TS Grewal Solution Class 12 Chapter 2 Accounting for Partnership Firms Fundamentals

Partnership is the relation between person who have agreed to share the profit of a business carried on by all or any of them acting for all.

 

Below are the characteristics of Partnership:-

1. Two or More Persons:- There must be at least two persons to form a partnership and all such persons must competent to contract. According to Indian Contract Act, 1872, every person except the following is competent to contract:

(a) Minor

(b) Persons of unsound mind

(c) Persons disqualified by any law.

2. Agreement:- Partnership comes into existence by and agreement, either written or oral. The agreement among the partners is the basis of their relationship which may be for a particular venture, for a period or at will.

 

No, a partnership firm does not have a separate legal entity from its partners.

Reason: Private assets of the partners can be used to meet the liabilities of the firm in case firm’s assets are not adequate to meet its liabilities.

 

The maximum number of partners in a firm can be 50 as per Section 464 of the Companies Act, 2013 read along with Rule 10 of the Companies (Miscellaneous) Rules, 2014.

 

Partnership comes into existence by an oral or written agreement. It is better to have written agreement to avoid any dispute. This written document known as Partnership Deed.

 

Answer:

Partnership Deed is an important legal document which defines relationship among the partners. It is important to have written Partnership Deed to avoid and settle possible dispute. 

Question 12. X and Y are partners. Y wants to admit his son K into business. Can K become the partner of the firm? Give reason.

K, cannot become the partner of the firm.

Reason: As per Section 31(1) of the Indian Partnership Act, 1932, a person can be admitted as a new partner only with the consent of all the existing partners unless otherwise agreed upon.

 

Question 13. Pratibha, partner of a firm, has advanced loan to the firm of 1,00,000. The firm does not have a Partnership Deed. Will Pratibha get interest on the loan? If yes, at which rate and why?

Yes, Pratibha get the interest on loan by 6%. In the absence of partnership deed, interest rate would be 6% p.a. This interest on loan would be paid because it is a charge against profits.

 

Question 14. Neha, a partner, owns a building in which the firm carries its business. The firm pays her 10,000 as rent of the building. To which account rent will be debited?

Yes, Rent is paid to Neha is to be debited to profit and loss account because it is paid against the profit.

 

Question 15. What is meant by 'Fixed Capital of a Partner?

‘Fixed Capital’ of a partner means that the capital remains unchanged unless additional capital is introduced or withdrawal is made from the existing capital. 

 

Question 16. What is meant by 'Fluctuating Capital of a Partner?

It is a method of maintaining Capital Accounts of partners under which all transactions related to a partner (such as his share of profit/loss, drawings, interest on capital or drawings, salary, etc.) are recorded in his Capital Account. 

 

Question 17. Distinguish between 'Fixed Capital Account' and 'Fluctuating Capital Account' on the basis of credit balance.

Fixed Capital Account always shows a credit (positive) balance, while Fluctuating Capital Account may show debit (negative) or credit (positive) balance. 

 

Question 18. A firm maintains a Capital Account and a Current Account for each partner. What is the term used when this method of maintaining Capital Accounts is followed?

If a firm maintains a Capita Account and a Current Account this approach is called Fixed Capital Account Method.

 

Question 19. Give two items which may appear on the debit side of a Partner's Current Account

Current Account of each partner is debited with:-

1. Drawings by a partner against profit
2. Interest on drawings

 

Question 20. State the two methods of maintaining Capital Accounts of partners.

Two methods of maintaining Capital Account of Partners:-

1. Fixed Capital Account Method
2. Fluctuating Capital Accounts Method

 

Question 21. If interest on capital, salary to the partner and share of profit are credited while interest on drawings, drawings and share of loss are debited to the Partners' Capital Accounts, what is the method followed to maintain the Capital Accounts?

Fluctuating Capital Accounts Method is maintain, If interest on capital, salary to the partner and share of profit are credited while interest on drawings, drawings and share of loss are debited to the Partners' Capital Accounts.

 

Question 22. Interest on capital is credited to Partner's Current Account. Name the method of maintaining Capital Account.

Fixed Capital Accounts Method used if Interest on capital is credited to Partner’s Current Account.

 

Question 23. Under which Capital Account Method, Current Accounts of partners are maintained?

Fixed Capital Accounts Method, Current Accounts of partners are maintained.

 

Question 24. Under which Capital Account Method, Current Accounts of partners are not maintained?

Fluctuating Capital Accounts Method, Current Accounts of partners are not maintained.

 

Question 25. Give four items that may appear on the credit side of the Partner's Current Account.

Current Account of each partner is credited with:-

1. Interest on Capital
2. Salary or Commission
3. Share of profit
4. Transfer of any amount from Capital Account permanently.

 

Question 26. Give three items that may appear on the debit side of the Partner's Current Account.

Current Account of each partner is debited with:-

1. Drawings by a partner against profit
2. Interest on drawings
3. Share of loss.

 

Question 27. M/S RSA maintains Partners' Capital Accounts under Fixed Capital Accounts Method. Accountant of the firm has credited their salary and interest on capital to their Capital Accounts. Do you agree with the treatment? Give reasons for your answer.

No, we don’t agree with the treatment as salary and interest on capital are to be credited to the partner’s current account under fixed capital account method.

 

Question 28. Give two circumstances in which the Fixed Capitals of partners may change.

Two circumstances in which the Fixed Capitals of partners may change:

1. When Additional Capital is introduced.
2. When a part of capital is permanently withdrawn.

 

Question 29. List the item that may appear on the debit side of a Partner's Fixed Capital Account.

Below items may appear on the debit side of a Partner’s Fixed Capital Account:-

1. Cash (Permanent capital withdrawn)
2. Balance c/d

 

Question 30. ABC, a partnership firm, does not have a Partnership Deed. The firm wants to pay remuneration to the partners. How can it do so?

In absence of partnership deed, partners are not allowed get remuneration so, ABC cannot pay remuneration.

 

Question 31. If the Partnership Deed does not specify the profit-sharing ratio, in what ratio is the profit or loss shared by the partners?

If the Partnership Deed does not specify the profit-sharing ratio, the partners will equally distribute the profit or loss.

 

Question 32. What share of profit would a sleeping partner who has contributed 75% of the total capital get in the absence of a deed?

In the absence of Partnership deed, if nothing is fixed about sharing of profits and losses by the partners in the deed, then partners share profits and losses in an equal ratio.

So, in this case, even if the sleeping partner has contributed 75% of the total capital of the firm, the provisions of Partnership deed implies distribution of profits and losses will be shared by all the partners equally.

 

Question 33. If the Partnership Deed does not specify the rate of interest payable on loan by a partner, at what rate will the interest be paid? If not, why?

Interest on loan will be payable @ 6%.

Reason:- In the absence of Partnership Deed, the provision of the Indian Partnership Act, 1932 will apply. It provides that interest @ 6% p.a. will be paid on partner’s loan, in the absence of Partnership Deed.

 

Question 34. State the provisions of Indian Partnership Act regarding the payment of remuneration to a partner for the services rendered.

As per the Provision of Indian Partnership Act, 1930, in the absence of Partnership Deed, no remuneration is to be provided to a partner.

 

Question 35. If the Partnership Deed does not specify the rate of interest chargeable on drawings, will the interest still be charged? If yes, at what rate? If not, why?

No, there is no interest chargeable on drawings.

Reason:- In the absence of Partnership Deed there is no provision to provide interest on drawings to partner’s.

 

Question 36. State the provisions of Partnership Act, 1932, in the absence of a Partnership Deed regarding (i) Interest on Partner's Drawings, and (ii) Interest on Advances other than capital.

(i)            Interest on Partner's Drawings:- In the absence of Partnership Deed there is no provision to provide Interest on Partner’s Drawings in Partnership Act, 1932. 

(ii)          Interest on Advances other than capital:- Advance other than capital are treated as Loan to the firm. In the absence of Partnership deed, according to Partnership Act of 1932, the partners are entitled for 6% p.a. interest on loan forwarded by them to the firm. 

 

Question 37. Can a partner be exempted from sharing losses in a firm? If yes, under what circumstances?

Yes, a partner may be exempted from bearing losses in a Partnership Firm. If a partner is admitted for the benefits of partnership, in such cases, minors are entitled to share only profit of the firm.

 

Question 38. A and B are partners in a firm without a Partnership Deed. A is an active partner and claims a salary of 18,000 per month. State with reason whether the claim is valid or not.

A’s Claim is invalid because there is no partnership deed and in the absence of partnership deed no partner can claim any salary. 

 

Question 39. Somesh and Ramesh are partners in a firm with capitals of 3,00,000 and 4,00,000 respectively. They do not have a Partnership Deed. Ramesh wants to share the profits in the ratio of capitals. State with reasons whether the claim is valid.

Ramesh’s Claim is invalid because there is no partnership deed and in the absence of partnership deed profit and loss will be shared equally. 

 

Question 40. Chander and Suman are partners in a firm without a Partnership Deed. Chander's capital is Rs. 10,000 and Suman's capital is Rs. 14,000. Chander has advanced a loan of 5,000 and claims interest @ 12% p.a. on it. State with reasons whether his claim is valid or not.

Chander’s Claim is Invalid because in the absence of a Partnership Deed, a partner is entitled to receive interest on loan and advances provided to the firm at the rate of 6% p.a.         

 

Question 41. State the provisions of Indian Partnership Act, 1932 regarding interest on partner's capital and interest on partner's loan when there is no Partnership Deed.

(1)  Interest on partner's capital:- According to provisions of Indian Partnership Act, 1932 interest on capital is not paid to partners. 

(2)   Interest on partner's Loan:- According to provisions of Indian Partnership Act, 1932 Interest on loan is paid @ 6% p.a. Interest on partner’s loan is charge against profit. It means interest is payable even if there is a loss.

 

Question 42. What is Profit and Loss Appropriation Account?

A partnership firm, like a proprietorship firm prepares Trading Account, Profit and Loss Account and Balance Sheet. In addition, a partnership firm prepares Profit and Loss Appropriation Account to which net profit or net loss as per the Profit and Loss Account is transferred to show its appropriation.

 

Question 43. List the items that are debited to profit and Loss Appropriation Account.

Below are the item’s which is debited into profit and loss appropriation account:-

1. Net Loss transferred from Profit and Loss Account.
2. Interest on Capital
3. Partner’s Salaries
4. Partner’s Commission
5. Reserve

 

Question 44. List the items that are credited to Profit and Loss Appropriation Account.

Below are the item’s which is credited into profit and loss appropriation account:-

1. Net Profit transferred from Profit and Loss Accounts
2. Interest on Drawings

 

Question 45. To which account salary, commission to partners and interest on capital be debited? Why?

Salary, Commission to partners and interest on capital to be debited in Profit and Loss Appropriation Account because these are the loss for the firm and income for the partners.

 

Question 46. Under what circumstances Average Method of calculating interest on drawings is applied?

Average Method is used when drawings are on regular basis or when:

(a)  The amount of drawings is uniform

(b)  The time interval between the two drawings is also uniform.

 

Question 47. If a fixed amount is withdrawn on 15th day of every month of a calendar year, for what period will the interest on total amount withdrawn be calculated?

A fixed amount is withdrawn on 15^th day of every month; interest would be calculated by Average Period Method. Total amount withdraw will be calculated for an average period of 6 month.

 

Question 48. If A draws 15,000 every month at the end of the month, what will be the interest @ 5% p.a.?

Calculation of Interest on Drawings:-

 

 

Question 49. How is interest on drawings calculated, if the drawings are made at regular intervals, as on the 15th day each month?

Calculation of Interest on Drawings:-

 

Question 50. How will you calculate interest on the drawings of equal amount made on the last day of every month a calendar year?

If a partner withdraws fixed amount at the end of every month, interest is charged for 5.5 months on the total amount.

 

Question 51. Explain briefly the meaning of guarantee of minimum profit.

A new partner may be admitted in the firm with minimum guaranteed profit from the business. The profit may be guaranteed to an existing or incoming partner by:

(a)  All the remaining partners in an agreed ratio

(b)  One or more f the existing or old partners.

When the guaranteed partner’s or new partner’s share of profit is more than guaranteed amount, his actual share of profit is given to him instead of the guaranteed amount of profit.

 

Question 52. State one difference between Fixed Capital Account and Fluctuating Capital Account of partners.

Fixed Capital Account cannot have a debit balance but Fluctuating Capital Account can have a debit balance.

 

Question 53. Why is it that the Capital Account of a partner does not show a Debit Balance' in spite of regular and consistent losses year after year?

The Capital Account of a partner shows a debit balance when partner withdraws amount from his Capital or he leave from the partnership.

It does not show debit balances in spite of regular and consistent losses year after year because these losses are first applied to the company’s assets or are recorded as part of a company's liability. 

 

Question 54. A Partnership Deed provides for the payment of interest on capital but there was a loss instead of profit during the year 2010-11. At what rates will the interest on capital be allowed?

In case of Loss, there is no interest on Capital allowed to partner. Interest on capital is allowed only when there is any profit.

 

Question 55. What is meant by 'unlimited liability of a partner'?

Unlimited liability means that the liability of a partner is joint and several. The personal assets of the partner can be utilised for paying a firm’s debts.

 

Question 56. When the partners' capitals are fixed, where will the drawings made by a partner be recorded?

When the partner’s capital is fixed, drawings made by a partner will be debited to the Partner’s Current Account.

 

Question 57. If the partners' capitals are fixed, where will you record interest charged on drawings?

When the partner’s capital is fixed, interest charge on drawings will be credited to the Partner’s Current Account.

 

Question 58. Name the method of calculating Interest on Drawings of the partner if different amounts are withdrawn on different dates.

When drawings are made in unequal amount at different dates, interest on drawings is calculated by Product Method. 

 

Short Answer Type Questions

 

Question 1. Mention the items that may appear on the credit side of the Capital Account of a Partner when the capitals are fluctuating.

List of the items that appear on the Credit side of the Capital account:-

1. Credit opening balance
2. Additional Capital
3. Interest on Capital
4. Commission
5. Partners Salary
6. Profit

 

Question 2. Mention the items that may appear on the debit side of the Capital Account of a Partner when the capitals are fluctuating.

List of the items that appear on the Debit side of the Capital account:-

1. Debit Opening Balance
2. Drawings against Capital
3. Drawings against Profit
4. Interest on Drawings
5. Loss

 

Question 3. List any four items appearing on the Profit and Loss Appropriation Account.

List of the items that appear in Profit and Loss Appropriation account at debit side:-

1. Net Loss Transferred from Profit and Loss Account
2. Interest on Capital
3. Partner’s Salaries
4. Partner’s Commission

 

Question 4. State any four features of a Partnership.

The essential characteristics of partnership are:

1. Two or More Persons:- There must be at least two persons to form a partnership and all such persons must be competent to contract. According to Indian Contract Act, 1872 every person except the following is competent to contract:

(a) Minor (b) Persons of unsound mind (c) Persons disqualified by any law.

Section 464 of the Companies Act, 2013 empowers the Central Government to prescribe maximum number of partners in a firm but the number of partners so prescribed cannot be more than 100. The Central Government has prescribed maximum number of partners in a firm to be 50 vide Rule 10 of the Companies (Miscellaneous) Rules, 2014. Thus, in effect, a partnership firm cannot have more than 50 members.

2. Agreement:- Partnership comes into existence by an agreement, either written or oral. The agreement among the partners is the basis of their relationship which may be for a particular venture, for a period or at will. The written agreement among the partners is known as Partnership Deed.

3. Lawful Business:- A partnership is formed to do a lawful business. Business includes trade, vocation and profession. A joint ownership or charitable activity (such as running of a charitable clinic) is not business as it does not function with the objective of earning profit. Therefore, Partnership Deed is not drawn.

4. Profit-sharing:- The agreement between/among the partners must be to share profits or losses of the business. It is not essential that all the partners must share losses also. There may be a provision in the Partnership Deed that a particular partner or partners shall not bear the losses.

 

Question 5. List any four contents of a Partnership Deed.

It is a legal document signed by all the partners and has clause on the following:

(i) Description of the Partners:- Names, description and addresses of the partners.

(ii) Description of the Firm:- Name and address of the firm.

(iii) Principal Place of Business:- Address of the principal place of business.

(iv) Nature of Business:- Nature of business that the firm shall carry on.   

 

Question 6. Discuss the main provisions of the Indian Partnership Act, 1932 that are relevant to partnership accounts if there is no Partnership Deed.

Below are the Important Provisions of the Indian Partnership Act, 1932:- 

(i)     If all the partners agree, a minor may be admitted for the benefit of partnership.

(ii)    A person may be admitted as a partner either with the consent of all the existing partners or in accordance with an express agreement among the partners.

(iii)   A partner may retire from the firm either with the consent of all the other partners or in accordance with an express agreement among the partners.

(iv)   Registration of the firm is optional and not compulsory.

(v)    Unless otherwise agreed by the partners in the Partnership Deed, a firm is dissolved on the death of a partner. 

 

Question 7. Distinguish between Fixed and Fluctuating Capitals.

 

Question 8. State the two situations in which interest on Partners' Capital is generally provided.

Below are the situations in which interest on Partner’s capital is allowed:-

1. When there is a provision in partnership deed about interest on partner’s capital.
2. When credit balance in the Partner’s Capital Account.

 

EXERCISE ::---->

 

Partnership Deed

 

Question 1:  In the absence of Partnership Deed, what are the rules relation to :

(a) Salaries of partners.
(b) Interest on partners’ capitals.
(c) Interest on partners’ loan.
(d) Division of profit.
(e) Interest on partners’ drawings. 

(A)   Salaries of Partners – No Salary Is Payable To Any Partner.

(B)   Interest on Partners Capital – No interest on capital is allowed or paid to any partner.

(C)   Interest on Partners Loan – Interest on Partner’s Loan is allowed @ 6% to the partners.

(D)  Division of Profit – Profit are divided equally.

(E)   Interest on Partner’s drawings – No interest on Partner’s drawings is charged from the Partners.

 

Point of Knowledge:-

Some Rights of Partners:-

1. Every partner has the right to participate in the management of the business.
2. Every partner has the right to be consulted about the affairs of the business.
3. Every partner has the right to inspect the books of accounts and have a copy of it.
4. Every partner has the right to share profit or losses with others in the agreed ratio.

 

Question 2:  Following differences have arisen among P, Q and R. State who is correct in each case:

(a) P used Rs. 20,000 belonging to the firm and made a profit of Rs. 5,000. Q and R want the amount to be given to the firm?
(b) Q used Rs. 5,000 belonging to the firm and suffered a loss ofRs1000. He wants the firm to bear the loss?
(c) P and Q want to purchase goods from A Ltd., R does not agree?
(d) Q and R want to admit C as partner, P does not agree? 

Following differences have arisen among P, Q and R. The partner/partners correct version is or are:

(a) Q and R

Reason: P has to pay Rs 20,000 along with profit of Rs 5,000 to the firm because this amount belongs to the firm.

 

(b) Q is wrong or P and R are correct.

Reason: Q is paying Rs. 5,000 to the firm because every partner of a partnership firm is liable to the firm for any loss caused by him.

 

(c) P and Q are correct.

Reason: P and Q can buy goods from A ltd.

(d)  P is correct.

Reason: As per partnership act a new partner could get admitted in the partnership firm only, when all the partners are agree to admit him.

 

Points to Remember:- 

(A) Any profit earned by an agent by using the firm’s property is attributable to the firm. 

(B) Any loss earned by an agent of a partnership firmby using the firm’s property, agent or partner should be responsible for the loss. 

(C) A partner has a right to buy and sell goods without consulting the other partners. 

(D) As per partnership act a new partner could get admitted in the partnership firm only, when all the partners are agree to admit him.

 

Question 3:  A, B and C are partners in a firm. They do not have a Partnership Deed. At the end of the first year of the commencement of the firm, they have faced the following problems :

(a) A wants that interest on capital should be allowed to the partners but B and C do not agree.
(b) B wants that the partners should be allowed to draw salary but A and C do not agree.
(c) C wants that the loan given by him to the firm should bear interest @ 10% p.a. but A and B do not agree.
(d) A and B having contributed larger amounts of capital, desire that the profits should be divided in the ratio of their capital contribution but C does not agree.
State how you will settle these disputes if the partners approach you for purpose. 

(A)   In The Absence of The Partnership Deed, No Interest On Capital Will Be Allowed Hence, B And C Are Correct. Interest On Capital Should Not Be Allowed.

(B)   In The Absence of The Partnership Deed, No Salary Will Be Allowed Hence, B And C Are Correct. Interest on Capital Should Not Be Allowed.

(C)   As per principle Interest on partner’s loan will be allowed at 6% p.a. So, In this situation A and B are correct C should be allowed Interest on loan @ 6%

(D)  In the Absence of Partnership Deed, Profit should be distributed in Equal Ratio not in capital ratio. So, in this situation C is correct A and B are wrong. 

Point of Knowledge:-

 

Question 4:  Jaspal and Rosy were partners with capital contribution of Rs. 10,00,000 and Rs. 5,00,000 respectively. They do not have a Partnership Deed. Jaspal wants that profits of the firm should be shared in their capital ratio. Rosy convinced Jaspal that profits should be shared equally. Explain how Rosy would have convinced Jaspal for sharing the profit equally. 

Rosy would have convinced Jaspal for sharing the profit equally as the rule, in the absence of partnership deed is to share the profit equally as per the Indian partnership act, 1932. 

Point of Knowledge:-

In the absence of Partnership deed Profit will be equally divided between partners.

 

Question 5:  Harshad and Dhiman are in partnership since 1st April, 2017. No partnership agreement was made. They contributed Rs 4,00,000 and 1,00,000 respectively as capital. In addition, Harshad advance an amount of Rs 1,00,000 to the firm on 1st October, 2017. Due to long illness, Harshad could not participate in business activities from 1st August to 30th September, 2017. The profit for the year ended 31st March, 2018 amounted to Rs 1,80,000. Dispute has arisen between Harshad and Dhiman.

Harshad Claims :

(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) Profit 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 Harshand and Dhiman. Also prepare Profit and Loss Appropriation Account. 

Answer:

 

 

Point of Knowledge:-

1.     The firm has incurred loss, so no interest on capital and salary will be allowed to the partners.

 

Question 15:  Bhanu and Partab are partners sharings profits eqully. Their fixed capitals as on 1st April, 2017 are Rs.8,00,000 and Rs.10,00,000 respectively. Their drawings the year were Rs.50,000 and Rs.1,00,000 respectively. Interest on Capital is a charge and is to be allowed @ 10% p.a. and interest on drawings is to be charged @ 15% p.a. Profit for the year ended 31st March, 2018 was Rs. 1,20,000.

Prepare Profit and Loss Appropriation Account.

Answer:

 

Partner’s Capital Accounts Fixed Capital

 

Question 16:  Amar and Bimal entered into partnership on 1st April, 2017 contributing Rs1,50,000 and Rs2,50,000 respectively towards capital. The Partnership Deed provided for interest on capital @ 10% p.a. It also provided that Capital Accounts shall be maintained following Fixed Capital Accounts method. The firm earned net profit ofRs1,00,000 for the year ended 31st March 2018.

Pass the Journal entry for interest on capital. 

Answer: