Loss Appropriation Account.
Working Notes:
-
Net Profit after Rent: Rent paid to a partner for the use of their personal property by the firm is a charge against profit, not an appropriation. Therefore, it must be deducted from the profit before preparing the P&L Appropriation Account.
- Annual Rent to Reena = Rs. 5,000 × 12 = Rs. 60,000
- Net Profit for appropriation = Rs. 1,80,000 - Rs. 60,000 = Rs. 1,20,000
-
Interest on Capital:
- Reena's Interest on Capital = Rs. 3,00,000 × 6% = Rs. 18,000
- Raman's Interest on Capital = Rs. 1,00,000 × 6% = Rs. 6,000
- Total Interest on Capital = Rs. 18,000 + Rs. 6,000 = Rs. 24,000
-
Interest on Drawings:
- Reena's Interest on Drawings = Rs. 1,000
- Raman's Interest on Drawings = Rs. 500
- Total Interest on Drawings = Rs. 1,000 + Rs. 500 = Rs. 1,500
Profit and Loss Appropriation Account
for the year ended March 31, 2020
| Dr. | | Cr. |
|---|---|---|---|---|---|---|---|
| Particulars | Amount (Rs.) | Particulars | Amount (Rs.) |
| To Interest on Capital: | | By Profit and Loss A/c | 1,20,000 |
| Reena | 18,000 | | (Net Profit after Rent) | |
| Raman | 6,000 | 24,000 | By Interest on Drawings: | |
| To Raman's Salary | 30,000 | Reena | 1,000 | |
| To Profit transferred to: | | Raman | 500 | 1,500 |
| Reena's Capital A/c (1/2) | 33,750 | | | |
| Raman's Capital A/c (1/2)| 33,750 | 67,500 | | |
| Total | 1,21,500 | Total | 1,21,500 |
Calculation of Distributable Profit:
- Total Credits = Rs. 1,20,000 (Profit) + Rs. 1,500 (Interest on Drawings) = Rs. 1,21,500
- Total Debits (Appropriations) = Rs. 24,000 (Interest on Capital) + Rs. 30,000 (Raman's Salary) = Rs. 54,000
- Distributable Profit = Rs. 1,21,500 - Rs. 54,000 = Rs. 67,500
Share of Profit:
Since they are equal partners, the distributable profit of Rs. 67,500 will be shared equally.
- Reena's share of profit = Rs. 67,500 × 1/2 = Rs. 33,750
- Raman's share of profit = Rs. 67,500 × 1/2 = Rs. 33,750