Study Material & Notes-Partnership Fundamentals

SN

Nature

Explanation

1

Two or More Persons

Minimum 2, Maximus 10 for Banking business & 50 for others

2

Agreement

Do business & share Profit/loss, oral possible, written not mandatory, dispute avoidance

3

Business

Carry on lawful business, co-ownership of property is not a business

4

Mutual Agency

Business carried by all/one, (a)entitlement to participate (b) relationship of mutual agency

5

Sharing of Profits

Agreement to share profits & losses, partnership definition, charitable activities

6

Liability of Partnership

Jointly & individually, unlimited liability, personal assets

Management
Related Matters

Money
Related Matters

Name of the business

Capitals of Partners

Nature of the business

Profit Sharing ratios

Responsibilities and duties of
partners

Interest on Capital and Drawings

Way of settlement of disputes

Interest on Loans

Remuneration of Partners

Method of Valuation of Goodwill

Method of maintaining books of accounts

Item

Type

With
Deed

Without
Deed

Interest on Loan given by Partner

Charge

As per
T&C

6% per
annum

Rent Payable to Partner

Charge

As per
T&C

Payable

Sharing of Profit & Loss

Appropriation

As per
T&C

Equal

Interest on Capital

Appropriation/
Charge

As per
T&C

Not
Permitted

Interest on Drawings

Appropriation

As per
T&C

Not
Permitted

Remuneration (Salary/Commission)

Appropriation

As per
T&C

Not
Permitted

Transaction

Particulars

Amount

To provide interest on Partner’s loan

Interest on Partner’s Loan A/C

Debit

To Partner’s Loan A/C

Credit

To close the interest on Partner’s Loan A/C

Profit & Loss A/C

Debit

To Interest on Partner’s Loan A/C

Credit

Transaction

Particulars

Amount

To record the rent expense

Rent A/C

Debit

To Rent Payable A/C

Credit

To Pay Rent

Rent Payable A/C

Debit

To Bank A/C

Credit

To close the Rent A/C

Profit & Loss A/C

Debit

To Rent A/C

Credit

Transaction

Particulars

Amount

Crediting partner’s salary/commission to partners’ capital
account

Salary/Commission A/C

Debit

To Partners’ Capital/Current A/Cs (individually)

Credit

Transferring partner’s salary/ commission to P&L
Appropriation A/C

Profit and Loss Appropriation A/C

Debit

To Salary/Commission A/C

Credit

Partner
Capital Account

For the year ended …………………….

Debit

Credit

Receipts

Amount

(Rs.)

Payments

Amount

(Rs.)

To Bank/Cash A/C (Drawings against Capital)

To Profit & Loss Appropriation
A/C (Loss)

To Balance c/d (Closing balance)

By Balance b/d (Opening balance)

By Bank/Cash A/C (Additional
Capital)

By Profit & Loss Appropriation
A/C (Profit)

Total

Total

Transaction

Particulars

Amount

Crediting interest on capital to Partner’s Capital Accounts

Interest on Capital A/C

Debit

To Partners Capital/Current A/Cs                                          

  (individually)

Credit

Transferring interest on capital to P&L Appropriation Account

Profit and Loss Appropriation A/C

Debit

To Interest on Capital A/C

Credit

Transaction

Particulars

Amount

Charging interest on Partners’ drawings

Partners Capital/Current A/Cs (individually)

Debit

      To Interest on Drawings A/C

Credit

Transferring interest on drawings to P&L Appropriation Account

Interest on Drawings A/C

Debit

      To Profit & Loss Appropriation A/C

Credit

Final Accounts

·         Trading A/C

·         Profit & Loss A/C

·         Balance Sheet

Profit & Loss A/C

·         Debit all expenses and losses

·         Credit all incomes & gains

·         Net result Income > Expenses = Net Profit

·         Net result Expenses > Income = Net Loss 

Appropriations as per partnership deed

·         Salary

·         Commission

·         Interest on capital

·         Transfer to reserves

·         Interest on Drawings

Profit & Loss Appropriation A/c

Net Profit

+/- Appropriations

= Distributable profit

   (shared by partners in their PSR)

Profit & Loss Account

Debit

Credit

Particulars

Amount

(Rs.)

Particulars

Amount

(Rs.)

To Operating Expenses/Losses

To Non-Operating Expenses/ Losses

By Operating Incomes/Gains

By Non-Operating Incomes/ Gains

To Manager’s Commission

To Rent to Partner

To Interest paid on Loan given by
Partner

To Interest on Partners’ Capital (if it is a charge)

To Net Profit

By Interest received on Loan provided to Partner

Total

Total

Profit & Loss Appropriation Account

Debit

Credit

Particulars

Amount

(Rs.)

Particulars

Amount

(Rs.)

To Interest on Partners’ Capital

To Partners’ Salary/Commission

To Interest on Partners’ Current A/C

To Transfer to Reserves

To Respective Partners’ Capital A/C (Profit)

By Profit & Loss A/C (Net Profit)

By Interest on Drawings

By Interest on Partner Current A/C (Dr. bal)

By Respective Partners Capital A/C (Loss)

Total

Total

Partners’
Capital Accounts

Debit

Credit

Particulars

Amount

(Rs.)

Particulars

Amount

(Rs.)

To Bank A/C (Drawings against
Capital)

To Balance c/d (Closing balance)

By Balance b/d
(Opening Balance)

By Bank A/C
(Additional capital)

Total

Total

Partners’
Current Accounts

Debit

Credit

Particulars

Amount

(Rs.)

Particulars

Amount

(Rs.)

To Balance b/d (Opening Balance)

To P&L Appropriation A/C (Loss)

To Drawings A/C (Against Profit)

To Interest on Drawings A/C

To Balance c/d (Closing balance)

By Balance b/d
(Opening Balance)

By P&L
Appropriation A/C (Profit)

By Interest on
Capital A/C

By Commission A/C

By Partners’
Salary A/C

By Balance c/d
(Closing Balance)

Total

Total

Partners’
Capital Accounts

Debit

Credit

Particulars

Amount

(Rs.)

Particulars

Amount

(Rs.)

To Drawings A/C (Against Capital)

To P&L Appropriation A/C (Loss)

To Drawings A/C (Against Profit)

To Interest on Drawings A/C

To Balance c/d (Closing balance)

By Balance b/d (Opening Balance)

By Bank A/C (Additional capital)

By P&L Appropriation A/C (Profit)

By Interest on Capital A/C

By Commission A/C

By Partners’ Salary A/C

Total

Total

Basis

Fixed Capital Accounts

Fluctuating Capital Accounts

Number of Accounts

Two- Capital A/Cs

      – Current A/C

One – Partner
Capital A/C

Transactions  Recording

Capital Addition

Drawings against Capital

 Partners’ Capital A/C-Cr

Partners’ Capital A/C-Dr

 Partners’ Capital A/C-Cr

Partners’ Capital A/C-Dr

Share of Profit/Loss

 Drawings against Profits

Interest on Drawings

Salary/Commission

Interest on Capital

Partners’ Current A/C (Cr/Dr)

Partners’ Current A/C-Dr

Partners’ Current A/C-Dr

Partners’ Current A/C-Cr

Partners’ Current A/C-Cr

Partners’ Capital A/C (Cr/Dr)

Partners’ Capital A/C-Dr

Partners’ Capital A/C-Dr

Partners’ Capital A/C-Cr

Partners’ Capital A/C-Cr

Account Balance

Capital A/C –
Always Cr

Capital balance
remains fixed unless additions/ withdrawals

Current A/C –  Cr/Dr

Capital A/C-
Cr/Dr

Balance
fluctuates year on year

Specific Mention

It should be
specifically mentioned in Partnership deed

Not necessary

Presentation in Financial Statements

Capital
A/C-Liabilities

Current
A/C-Cr-Liabilities

Current
A/C-Dr-Assets

Capital
A/C-Liabilities

Past Adjustments

(Adjustments related to past period)

Due to
errors or omission
in the books of the firm

To give
effect to a new agreement      with
retrospective effect

•
Interest on
capital/drawings, commission/ salary is omitted, charged or allowed at
higher/lower rate

•
Profits/losses
distributed in wrong ratio

•
Assets charged to
Expense or vice versa

•
Change in PSR

•
Interest on
capital/drawings,

•
Interest on loan
at an agreed rate

•
Commission/
salary

•
Rent payment at
an agreed rate

1)
Pass adjustment
entry for each adjustment

2)
Single adjustment
entry via Partners’ capital/current a/c

Particulars

A’s
Capital A/C

Dr.              Cr.

B’s
Capital A/C

Dr.              Cr.

Firm

Dr.              Cr.

1.    Interest on Capital

2.    Interest on Drawings

3.    Salary/Commission to
Partner

4.    Profit/Loss
distribution reversal

Total

5.    Adjustment of Appropriations
or correct distribution of Profits/losses in correct PSR

Net Effect

Transaction

Particulars

Amount

Impact of Past adjustments

Partners Capital/Current A/Cs (individually)

Debit

     
To Partners Capital/Current A/Cs (individually)

Credit

Transaction

Particulars

Amount

For items which are to be credited to Partners’ Capital/ Current
Account

Profit and Loss Adjustment Account

Debit

     
To Partners Capital/Current A/Cs (individually)

Credit

For items which are to be debited to Partners’ Capital/ Current
Account

Partners’ Capital/Current Accounts

Debit

    
To Profit and Loss Adjustment Account

Credit

For Net Profit/Loss due to above adjustments

(a) For Profit

Profit and Loss Adjustment Account

Debit

    
To Partners’ Capital/Current Account

Credit

(b) For Loss

Partners’ Capital/Current Account

Debit

    
To Profit and Loss Adjustment Account

Credit

What is Guarantee

Guarantee is a
promise, an assurance or commitment wherein the giver of the guarantee
indemnifies the beneficiary that their rights/economic benefits are secured
and in case of loss it will be reimbursed to the beneficiary.

Guarantee of Profit in Partnership Firm

It is the minimum
guaranteed profit given to a specific partner or partners of the firm and
vice versa.

Guarantor

The Guarantor is the person/organization who gives the guarantee to beneficiary to
make good the loss. 

Beneficiary

Beneficiary is the
person to whom Guarantee has been provided.

Guaranteed Profits

The Minimum profit which
has been promised to be earned by the Beneficiary

Deficiency

Guaranteed
Profits – Actual share of Profits earned

Guarantee

Guarantor

Beneficiary

Gain Treatment (Beneficiary)

Loss Treatment (Guarantor)

1. Firm to Partner

Firm

Partner

Partner is
paid the guaranteed profit

Balance profit is distributed to the
remaining partners

2. Remaining Partner to
Partner

Remaining Partner

Partner

Partner is
paid the guaranteed profit

Any deficiency is borne by remaining
partners in specified ratio

3. Partner to Partner

Partner

Partner

Partner is
paid the guaranteed profit

Any deficiency is borne by
guaranteed partner

4. Partner to Firm

Partner

Firm

Partners shares guaranteed
profits in their profit sharing ratio

Deficiency in profit is
contributed by the guaranteed partner