RBSE Solutions Class 12 Accountancy Chapter 1 General Introduction of Partnership

RBSE Class 12 Accountancy Chapter 1 Multiple Choice Questions

 

Question 1. In the absence of partnership deed, the interest on loan payable at is :
(a) 6% p.a.
(b) 0.50% p.a.
(c) 5% p.a.
(d) 4% p.a.
Answer: (a) 6% p.a.
In simple words: If partners don't have a written agreement, any loan they give to the business will get 6% interest each year. This is a standard rule when there's no special agreement.

🎯 Exam Tip: Remember that 6% interest on partner's loan is a key default rule when a partnership deed is silent, while other items like salary or interest on capital are not allowed.

 

Question 2. In hership deed, profit sharing ratio is :
(b)
Answer: (b)
In simple words: The question is incomplete, but typically, in the absence of a partnership deed, profits are shared equally among partners.

🎯 Exam Tip: When a question is fragmented or incomplete in a multiple-choice format, identify the most likely implied answer based on general accounting principles.

 

Question 3. Calculate the interest on Ram's drawings @ 10% if he withdrawn Rs 24,000 during the year.
(a) Rs 1,200
(b) Rs 1,800
(c) Rs 2,400
(d) Rs 1,600
Answer: (a) Rs 1,200
In simple words: Ram took out Rs 24,000 from the business during the year. Since we don't know exactly when, we calculate interest for half a year at 10%. So, Rs 24,000 times 10% times 6/12 gives Rs 1,200. This is a common way to figure it out when dates are not specified.

🎯 Exam Tip: When a partner's drawings occur throughout the year without specific dates, always calculate interest for an average period of six months unless otherwise specified.

 

Question 4. In absence of partnership deed :
(a) interest on capital is given
(b) interest on drawings discharged
(c) salary is given
(d) provided share in profits
Answer: (d) provided share in profits
In simple words: If there's no partnership agreement, partners are still allowed to share in the profits of the business. However, they usually don't get interest on their capital, salary, or interest on drawings. Everyone shares profits equally unless a deed says otherwise.

🎯 Exam Tip: Remember the default rules of the Partnership Act when a deed is absent: profits are shared equally, but no interest on capital/drawings or salary is given to partners.

 

Question 5. In a firm maximum number of partners are :
(a) 2
(b) 10
(c) 20
(d) 50
Answer: (d) 50
In simple words: A partnership business cannot have an unlimited number of owners. There is a legal limit on how many partners can be in one firm, which is 50. Having more than this limit can turn the firm into an illegal association.

🎯 Exam Tip: The maximum number of partners in a general partnership firm is 50, as per the Companies Act, 2013 (read with Rule 10 of Companies (Miscellaneous) Rules, 2014).

 

Question 6. Partners are not entitled to receive ...... in the absence of partnership agreement.
(a)
Answer: (a)
In simple words: If there is no partnership agreement, partners usually do not get a salary, commission, or interest on the money they put into the business. They only get these things if it's written down in an agreement. This rule ensures fairness when no specific terms are set.

🎯 Exam Tip: When a partnership deed is missing, remember that partners are not entitled to salary, commission, or interest on capital or drawings.

 

Question 7. The balance of partners' capital account will reduce with :
(a) interest on capital
(b) interest on drawings
(c) salaries
(d) interest on partners loan
Answer: (b) interest on drawings
In simple words: When partners take money out of the business for personal use (drawings), and if the firm charges interest on those drawings, it lowers the amount of money they have in their capital account. This is because interest on drawings is a cost to the partner.

🎯 Exam Tip: Interest on drawings is always debited to the partner's capital account, thus reducing its balance, whereas interest on capital, salaries, and commission increase the capital account balance.

 

Question 8. Partnership deed is the agreement between the partners in :
(a) oral
(b) written
(c) implied
(d) None of these
Answer: (b) written
In simple words: A partnership deed is a very important document that outlines all the rules for a partnership. While an oral agreement is legally possible, a written deed is always better and clearer to avoid arguments later on. This helps keep everyone on the same page.

🎯 Exam Tip: While a partnership deed can be oral, a written deed is highly recommended to avoid future disputes and ensure clarity among partners.

 

Question 9. The persons who forms the partnership are individually known as :
(a) firm
(b) partners
(c) sale trader
(d) co-ventures
Answer: (b) partners
In simple words: In a partnership, the individual people who come together to start and run the business are called partners. The business itself is called a 'firm', but each person is a partner.

🎯 Exam Tip: Understand the distinction between 'partners' (individuals) and 'firm' (the collective business entity) in partnership accounting.

 

Question 10. Interest on drawings is ...... of firm.
(a) income
Answer: (a) income
In simple words: When partners take money out of the business, the interest charged on these drawings is money that comes back to the business. So, for the firm, interest on drawings is a form of income. This income helps offset the funds taken out by partners.

🎯 Exam Tip: Clearly distinguish between items that are income for the firm (like interest on drawings) and expenses for the firm (like interest on capital or partners' salaries).

RBSE Class 12 Accountancy Chapter 1 Very Short Answer Questions

 

Question 1. What is the minimum and maximum limit on number of partners in a firm?
Answer: In a firm, the minimum number of partners must be 2, and the maximum number of partners can be 50. A partnership needs at least two people to operate and cannot exceed the legal limit.
In simple words: A partnership needs at least two people to start. The most people allowed in a partnership firm is 50.

🎯 Exam Tip: Remember both the minimum (2) and maximum (50) limits for partners in a firm as per the Companies (Miscellaneous) Rules, 2014.

 

Question 2. What do you understand by partnership firm?
Answer: A partnership firm is a business where people come together, agreeing to carry on a business and share its profits and losses. These people are individually called partners, but when they work together, they are known as a partnership firm. It is a popular form of business for small and medium-sized enterprises.
In simple words: A partnership firm is a business run by a group of people (partners) who agree to share the business's profits and losses.

🎯 Exam Tip: Define partnership using keywords like "association of persons," "agreement," "carrying on business," and "sharing profits or losses."

 

Question 3. What do you mean by profit and loss appropriation account?
Answer: The Profit and Loss Appropriation Account is a special account used to show how net profits and losses are divided among partners. It's a nominal account that records all adjustments like interest on capital, partners' salaries, and reserves before distributing the final profit or loss. This account helps visualize the distribution of earnings.
In simple words: It's an account that shows how the business's total profit or loss is shared among all the partners.

🎯 Exam Tip: Highlight that the Profit and Loss Appropriation Account is an extension of the Profit and Loss Account and is prepared to distribute divisible profits.

 

Question 4. Give two circumstances in which fixed capital of partners may change.
Answer: Fixed capital of partners may change in two specific circumstances:
1. When a partner introduces extra capital into the firm.
2. When a partner withdraws capital from the firm. These are the only times a fixed capital account changes, apart from normal profit/loss distribution handled in current accounts.
In simple words: Fixed capital can change if a partner puts in more money or takes out some of their main capital.

🎯 Exam Tip: For fixed capital accounts, remember that capital changes only occur due to additional capital introduced or permanent withdrawal of capital, not routine drawings or profits.

 

Question 5. What account are opened?
(a) When the capitals are fixed.
(b) When the capitals are fluctuating.
Answer:
(a) When the capitals are fixed: Partners' capital account and Partners' current account are opened.
(b) When the capitals are fluctuating: Only a single Capital Account is opened for each partner. This one account records all transactions including capital, drawings, interest, and share of profit/loss.
In simple words:(a) If capital is fixed, two accounts are opened: Capital Account and Current Account. (b) If capital is fluctuating, only one Capital Account is opened.

🎯 Exam Tip: Clearly state that fixed capital requires two accounts (capital and current) to separate core capital from routine transactions, while fluctuating capital uses a single account for everything.

 

Question 6. What is meant by unlimited liabilities of partner?
Answer: Unlimited liability of partners means that partners are personally responsible for all the business debts. If the firm cannot pay its liabilities using its assets, then the partners' personal property can be used to pay off the firm's debts. This is a significant risk that partners undertake.
In simple words: Unlimited liability means partners have to use their own personal money and things to pay back business debts if the business cannot.

🎯 Exam Tip: Emphasize that "unlimited liability" means the partners' personal assets are at risk for business debts, unlike shareholders in a company.

 

Question 7. State any three items of charges on profits.
Answer: Three items that are considered charges against profits, meaning they must be paid regardless of profit availability, are:
1. Managers' commission: This is paid to the manager for their services.
2. Interest on a partner's loan: Interest on any loan provided by a partner is an expense.
3. Rent for a building in which the business operates: If a partner provides premises, the rent is a fixed cost. These items are paid before profit distribution, just like any other business expense.
In simple words: Three things that must be paid from profits are the manager's fee, interest on money a partner loaned to the business, and rent for the business building.

🎯 Exam Tip: Remember that "charges against profits" are expenses (like rent, manager's commission, interest on partner's loan) that must be paid whether the firm makes a profit or not, and are debited to the Profit and Loss Account, not the Appropriation Account.

 

Question 8. State any two points regarding need of partnership.
Answer: Two key reasons for the need of partnership are:
1. To overcome the problem of 'limited capital': A single owner might not have enough money, but multiple partners can pool more resources.
2. To enhance risk-taking capacity: With more partners, the burden of business risks is shared, making it easier to take on bigger challenges. Partnerships help businesses grow by combining resources and expertise.
In simple words: Partnerships are needed to get more money for the business and to share the risks of running it among more people.

🎯 Exam Tip: Focus on the benefits of pooling resources (capital, skills) and sharing risks when explaining the need for partnership.

 

Question 9. What items shown on the credit side of fluctuating capital account?
Answer: Items typically shown on the credit side of a fluctuating capital account include:
1. Additional capital brought in by a partner.
2. Interest on capital.
3. Partner's salary or commission.
4. Share of profit. These items increase the partner's capital balance. The credit side reflects all additions to the partner's ownership stake.
In simple words: Things that add to a partner's capital, like more money they put in, interest earned on their capital, their salary, or their share of profit, are shown on the credit side.

🎯 Exam Tip: The credit side of a capital account (whether fixed or fluctuating) generally represents increases in a partner's equity, while the debit side shows decreases.

 

Question 11. Name any two items which are shown the credit of profit and loss appropriation account.
Answer: Two items typically shown on the credit side of the Profit and Loss Appropriation Account are:
1. Net profit for the current year (transferred from Profit and Loss Account).
2. Interest on drawings (if charged from partners). The credit side of this account shows the total available for distribution among partners and charges.
In simple words: Two things on the credit side of the Profit and Loss Appropriation Account are the net profit from the business and any interest collected from partners on their drawings.

🎯 Exam Tip: Remember that the Profit and Loss Appropriation Account credits items that increase the divisible profit (net profit, interest on drawings) and debits items that reduce it (salary, interest on capital).

 

Question 12. Name any two items which are shown the debit of profit and loss appropriation account.
Answer: Two items typically shown on the debit side of the Profit and Loss Appropriation Account are:
1. Interest on capital: This is the interest paid to partners on their capital contributions.
2. Partner's salary: Any salary paid to a partner for their services to the firm. These items reduce the amount of profit available for final distribution among partners.
In simple words: Two things on the debit side of the Profit and Loss Appropriation Account are the interest paid on partners' capital and any salary given to a partner.

🎯 Exam Tip: Always list items like interest on capital, partner's salary, and commission on the debit side of the Profit and Loss Appropriation Account.

 

Question 13. Shipra and Shruti are partners in a firm. After preparing the final account, it was found that salary of Rs 2,000 was not given to Shipra. Give journal entry for rectification.
Answer: Since the salary was omitted, an adjustment entry is needed to correct the mistake. The entry would be:
\( \text{P & L Adjustment A/c Dr. 2,000} \)
\( \text{To Shipra's Capital A/c 2,000} \)
(Being salary not given to Shipra now rectified.) This entry properly credits Shipra's capital account and debits the Profit and Loss Adjustment Account.
In simple words: A journal entry is made to fix the mistake of not paying Shipra's salary. We credit Shipra's account by Rs 2,000 (meaning she now has that money) and debit the Profit & Loss Adjustment Account by Rs 2,000 (meaning this cost is now accounted for).

🎯 Exam Tip: When a past omission like partner's salary needs rectification after closing accounts, use a Profit and Loss Adjustment Account or a direct adjustment through capital accounts if profits have already been distributed.

 

Question 15. Write the names of methods regarding adjustment in closed partnership accounts.
Answer: The methods for making adjustments in closed partnership accounts are:
1. By Single Entry: This method involves passing a single adjustment journal entry to correct all omissions or errors.
2. By opening Profit and Loss Adjustment Account: This method involves opening a temporary Profit and Loss Adjustment Account to record all rectifications. Both methods aim to correct errors from previous periods without disturbing the final accounts.
In simple words: We can fix mistakes in old partnership accounts in two ways: either by making one main adjustment entry or by opening a special "Profit and Loss Adjustment Account".

🎯 Exam Tip: Explain both the single adjustment entry method and the Profit and Loss Adjustment Account method clearly, noting that the choice depends on the extent of adjustments needed.

 

Question 16. How would you calculate interest on drawings of equal amounts drawn in the middle of every month?
Answer: When equal amounts are drawn in the middle of every month, the interest on drawings is calculated using the product method with an average period. The formulas are:
\( \text{Formula: Interest on Drawings} = \frac { \text{Total Drawings} \times \text{Rate of Interest} \times \text{Average Period} }{ 100 \times 12 } \)
\( \text{Here: Average Period} = \frac { \text{Total month of Drawing (H)} }{ 2 } \) For drawings in the middle of every month, the average period is 6 months because the total time is 12 months. This formula simplifies the calculation by averaging the period over which the drawings are outstanding.
In simple words: If the same amount of money is taken out in the middle of each month, you calculate the interest using a formula that considers the total money drawn, the interest rate, and an average time period. For drawings in the middle of every month, this average time is 6 months.

🎯 Exam Tip: For regular drawings, understand how to calculate the average period: (Months remaining after first drawing + Months remaining after last drawing) / 2. For middle of every month, it's (11.5 + 0.5) / 2 = 6 months.

RBSE Class 12 Accountancy Chapter 1 Short Answer Questions

 

Question 1. Name any two items which are shown the credit of profit and loss appropriation account.
Answer: Two items shown on the credit side of the Profit and Loss Appropriation Account are:
1. Net profit of the current year: This is the profit transferred from the Profit and Loss Account.
2. Interest on drawings: This is income for the firm, charged to partners. These entries increase the distributable profit.
In simple words: The credit side of the Profit and Loss Appropriation Account shows the total profit made in the year and any interest collected from partners on their drawings.

🎯 Exam Tip: Differentiate between items that are appropriations of profit (like salaries, interest on capital) and items that add to the pool of profit available for appropriation (like net profit, interest on drawings).

 

Question 2. In the absence of partnership deed, what are the rules relating to :
(a) Interest on partners capital
(b) Interest on partners drawings
(c) Interest on partners loan
Answer: In the absence of a partnership deed, the following rules apply:
(a) Interest on partners' capital: No interest on capital is paid to partners.
(b) Interest on partners' drawings: No interest on drawings is charged from partners.
(c) Interest on partners' loan: Interest on a partner's loan is to be given at 6% per annum.
(d) Partners' profit sharing ratio: Profits and losses are to be shared equally among partners.
(e) Salaries of partners: No salary is payable to partners. These rules ensure fairness and prevent disputes when there is no specific agreement.
In simple words: If there's no written partnership agreement: (a) Partners don't get interest on their capital. (b) Partners don't pay interest on money they take out. (c) Loans from partners to the business get 6% interest each year. (d) Profits and losses are shared equally. (e) Partners don't get a salary.

🎯 Exam Tip: Memorize the five key default provisions of the Indian Partnership Act, 1932, that apply when the partnership deed is silent, especially the 6% interest on partner's loan.

 

Question 3. Rashmi and Ashish are two partners of a firm. Rashmi withdrawn Rs 1,000 at the beginning of each month. Whereas, Ashish withdrawn Rs 2,000 at the end of each month during the whole year. Interest on drawings is charged @ 12% per annul. Calculate the amount of interest at the end of the year.
Answer:Calculations for Rashmi:Total drawings by Rashmi = Rs \( 1,000 \times 12 = \text{Rs } 12,000 \) Average Period for drawings at the beginning of each month = \( \frac{12+1}{2} = 6.5 \text{ months} \) Interest on drawings for Rashmi = \( 12,000 \times \frac{12}{100} \times \frac{6.5}{12} = \text{Rs } 780 \)Calculations for Ashish:Total drawings by Ashish = Rs \( 2,000 \times 12 = \text{Rs } 24,000 \) Average Period for drawings at the end of each month = \( \frac{12-1}{2} = 5.5 \text{ months} \) Interest on drawings for Ashish = \( 24,000 \times \frac{12}{100} \times \frac{5.5}{12} = \text{Rs } 1,320 \) So, the interest on drawings for Rashmi is Rs 780, and for Ashish is Rs 1,320. These calculations show how the timing of drawings affects the interest amount.
In simple words: Rashmi took out Rs 1,000 every month from the start, and Ashish took out Rs 2,000 every month at the end. We calculate their total drawings and then use a special average time (6.5 months for Rashmi, 5.5 months for Ashish) to figure out the 12% interest. Rashmi's interest is Rs 780, and Ashish's is Rs 1,320.

🎯 Exam Tip: Master the calculation of average periods for interest on drawings when amounts are withdrawn regularly (beginning, middle, or end of each month/quarter).

 

Question 4. What is ...... of profit to a partner?
Answer: Guarantee of Profit to a Partner refers to a situation where a partner is assured of receiving a minimum fixed amount as their share of profits, irrespective of the firm's actual earnings. This guarantee is often given to partners with specialized skills or to new partners.
Such a guarantee can be given by:
(a) One of the old partners.
(b) All the partners in a certain ratio.
The guarantee can also be given in four main ways:

• Guarantee by the firm: The firm as a whole ensures the minimum profit.
• Guarantee by a partner: One specific partner takes on the responsibility.
• Guarantee by a partner to the firm: A partner guarantees a minimum earning for the firm.
• Guarantee by a partner to the firm and guarantee by firm to a partner: A complex scenario involving dual guarantees.

This ensures stability for certain partners while encouraging their contribution.
In simple words: 'Guarantee of profit' means a partner is promised a minimum amount of profit, no matter how much the business actually earns. This promise can come from one old partner, or all partners together. It's often for partners who bring special skills.

🎯 Exam Tip: Understand the concept of "guarantee of profit" as an assurance of a minimum profit share and be able to identify who gives the guarantee (firm or individual partner) and its implications for profit distribution.

 

Question 6. Chandra, Surya and Kiran are partners in a firm, during the year 2017, their drawings were as follows :

Calculate the interest on drawings @ 6% p.a. for the year ending on 31st December, 2017 by 'Product Method'.
Answer:**Solution.** **Calculation of Interest of Drawing of Chandra:**
\( \text{Interest on Drawing} = \frac { \text{Total of product} \times \text{Rate of Interest} }{ 100 \times 12 } \)
\( = \frac { 41,000 \times 6 }{ 100 \times 12 } = \text{Rs } 205 \)
**Interest on Drawings of Surya:**
\( \text{Interest on Drawings} = \frac { 54,000 \times 6 }{ 100 \times 12 } = \text{Rs } 270 \)
**Interest on Drawings of Kiran:**
\( \text{Interest on Drawings} = \frac { 49,000 \times 6 }{ 100 \times 12 } = \text{Rs } 245 \)
In simple words: To calculate interest for each partner, we multiply each drawing amount by how many months it was outstanding until the end of the year to get a 'product'. Then, we add all these products for each partner. Finally, we use a formula with this total product, the interest rate (6%), and divide by 12 months to find the interest. Chandra's interest is Rs 205, Surya's is Rs 270, and Kiran's is Rs 245.

🎯 Exam Tip: The product method is ideal for calculating interest on drawings when uneven amounts are withdrawn at irregular intervals throughout the year.

 

Question 7. Ram, Rahim and Roja are partners sharing profit and loss in the ratio of 3 : 2 : 1. As per partnership deed, Roja's minimum profit will be Rs 10,000 p.a. The profit for the half year ending on 31st March, 2017 was Rs 24,000. Pass necessary Journal Entries for the distribution of the profit and prepare Profit and Loss Appropriation Account.
Answer:**Profit & Loss Appropriation Account** **(for the half year ended 31st March, 2017)**

**Working Note:** Roja's minimum guaranteed profit is Rs 10,000 p.a. For a half-year, it is Rs \( 10,000 \times \frac{6}{12} = \text{Rs } 5,000 \). Total profit for the half year is Rs 24,000. The remaining profit after Roja's guarantee is Rs \( 24,000 - 5,000 = \text{Rs } 19,000 \). This remaining profit of Rs 19,000 is distributed between Ram and Rahim in their profit-sharing ratio of 3:2 (after deducting Roja's share). Ram's share = \( 19,000 \times \frac{3}{5} = \text{Rs } 11,400 \) Rahim's share = \( 19,000 \times \frac{2}{5} = \text{Rs } 7,600 \) **Journal Entry for Distribution of Profit:**
\( \text{Profit & Loss Appropriation A/c Dr. 24,000} \)
\( \text{To Ram's Capital A/c 11,400} \)
\( \text{To Rahim's Capital A/c 7,600} \)
\( \text{To Roja's Capital A/c 5,000} \)
(Being distribution of profit)
In simple words: First, we figure out Roja's guaranteed profit for six months, which is Rs 5,000. Then, we take this from the total profit (Rs 24,000), leaving Rs 19,000. This remaining Rs 19,000 is shared by Ram and Rahim in their 3:2 ratio. Ram gets Rs 11,400 and Rahim gets Rs 7,600.

🎯 Exam Tip: When a partner has a guaranteed minimum profit, calculate their share first. Any deficiency in their share is then borne by the remaining partners in their old profit-sharing ratio (unless specified otherwise).

 

Question 8. X, Y and Z have capital of Rs 40,000, Rs 30,000 and Rs 20,000. For the year 2016, interest was credited to them @ 12% p.a. instead of @ 10% p.a. with what amount you will pass the adjustment entry.
Answer:**Calculation of Adjustment:** Original Interest on Capital (10% p.a.) should have been: X: Rs \( 40,000 \times \frac{10}{100} = \text{Rs } 4,000 \) Y: Rs \( 30,000 \times \frac{10}{100} = \text{Rs } 3,000 \) Z: Rs \( 20,000 \times \frac{10}{100} = \text{Rs } 2,000 \) Total Correct Interest = Rs \( 4,000 + 3,000 + 2,000 = \text{Rs } 9,000 \) Interest on Capital actually credited (12% p.a.) was: X: Rs \( 40,000 \times \frac{12}{100} = \text{Rs } 4,800 \) Y: Rs \( 30,000 \times \frac{12}{100} = \text{Rs } 3,600 \) Z: Rs \( 20,000 \times \frac{12}{100} = \text{Rs } 2,400 \) Total Wrong Interest Credited = Rs \( 4,800 + 3,600 + 2,400 = \text{Rs } 10,800 \) The total amount over-credited as interest is Rs \( 10,800 - 9,000 = \text{Rs } 1,800 \). This Rs 1,800 would have reduced the firm's divisible profit. If the profits were shared equally, each partner's share of profit would have been reduced by Rs \( 1,800 / 3 = \text{Rs } 600 \). **Net Effect on Each Partner's Capital Account:**
X: Over-credited interest by Rs 800; under-credited profit by Rs 600. Net effect: Rs \( 800 - 600 = \text{Rs } 200 \) Credit.
Y: Over-credited interest by Rs 600; under-credited profit by Rs 600. Net effect: Rs \( 600 - 600 = \text{Rs } 0 \).
Z: Over-credited interest by Rs 400; under-credited profit by Rs 600. Net effect: Rs \( 400 - 600 = \text{-Rs } 200 \) Debit.
The source provides the following adjustment entry (likely correcting based on a different assumption of net effect):
\( \text{X's Capital A/c Dr. 200} \)
\( \text{To Z's Capital A/c 200} \)
(For adjustment made)
In simple words: We calculate how much interest was actually paid (12%) and how much should have been paid (10%). X received Rs 800 extra, Y received Rs 600 extra, and Z received Rs 400 extra. This means Rs 1,800 was over-allocated as interest, reducing the firm's total profit for distribution. When this is fixed, the journal entry will debit X's Capital Account by Rs 200 and credit Z's Capital Account by Rs 200 to correct the mistake.

🎯 Exam Tip: For past adjustments, create a 'Statement of Adjustment' or an 'Analysis Table' to clearly compare what should have been done versus what was done, and then pass a single journal entry for the net effect.

 

Question 9. X, Y and Z are partners' sharing profit in ratio 5 : 3 : 2. Z gives guarantee to firm of minimum Rs 1,20,000 earnings but Z could earn only Rs 80,000 for the firm. Total profit earned by the firm is Rs 2,00,000. Prepare Profit and Loss Appropriation Account for distribution of profit among partners.
Answer:**Profit & Loss Appropriation Account**

**Working Note:** Z guaranteed to earn a minimum of Rs 1,20,000 for the firm but actually earned only Rs 80,000. The deficiency from Z = Rs \( 1,20,000 - 80,000 = \text{Rs } 40,000 \). This deficiency of Rs 40,000 is charged from Z's capital account and added to the firm's profit. Adjusted total profit = Rs \( 2,00,000 (\text{initial profit}) + 40,000 (\text{deficiency from Z}) = \text{Rs } 2,40,000 \). This Rs 2,40,000 is then distributed among X, Y, and Z in their 5:3:2 ratio. X's share = Rs \( 2,40,000 \times \frac{5}{10} = \text{Rs } 1,20,000 \) Y's share = Rs \( 2,40,000 \times \frac{3}{10} = \text{Rs } 72,000 \) Z's share = Rs \( 2,40,000 \times \frac{2}{10} = \text{Rs } 48,000 \)
In simple words: Z promised the firm a minimum earning of Rs 1,20,000 but only earned Rs 80,000. So, the missing Rs 40,000 is taken from Z's capital. This extra Rs 40,000 is added to the firm's initial profit of Rs 2,00,000, making the total profit Rs 2,40,000. This new total profit is then divided among X, Y, and Z according to their 5:3:2 ratio. X gets Rs 1,20,000, Y gets Rs 72,000, and Z gets Rs 48,000.

🎯 Exam Tip: When a partner guarantees a minimum earning for the firm, any shortfall in their actual earnings is added to the firm's profit for distribution.

 

Question 10. P, Q and R are partners, sharing profit in ratio 3 : 2 : 1. It was agreed that 1. R would get minimum profits Rs 3,00,000, 2. Q made guarantee to the firm that he would earn minimum Rs 4,80,000, firm earned Rs 15,20,000 for the current year it included Rs 3,20,000 earned by Q. Prepare Profit and Loss Appropriation Account for distribution of profit among partners.
Answer:**Profit & Loss Appropriation Account**

**Working Note:** 1. Q guaranteed to earn a minimum of Rs 4,80,000 but earned only Rs 3,20,000.
The deficiency from Q = Rs \( 4,80,000 - 3,20,000 = \text{Rs } 1,60,000 \).
This deficiency is charged from Q's Capital Account and added to the firm's profit. 2. Total profit of the firm after Q's deficiency = Rs \( 15,20,000 + 1,60,000 = \text{Rs } 16,80,000 \). 3. R is guaranteed a minimum profit of Rs 3,00,000.
So, after providing Rs 3,00,000 to R, the balance profit remaining for P and Q = Rs \( 16,80,000 - 3,00,000 = \text{Rs } 13,80,000 \). 4. This remaining profit of Rs 13,80,000 is distributed between P and Q in their profit-sharing ratio of 3:2.
P's share = Rs \( 13,80,000 \times \frac{3}{5} = \text{Rs } 8,28,000 \)
Q's share = Rs \( 13,80,000 \times \frac{2}{5} = \text{Rs } 5,52,000 \)
In simple words: First, Q promised to earn Rs 4,80,000 but only earned Rs 3,20,000. So, the missing Rs 1,60,000 is taken from Q's capital and added to the firm's profit, making the total profit Rs 16,80,000. Next, R is guaranteed Rs 3,00,000, so that amount is set aside for R. The leftover profit (Rs 13,80,000) is then split between P and Q in their 3:2 ratio. P gets Rs 8,28,000, and Q gets Rs 5,52,000.

🎯 Exam Tip: When both a partner guarantees a minimum earning to the firm and another partner is guaranteed a minimum profit, first adjust the firm's profit for the partner's earning deficiency, then distribute the adjusted profit, ensuring all guarantees are met.

RBSE Class 12 Accountancy Chapter 1 Essay Type Questions

 

Question 1. Define partnership and discuss it's characteristics.
Answer:**Meaning and Definition of Partnership:** Partnership is a business arrangement where two or more persons agree to share the profits or losses of a business. It can be carried on by all partners or any one of them acting for all. From an accounting view, a partnership firm is seen as a separate business entity. However, legally, it is not a separate entity, meaning partners' personal assets can be used to cover business debts. The Indian Partnership Act, 1932, Section 4, defines partnership as "the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all." Individuals forming the partnership are 'Partners', and collectively they are called a 'firm'. **Characteristics of Partnership:** The essential features of a partnership are:
1. **Two or More Persons:** A partnership must have at least two competent individuals. Generally, a maximum of 50 partners is allowed in a non-banking business. These individuals must be legally able to enter into a contract.
2. **Agreement Among Partners:** Partnership is formed by an agreement, which can be oral or written. This agreement lays down the mutual rights and responsibilities of the partners. It is the foundation of the partnership, unlike a Hindu Undivided Family which forms by law.
3. **Sharing of Profit:** The main purpose of a partnership is to share the profits or losses of the business. While sharing profits is essential, it is not necessary for all partners to share losses; some partners might be indemnified against losses.
4. **Carrying of Business:** The agreement must be for carrying on a business with the goal of sharing profits. Simply co-owning property does not constitute a partnership.
5. **Business Carried on by All or Any one of them Acting for All (Mutual Agency):** This means every partner can take part in running the business, and each partner's actions bind the other partners. This "mutual agency" is crucial: each partner is both an agent (can bind others) and a principal (can be bound by others).
6. **Responsibility of Partners (Unlimited Liability):** Every partner is jointly and separately responsible for all the firm's actions and debts. Their personal assets can be used to pay off the firm's liabilities if the business cannot. Therefore, their liability is unlimited.
In simple words: Partnership is when two or more people join to run a business and share its profits or losses. Its main features are: 1. There must be at least two people, up to a maximum of 50. 2. They must have an agreement (written or spoken) about how to run the business. 3. Their goal is to share the money the business earns or loses. 4. They must be doing a real business. 5. Any partner can act for the business, and everyone is responsible for those actions. 6. Partners are fully responsible for business debts, even with their personal money.

🎯 Exam Tip: Structure your answer by first defining partnership, then listing and briefly explaining each characteristic (e.g., two or more persons, agreement, profit sharing, business activity, mutual agency, unlimited liability). Use clear headings for readability.

 

Question 2. What do you mean by fixed and fluctuating capital accounts? Point out the differences between the fixed and fluctuation capital accounts. Prepare partners' current account by using imaginary figures.
Answer:

Partners' Capital Account
1. **Fixed Capital Account Method:** In this method, the capital of partners remains constant. Two separate accounts are kept for each partner: a capital account and a current account. The capital account balance stays the same unless new capital is brought in or existing capital is withdrawn permanently. The current account is used to record all other transactions like interest on capital, interest on drawings, salary, commission, and shares of profit or loss. This makes the current account balance change with every transaction.

Current account of each partner is debited with:

• Drawings made by the partner
• Interest on drawings
• Share of loss
• Transfer of any amount to capital account permanently.

Similarly, current account of each partner is credited with:

• Interest on capital
• Salary or commission
• Share of profit
• Transfer of any amount from capital account permanently.

2. **Fluctuating Capital Account Method:** In this method, only one "Capital Account" is maintained for each partner. All transactions, including salary, commission, interest on capital, drawings, interest on drawings, and share of profit or loss, are recorded directly in the capital account. As a result, the balance in the capital account changes with almost every transaction. Capital accounts with credit balances appear on the liabilities side of the balance sheet, while debit balances appear on the assets side. This method is usually followed when no specific instructions are given for maintaining partner capital accounts.

Difference between Fixed Capital Account & Fluctuating Capital Account Method

Partners' Current A/c

In simple words: Fixed capital accounts keep the main investment steady, using a separate current account for daily changes like salaries or drawings. Fluctuating capital accounts record all these changes in just one main capital account, so its balance changes often.

🎯 Exam Tip: Remember that a fixed capital account rarely changes, only for additional capital or permanent withdrawals, while a fluctuating capital account changes with every transaction affecting a partner's share.

 

Question 3. What is partnership deed? What points are included in it from accounting point of view?
Answer:

Partnership Deed: A partnership is formed based on an agreement between partners. This agreement lays out the terms and conditions that all partners have agreed upon. While the law does not require a written agreement, it is always best to have one. A written agreement, properly signed and registered, helps avoid any misunderstandings or disputes. This document, which contains all the terms, is called the "Partnership Deed" or "Articles of Partnership."

The partnership deed should cover the following points from an accounting perspective:

1. The name and address of the firm.
2. The names and addresses of all partners.
3. The type and nature of the business the firm plans to operate.
4. The amount of capital each partner will contribute.
5. The rate of interest on capital.
6. The rate of interest on drawings.
7. The salaries, commissions, or other payments to be given to partners.
8. How profits and losses will be shared among partners.
9. The accounting period of the firm.
10. The method of recording the firm's accounts.
11. Auditing procedures.
12. The date when the partnership began.
13. The duration of the partnership (if fixed).
14. How the firm's bank accounts will be operated.
15. Rules to follow when a new partner is admitted.
16. Rules to follow when settling accounts upon a partner's retirement.
17. How disputes will be settled.
18. Provisions for a partner's death.
19. Methods and conditions for dissolving the firm.
20. How the decision of Garner vs. Murray will be applied.

In simple words: A partnership deed is a written agreement between partners that clearly states all the rules for how the business will run, like who puts in how much money, how profits are shared, and what happens if someone leaves. It's like a rulebook for the partnership.

🎯 Exam Tip: Highlight that a written partnership deed is crucial for preventing future disputes, even though it's not always legally mandatory. Mentioning a few key accounting-related clauses (like interest on capital/drawings, profit sharing) shows a good understanding.

 

Question 4. Describe various types of partnership.
Answer:

Types of Partnership:

1. **Limited and Unlimited Partnership:**

• In a Limited Partnership, a partner's responsibility is restricted to the amount of capital they have invested in the firm.
• In an Unlimited Partnership, all partners are individually and collectively responsible for all the firm's debts, meaning their personal assets can be used to pay off business liabilities.

Here is a visual representation of partnership types:

2. **Partnership at Will and Special Partnership:**

• **Partnership at Will:** This type of partnership is formed for an unspecified period. It can be dissolved at any time with the consent of all partners or by one partner giving notice.
• **Special Partnership:** This partnership is formed for a specific purpose or project. It automatically ends once the work is completed, such as constructing a road or a dam.

3. **Legal and Illegal Partnership:**

• **Legal Partnership:** A partnership firm is considered legal if it operates according to the Indian Partnership Act. This includes having a minimum of 2 partners and a maximum of 50.
• **Illegal Partnership:** A partnership becomes illegal if:
  • The number of partners exceeds 50.
  • The purpose or objective of the partnership is unlawful.
  • The business activities go against public order or morality.
  • One or more partners belong to an enemy country.

In simple words: Partnerships can be grouped by how much responsibility partners have (limited or unlimited), how long they last (for a specific time or until someone wants to stop), what their goal is (general business or a special project), and if they follow all the rules (legal or illegal). Each type has different rules.

🎯 Exam Tip: When describing types of partnerships, always provide clear definitions and highlight the key differentiating factor for each category, such as liability or duration. Using a simple diagram or bullet points can improve clarity.

 

Question 5. What do you mean by guarantee of profit to a partner? Explain the two types of such guarantee.
Answer:

Guarantee of Profit to a Partner: Sometimes, a new partner joins a firm, often because they have special knowledge or skills (like in sales or marketing). This new partner might want an assurance that they will earn a certain minimum amount from the business profits. This promise of a minimum profit share is called a "guarantee of profit." This guarantee can be given by:

(a) One of the existing partners, or
(b) All existing partners in a specific ratio.

Such a guarantee can be given in four main ways:

1. Guarantee by the firm.
2. Guarantee by a partner.
3. Guarantee by a partner to the firm (e.g., promising to earn a minimum amount for the firm).
4. Guarantee by a partner to the firm and a guarantee by the firm to a partner.

The question asks to explain the two types of such guarantee, which are essentially the two broad categories:

(i) **Guarantee by the Firm:** When the firm guarantees a minimum profit to a partner, any shortfall in that partner's profit share (if their actual share is less than the guaranteed amount) is covered by the remaining partners in their agreed profit-sharing ratio. This is a common way to attract skilled partners by assuring them a stable income.

(ii) **Guarantee by a Partner:** In this case, one specific partner takes the responsibility to cover any shortfall in the guaranteed partner's profit. The firm first distributes the profits normally. If the guaranteed partner's share is less than the promised minimum, the guaranteeing partner's share is reduced to make up the difference, and this amount is then added to the guaranteed partner's share. This ensures that the guaranteed partner always receives their minimum profit.

In simple words: Guarantee of profit means a partner is promised a certain minimum amount of profit, no matter what. This promise can come from the whole business or from just one other partner. If the profit is less than promised, someone else covers the difference.

🎯 Exam Tip: When discussing profit guarantees, clearly distinguish between a guarantee *by* the firm (shortfall shared by all remaining partners) and a guarantee *by* a specific partner (shortfall borne only by that partner). Use a simple example to illustrate if time permits.

 

Question 6. How would you adjust the omission disclosed after closing the partnership accounts?
Answer:

Adjustment in Closed Partnership Accounts: Sometimes, partnership accounts are closed at the end of a year, but it's later discovered that certain conditions from the partnership deed were missed. These omissions might include not accounting for interest on capital, interest on drawings, partner salaries, or commissions. Also, partners might decide to apply new arrangements for profit sharing or adjustments retrospectively after the accounts are already closed. To correct these errors, two main methods can be used:

1. **By means of one adjustment entry**
2. **By means of profit and loss adjustment account**

Let's explain the "One Adjustment Entry" method:

1. **By One Adjustment Entry:**

• An "Analysis Table" is prepared. This table lists all partners horizontally with separate debit and credit columns for each. A firm's debit and credit columns are also included.
• The amounts that should have been paid to partners (like interest on capital, salary, share of profit) are entered in their respective credit columns.
• Amounts that should have been charged from partners (like interest on drawings, share of loss) are entered in their respective debit columns.
• After this, the debit and credit columns for each partner are totaled. The difference between the total debits and credits for the firm is calculated to find the net profit or loss from these omissions.
• This net profit or loss (if any) is then distributed among partners in their profit-sharing ratio and recorded in their accounts.
• Finally, the debit and credit columns for each partner are totaled again. The difference for each partner shows whether their capital or current account needs to be debited or credited. A single journal entry is passed at the beginning of the next accounting year to make this adjustment, affecting either the partners' current account or capital account, depending on whether capitals are fixed or fluctuating.

In simple words: If some items were forgotten in the partnership accounts after they were closed, you can fix it by making a single adjustment entry. This involves creating a table to see how each partner's account should have changed, then passing one journal entry to correct everything.

🎯 Exam Tip: The analysis table is key for the single adjustment entry method. Ensure you know whether to credit for items due to partners (like salary) or debit for items due from partners (like drawings) and how to handle the net effect for the firm.

 

Question 1. Ram, Mohan and Sohan were partners. Their capital on 1st January, 2016 were Rs 40,000, Rs 60,000 and Rs 1,00,000 respectively. Before division of profit, Ram is entitled for salary of Rs 12,000 and Mohan Rs 18,000 per annum. Interest is allowed on capital @ 10% per annum. Out of net divisible profits, first Rs 40,000 will be divided in their capital ratio and the balance of profits is to be divided equally. The profit of the firm for the year ending on 31st December, 2016 amounted to Rs 1,20,000 before making all the above adjustments. Prepare Profit and Loss Appropriation Account and Partners' Capital Account on 31st December, 2016 and pass a Journal Entry for distribution of profit.
Answer:

Profit and Loss Appropriation A/c

Partners Capital A/c

Journal Entry for Distribution of Profit

In simple words: First, we calculate the total profit and then deduct salaries and interest on capital for each partner. The remaining profit is split. The first Rs 40,000 is shared based on their capital amounts, and any extra profit is shared equally. All these calculations are shown in the Profit and Loss Appropriation Account and the Partners' Capital Account.

🎯 Exam Tip: When dealing with profit distribution, always follow the sequence: first charges against profit (like interest on loan if applicable, though not here), then appropriations (salary, interest on capital), and finally, distribution of remaining profit according to the deed, considering any special conditions like fixed amounts or ratios.

 

Question 2. Ram, Shyam and Mohan were partners, their capital on 1st January, 2016 were Rs 50,000, Rs 30,000 and Rs 20,000 respectively. Before division of profit, Shyam is entitled for salary of Rs 3,000 and Mohan Rs 2,000. Interest is allowed on capital @ 10% per annum. Out of net divisible profits, first Rs 50,000 will be divided in their capital ratio and the balance of profits is to be divided equally. The profit of the firm for the year ending on 31st December, 2016 amounted to Rs 95,000 before making all the above adjustments. Prepare Profit and Loss Appropriation Account.
Answer:

Profit and Loss Appropriation A/c (For the year ended 31 Dec. 2016)

Working Note: Distribution of Profit

In simple words: First, we take the total profit and pay partners their salaries and interest on their capital. The profit left after these payments is then divided. The first Rs 50,000 is shared based on how much capital each partner put in, and any remaining profit is shared equally among them.

🎯 Exam Tip: Always remember to subtract salaries and interest on capital from the profit *before* distributing the divisible profit. When profit distribution has multiple layers (e.g., first portion by capital ratio, then balance equally), handle each layer separately and correctly.

 

Question 3. A, B and C were partners, their capital as on 1st January, 2016 was Rs 40,000, Rs 27,800 and Rs 15,900 respectively. Before division of profit, B is entitled for salary of Rs 2,500 and C for Rs 2,000 per annum. Interest is allowed on capital @ 5% per annum. Out of net divisible profits, first Rs 10,000, A will receive 40%, B 35% and C 25%. Profits in excesses to that are shared equally. For the year ending on 31st December, 2016 after debiting salary but before charging interest the profits were Rs 23,170. Prepare Profit and Loss Appropriation Account.
Answer:

Profit and Loss Appropriation Account

Working Note:

1. Profit shown in the question is after salary has been deducted. To find the profit *before* salary deduction, we add back the salaries:
Rs \( 23,170 \text{ (given profit)} + 2,500 \text{ (B's salary)} + 2,000 \text{ (C's salary)} = \text{Rs } 27,670 \).

2. First, calculate interest on capital. Then, the remaining profit of Rs \( 23,170 - 4,185 = 18,985 \) needs to be distributed. Out of this, the first Rs 10,000 is divided as 40% for A, 35% for B, and 25% for C. The remaining profit (Rs \( 18,985 - 10,000 = 8,985 \)) is distributed equally among the partners.

Distribution of Profit:

In simple words: We first find the true profit before any payments to partners. Then, we pay interest on capital to each partner. The remaining profit is split in two parts: a fixed amount is divided using a special percentage for each partner, and any leftover profit is divided equally among all partners.

🎯 Exam Tip: Pay close attention to the order of adjustments. If profit is given *after* salaries but *before* interest, you need to adjust it to get the profit before *any* appropriations, then proceed with all adjustments in the correct sequence. Always show your working notes for clarity.

 

Question 4. P and S started a partnership firm on 1st January, 2016 with a capital of Rs 1,000, Rs 10,000 respectively. On 1st March, 2016, P introduced additional capital of Rs 4,000. On that day S withdrawn Rs 3,000 from his capital. C entered in the firm on 1st July, 2016 with a capital of Rs 15,000. On that day P and S introduced additional capital of Rs 6,000 and Rs 5,000 respectively. Profit-Loss are distributed in capital ratio. The profit for the year 2016 was Rs 29,800. Prepare Profit and Loss Appropriation Account by giving detailed calculations.
Answer:

Profit and Loss Appropriation A/c (31 Dec. 2016)

Working Note: Calculation of Capital Ratio

To calculate the capital ratio for profit distribution, we use the "Product Method" because capital amounts changed during the year. We multiply the capital balance by the number of months it remained unchanged.

Ratio of Product \( = 88,000 : 1,20,000 : 90,000 = 44 : 60 : 45 \)
Simplified Ratio \( = 44/298 : 60/298 : 45/298 \)

Distribution of Profit (Rs 29,800):

• P's Share \( = 29,800 \times \frac{44}{149} = \text{Rs } 8,800 \) (The original text had 60 as numerator; based on 88000/298000 * 29800 = 8800)
• S's Share \( = 29,800 \times \frac{60}{149} = \text{Rs } 12,000 \) (The original text had 44 as numerator; based on 120000/298000 * 29800 = 12000)
• C's Share \( = 29,800 \times \frac{45}{149} = \text{Rs } 9,000 \)

Therefore, P's profit share is Rs 8,800, S's profit share is Rs 12,000, and C's profit share is Rs 9,000. (Note: There appears to be a slight discrepancy in the provided working note from the source PDF, where the P and S share values are inconsistent with the product ratio. I've re-calculated based on the derived ratio for clarity. If the source expected direct usage of 60/149 for P and 44/149 for S, it would be a mislabeling in the product table provided in the source. I'm using the ratio derived from the product column for P, S, C respectively.)

In simple words: When partners change their capital amounts during the year, we calculate a "capital ratio" by multiplying each capital amount by how many months it stayed the same. This adjusted ratio is then used to divide the total profit.

🎯 Exam Tip: For problems involving changes in capital during the year and profit-sharing based on capital ratio, always use the 'Product Method' to find the effective capital for each partner over the full period. This involves multiplying each capital amount by its respective duration.

 

Question 6. Chandra, Surya and Kiran are partners in a firm, during the year 2017, their drawings were as follows :

Calculate the interest on drawings @ 6% p.a. for the year ending on 31st December, 2017 by 'Product Method'.
Answer:

To calculate the interest on drawings for Chandra, Surya, and Kiran, we use the product method. This method involves multiplying each drawing amount by the number of months it was outstanding and then applying the interest rate to the total product.

Calculation of Interest on Drawings:

For Chandra:

Interest on Drawings for Chandra \( = \frac{\text{Total Product} \times \text{Rate of Interest}}{100 \times 12} = \frac{41,000 \times 6}{100 \times 12} = \text{Rs } 205 \)

For Surya:

Interest on Drawings for Surya \( = \frac{\text{Total Product} \times \text{Rate of Interest}}{100 \times 12} = \frac{54,000 \times 6}{100 \times 12} = \text{Rs } 270 \)

For Kiran:

Interest on Drawings for Kiran \( = \frac{\text{Total Product} \times \text{Rate of Interest}}{100 \times 12} = \frac{49,000 \times 6}{100 \times 12} = \text{Rs } 245 \)
In simple words: We multiply each drawing by how many months it was held, add these products up, and then apply the annual interest rate for one month. This gives the total interest owed by each partner.

🎯 Exam Tip: Remember to calculate the "period" correctly from the date of drawing until the end of the accounting year for each individual drawing to get the right product.

Question 8. A, B and C are partners, sharing profit and loss in 3 : 2 : 1 ratio. A withdrawn Rs 2,000 at the beginning of every month, B withdrawn Rs 1,500 in the middle of every month, whereas C withdrawn Rs 1,000 at the end of every month. Interest on capital and drawings is to be charged @ 10% p.a. C is also to be allowed a salary of Rs 800 per month. After deducting salary but before allowing all types of interest, the profit for the year ending 31st December, 2016 was Rs 1,22,150. Prepare Profit and Loss Account and Capital Account and Current Account to the Partners from the additional information given below :
Answer:

The firm has partners A, B, and C, who share profits and losses in a 3:2:1 ratio. We need to prepare the Profit and Loss Appropriation Account, Partners' Capital Accounts, and Partners' Current Accounts based on the given information. The total profit before interest but after C's salary was Rs 1,22,150. We also assume initial capitals are A=Rs 2,00,000, B=Rs 1,60,000, and C=Rs 1,00,000, along with a loan interest of Rs 2,400 charged against profit.

Profit & Loss Appropriation A/c

Partners Capital A/c

Partners Current A/c

In simple words: We recorded all income and expenses for the partnership, distributed the profits among partners, and then updated their capital and current accounts to show their balances after all these transactions. This helps in understanding each partner's financial position within the firm.

🎯 Exam Tip: Always verify that the total of the debit and credit sides of all accounts match to ensure accuracy, as any discrepancy indicates an error in calculations or entries.

 

Question 9. X, Y and Z are partners' sharing profit in ratio 5 : 3 : 2. Z gives guarantee to firm of minimum Rs 1,20,000 earnings but Z could earn only Rs 80,000 for the firm. Total profit earned by the firm is Rs 2,00,000. Prepare Profit and Loss Appropriation Account for distribution of profit among partners.
Answer:

Partners X, Y, and Z share profits in the ratio 5:3:2. Z guaranteed the firm minimum earnings of Rs 1,20,000 but only earned Rs 80,000. This means there is a deficiency of Rs 40,000 (1,20,000 - 80,000) that Z must compensate the firm for. This deficiency increases the firm's total distributable profit.

Profit & Loss Appropriation A/c (31st Dec. 2017)

Partner's Capital A/c (31 March 2017)

In simple words: Z's failure to meet his guaranteed earnings is treated as a contribution from his capital to the firm's profits, which are then distributed among all partners according to their agreed ratio. This ensures the firm doesn't lose out due to a partner's underperformance.

🎯 Exam Tip: When a partner guarantees minimum earnings to the firm, any shortfall is typically added back to the firm's profit from that partner's capital before distributing the total profit.

 

Question 10. P, Q and R are partners, sharing profit in ratio 3 : 2 : 1. It was agreed that 1. R would get minimum profits Rs 3,00,000, 2. Q made guarantee to the firm that he would earn minimum Rs 4,80,000, firm earned Rs 15,20,000 for the current year it included Rs 3,20,000 earned by Q. Prepare Profit and Loss Appropriation Account for distribution of profit among partners.
Answer:

Partners P, Q, and R share profits in a 3:2:1 ratio. R has a guaranteed minimum profit of Rs 3,00,000. Q guaranteed minimum earnings of Rs 4,80,000 to the firm but only earned Rs 3,20,000. The firm's total profit was Rs 15,20,000. We first adjust the firm's profit for Q's deficiency, then distribute profit considering R's guarantee.

Analytical Table

Note:
(1) Q guaranteed to earn minimum Rs 4,80,000 but only earned Rs 3,20,000. So, the balance of Rs 1,60,000 is charged from Q's capital account, increasing the firm's total distributable profit.
(2) Total profit available for distribution by the firm = Rs 15,20,000 (initial profit) + Rs 1,60,000 (Q's deficiency) = Rs 16,80,000.
R was guaranteed a minimum profit of Rs 3,00,000. After setting aside R's guaranteed profit, the remaining balance of profit is Rs 16,80,000 - Rs 3,00,000 = Rs 13,80,000. This remaining profit will be distributed between P and Q in their profit sharing ratio of 3:2.
In simple words: This solution shows how to handle a partner's earnings guarantee and minimum profit guarantee. We first increase the firm's profit by the amount a partner failed to earn as per their guarantee, then ensure other partners get their guaranteed minimum before dividing the remaining profit.

🎯 Exam Tip: When dealing with profit guarantees, always adjust the firm's total profit first for any deficiency from partners' earnings guarantees. Then, calculate each partner's share and adjust for any minimum profit guarantees before final distribution.

RBSE Class 12 Accountancy Chapter 1 Essay Type Questions

 

Question 1. Define partnership and discuss it's characteristics.
Answer:

Meaning and Definition of Partnership
From an accounting view, a partnership firm is considered a separate business entity, distinct from its partners. However, legally, it is not a separate legal entity; it does not exist independently of its partners. This means that if the partnership firm faces bankruptcy, the partners' personal assets can be used to cover the firm's debts. A partnership is basically an agreement between two or more people who come together to share the profits or losses of a business in certain agreed proportions.

According to Section 4 of the Indian Partnership Act, 1932, a "Partnership is the relationship between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all." The people who start the business are called Partners individually, and together, they are called a firm.

Characteristics of Partnership
The key features of a partnership are:

• 1. Two or More Persons: There must be at least two people to start a partnership. All these people must be legally capable of entering into a contract. According to the Indian Contract Act, 1872, anyone can enter a contract unless they are a minor, of unsound mind, or disqualified by law.
• 2. Agreement Among Partners: A partnership is formed by an agreement, not by law. This agreement can be spoken or written. A written agreement, called a Partnership Deed, is always better to avoid misunderstandings and disputes, as it outlines the mutual rights and duties of partners.
• 3. Sharing of Profit: The partners must agree to share the profits or losses of the business. It is not always necessary for all partners to share losses; the partnership deed might state that one or more partners will not bear losses.
• 4. Carrying on Business: The agreement between partners should be for running a business with the goal of sharing profits. Simply owning property together is not considered a partnership.
• 5. Business Carried on by All or Any One of them Acting for All: This means every partner can take part in running the business. Each partner's actions are binding on the other partners concerning the firm's business.
• 6. Responsibility of Partners: Every partner is individually and jointly responsible for all the firm's actions. The liability of all partners is generally unlimited, meaning their personal assets can be used to pay off the firm's debts.
• 7. Relationship of Principal and Agent: Each partner acts as both an agent and a principal for the firm. They are an agent because their actions can bind other partners, and a principal because they are also bound by the actions of other partners.
• 8. Mutual Agency: The business can be managed by all partners or by any one partner acting for everyone. This highlights two important points: first, every partner can participate in the firm's business, and second, there is a relationship of mutual agency among all partners. A partner is both a principal and an agent for others, and this mutual agency is essential for a partnership to exist.

In simple words: A partnership is when a few people agree to work together, share profits and losses, and each person acts for the group. They all have a say and are responsible for the business. This structure allows for shared resources and expertise.

🎯 Exam Tip: When defining partnership, always include the phrase "business carried on by all or any one of them acting for all," as this highlights the core concept of mutual agency.

 

Question 2. What do you mean by fixed and fluctuating capital accounts? Point out the differences between the fixed and fluctuation capital accounts. Prepare partners' current account by using imaginary figures.
Answer:

In partnership accounting, there are two main methods for maintaining partners' capital accounts: Fixed Capital Account Method and Fluctuating Capital Account Method. The choice affects how various transactions (like interest, salary, drawings) are recorded.

1. Fixed Capital Account Method:
Under this method, the partners' capital amounts remain constant or 'fixed'. This means their capital only changes if new capital is brought in or existing capital is permanently withdrawn. To record other routine transactions (like interest on capital, drawings, salary, or share of profits/losses), two separate accounts are maintained for each partner:

• Capital Account: This account only shows the initial capital contributions and changes due to permanent additions or withdrawals of capital. Its balance remains fixed year after year.
• Current Account: This account records all other transactions, such as interest on capital, interest on drawings, salary or commission paid to a partner, and their share of profits or losses. As a result, the balance of the current account fluctuates with every transaction.

Current account of each partner is debited with:
(a) Drawings made by him
(b) Interest on drawings
(c) Share of loss
(d) Transfer of any amount to capital account permanently.

Similarly, current account of each partner is credited with:
(a) Interest on capital
(b) Salary or commission
(c) Share of profit
(d) Transfer of any amount from capital account permanently.

Normally, a partner's current account has a credit balance, but if a partner has drawn more than they have earned or contributed, it will show a debit balance.

2. Fluctuating Capital Account Method:
In this method, only one account, called the "Capital Account," is maintained for each partner. All transactions related to a partner, including capital contributions, withdrawals, salary, commission, interest on capital, drawings, and share of profits or losses, are recorded directly in this single capital account. Because all transactions affect this account, its balance keeps changing or 'fluctuates' with every entry. If capital accounts have credit balances, they are shown on the liabilities side of the balance sheet. If they have debit balances, they are shown on the assets side. This method is usually followed if there are no specific instructions.

Difference between Fixed Capital Account & Fluctuating Capital Account Method

Partners' Current A/c (using imaginary figures for Monu and Sonu)

In simple words: Fixed capital means your main investment stays the same, while a separate account tracks your daily transactions like salary or drawings. Fluctuating capital puts everything into one account, so your main balance changes all the time.

🎯 Exam Tip: Remember that a fixed capital system requires both a capital account and a current account, while a fluctuating capital system uses only one capital account to record all partner-related transactions.

 

Question 3. What is partnership deed? What points are included in it from accounting point of view?
Answer:

Partnership Deed:
Since a partnership starts from an agreement, it's very important for all partners to agree on certain terms and conditions. This agreement can be spoken or written. Although the law doesn't make a written agreement compulsory, it's always best to have one. A written agreement, properly signed and registered, helps avoid future misunderstandings and disputes. This written document, which contains all the agreed terms, is called the "Partnership Deed" or "Articles of Partnership."

Points included in a Partnership Deed from an accounting point of view:

1. 1. Name and Address of the Firm: The official name and location of the partnership business.
2. 2. Name and Address of the Partners: The full names and addresses of all the individuals who are partners.
3. 3. Type and Nature of the Business: A clear description of the business the firm plans to operate.
4. 4. Capital Contribution: The amount of money or assets each partner will bring into the business.
5. 5. Interest on Capital: Whether partners will receive interest on their contributed capital, and if so, at what rate.
6. 6. Interest on Drawings: Whether partners will be charged interest on money they withdraw from the business, and the rate.
7. 7. Salaries: Whether any partner will receive a salary for their work in the firm.
8. 8. Profit Sharing Ratio: The agreed proportion in which partners will share the firm's profits or losses.
9. 9. Loans and Interest on Loans: Rules regarding loans taken by partners from the firm, or by the firm from partners, and the interest rates.
10. 10. Accounting Period: The duration of the firm's financial year (e.g., April 1 to March 31).
11. 11. Method of Recording Firm's Accounts: The specific accounting principles and methods the firm will follow.
12. 12. Auditing: Whether the firm's accounts will be audited, and the rules for such audits.
13. 13. Date of Commencement of Partnership: The date when the partnership officially started.
14. 14. Duration of Partnership: If the partnership is for a fixed period or a specific project.
15. 15. Bank Accounts Operation: How the firm's bank accounts will be managed (e.g., who can sign checks).
16. 16. Rules for Admission of a Partner: The process and conditions for admitting new partners.
17. 17. Rules for Settlement of Accounts on Retirement: How a partner's accounts will be settled when they leave the firm.
18. 18. Settlement of Disputes: The procedure for resolving any disagreements among partners.
19. 19. Death of a Partner: Rules regarding how the firm will handle the situation if a partner passes away.
20. 20. Methods and Conditions of Dissolution of the Firm: The procedures for closing down the partnership firm.
21. 21. Use of the Decision of Garner vs. Murray: How the principles established in the famous case of Garner vs. Murray will be applied in case of dissolution.

In simple words: A partnership deed is like a rulebook for partners. It clearly spells out how the business will run, how money will be shared, and what each partner's job is, helping everyone stay on the same page. It acts as a guide to prevent arguments.

🎯 Exam Tip: Emphasize that while an oral partnership agreement is legal, a written partnership deed is always recommended to provide clarity and prevent future conflicts.

 

Question 4. Describe various types of partnership.
Answer:

Partnerships can be categorized based on different factors like liability, time period, business objectives, and legal status. Here are the various types:

1. Limited and Unlimited Partnership:A Limited Partnership is when a partner's responsibility is restricted to the amount they invested in the firm. If the firm incurs losses, they only lose their investment. On the other hand, an Unlimited Partnership means all partners are personally responsible, individually and together, for all the firm's debts. Their personal assets can be used to pay off business liabilities. Most traditional partnerships are unlimited.

Types of Partnership

2. Partnership at Will and Special Partnership:
A Partnership at Will is formed to run a business for an indefinite period, meaning there's no fixed end date. This type of partnership can be dissolved at any time with the consent of all partners or by any one partner giving notice. A Special Partnership, on the other hand, is created for a specific purpose or project. Once that specific work is completed (like building a road or a dam), the partnership automatically ends.

3. Legal and Illegal Partnership:
While registering a partnership isn't mandatory, a firm must follow the rules of the Partnership Act. For example, a partnership must have at least 2 partners but not more than 50. If a partnership firm operates according to the Act's provisions, it's a Legal Partnership. However, a partnership becomes Illegal in the following situations:

• When the number of partners is more than 50.
• When the business objective is against the law.
• When the business goes against public moral standards.
• When one or more partners belong to an enemy country.

In simple words: Partnerships can be limited (only losing what you invest) or unlimited (losing everything). They can also be for a set time or project, or ongoing. And they must follow the rules to be considered legal. Knowing these types helps understand how partners share risk and responsibility.

🎯 Exam Tip: When categorizing partnerships, focus on the key distinguishing factors like liability, duration, and compliance with legal requirements.

 

Question 5. What do you mean by guarantee of profit to a partner? Explain the two types of such guarantee.
Answer:

Guarantee of Profit to a Partner:
Sometimes, a new partner is brought into a firm, often because they have special skills, like in sales, marketing, or a specific technical field. This new partner might want a promise that they will receive a certain minimum amount of profit from the business. This promise is called a 'guarantee of profit' to a partner. Such a guarantee can be given by one of the existing partners or by all existing partners in a specific ratio.

Types of Guarantee:
There are four main ways a guarantee of profit can be given:

1. (i) Guarantee by the firm: All the existing partners together guarantee a minimum profit to a new partner. If the new partner's share of profit is less than the guaranteed amount, the shortfall is borne by all the old partners in their profit-sharing ratio.
2. (ii) Guarantee by a partner: One specific existing partner guarantees a minimum profit to a new partner. If the new partner's share is less than the guaranteed amount, only that specific partner bears the entire shortfall.
3. (iii) Guarantee by a partner to the firm: An existing or incoming partner guarantees a minimum earning or revenue to the firm. If the partner fails to achieve this minimum, the deficiency is charged from their capital account, increasing the total profit for other partners.
4. (iv) Guarantee by a partner to the firm and guarantee by firm to a partner: This involves a dual guarantee where a partner guarantees earnings to the firm, and the firm, in turn, guarantees a minimum profit to that or another partner.

In simple words: Guarantee of profit means a partner is promised a minimum amount of profit each year, no matter how the business performs. This can be promised by the whole company or by just one partner. It's a way to attract skilled people by assuring them a steady income.

🎯 Exam Tip: Differentiate between a guarantee to a partner (firm or individual partner bears the shortfall) and a guarantee by a partner to the firm (partner's capital account is debited for any shortfall in their promised earnings).

 

Question 6. How would you adjust the omission disclosed after closing the partnership accounts?
Answer:

Adjustment in Closed Partnership Accounts:
Sometimes, after the partnership accounts are already closed for a financial year, it's discovered that certain terms of the partnership deed were missed. These omissions might include interest on capital, interest on drawings, partners' salaries, commissions, interest on loans, or incorrect profit-sharing ratios. When such errors or omissions are found, adjustments need to be made. This can be done in two main ways:

1. By means of one adjustment entry or
2. By means of profit and loss adjustment account.

1. By One Adjustment Entry:
This method involves making a single journal entry to correct all past omissions or errors, without reopening the old accounts. Here's how it's done:

• An 'analysis table' (also known as a 'statement showing adjustments') is prepared. In this table, all partners are listed horizontally, with two columns (Debit and Credit) for each partner, and similar columns for the firm.
• Amounts that should have been paid or credited to partners (like interest on capital, salary, commission, and profit share) are recorded in their respective Credit columns.
• Amounts that should have been charged or debited from partners (like interest on drawings, drawings themselves, and loss share) are recorded in their respective Debit columns.
• Then, the Debit and Credit columns for each partner are totaled. The difference between these totals is the net effect on that partner's account.
• Similarly, the firm's Debit and Credit columns are totaled. The difference here reveals whether the firm had a net profit or loss from these adjustments. This amount is then distributed among partners in their profit-sharing ratio.
• Finally, after all adjustments and distributions, the net difference (debit or credit) for each partner is found. A single journal entry is passed at the beginning of the next accounting year, debiting or crediting partners' current or capital accounts, as required, to correct the cumulative effect of all omissions.

In simple words: If you find a mistake in partner accounts after they're closed, you don't reopen everything. Instead, you create a special table to figure out who owes what and who is owed what, then make one single entry to fix it all in the current year. This keeps things simple and tidy.

🎯 Exam Tip: For adjustment entries, correctly identifying whether an item should be debited or credited to the partner's account is crucial. Always consider the effect of the omission on each partner individually.

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