Samacheer Kalvi Class 12 Accountancy Solutions Chapter 3 Accounts of Partnership Firms Fundamental

I Multiple Choice Questions

 

Question 1. In the absence of partnership deed, profits of the firm will be shared by the partners in
(a) Equal ratio
(b) Capital ratio
(c) Both (a) and (b)
(d) None of the options
Answer: (a) Equal ratio
In simple words: When there is no formal agreement (partnership deed), profits are always shared equally among partners. This ensures fairness if no other rule is set.

🎯 Exam Tip: Focus on the default rule for profit sharing when a partnership deed is missing, which is always equal distribution.

 

Question 2. In the absence of an agreement among the partners, interest on capital is
(a) Not allowed
(b) Allowed at bank rate
(c) Allowed @ 5% per annum
(d) Allowed @ 6% per annum
Answer: (a) Not allowed
In simple words: If partners do not have a written agreement, the business cannot give them interest on the money they put in as capital. This stops partners from claiming extra money without a clear rule.

🎯 Exam Tip: Remember that interest on capital is usually only permitted if explicitly stated in the partnership deed; otherwise, it's not allowed.

 

Question 3. As per the Indian Partnership Act, 1932, the rate of interest allowed on loans advanced by partners is
(a) 8% per annum
(b) 12% per annum
(c) 5% per annum
(d) 6% per annum
Answer: (d) 6% per annum
In simple words: According to the Indian Partnership Act, 1932, if a partner gives a loan to the firm and there is no agreement on interest, the partner can charge 6% interest per year. This rate protects partners who lend money to their firm.

🎯 Exam Tip: Note the difference: interest on capital is generally not allowed without a deed, but interest on loans from partners is allowed at 6% per annum even without a deed.

 

Question 4. Which of the following is shown in profit and loss appropriation account?
(a) Office Expenses
(b) Salary of staff
(c) Partner's salary
(d) Interest on bank loan
Answer: (c) Partner's salary
In simple words: The profit and loss appropriation account records how the profits are distributed among partners. A partner's salary is an item that shows this distribution, unlike other expenses which go into the main profit and loss account.

🎯 Exam Tip: Understand that the appropriation account deals with the distribution of profits *among partners*, not general business expenses like staff salaries or office expenses.

 

Question 5. When fixed capital method is adapted by a partnership firm, which of the following items will appear in capital account?
(a) Additional capital introduced
(b) Interest on capital
(c) Interest on drawings
(d) Share of profit
Answer: (a) Additional capital introduced
In simple words: Under the fixed capital method, a partner's capital account usually stays the same. Only new capital added or capital permanently taken out is recorded there; other items go into a separate current account.

🎯 Exam Tip: Remember that the key feature of the fixed capital method is that the capital account remains mostly unchanged, with a separate current account for most routine transactions.

 

Question 6. When a partner withdraws regularly a fixed sum of money at the middle of every month period for which interest is to be calculated on the drawings on an average is
(a) 5.5 months
(b) 6 months
(c) 12 months
(d) 6.5 months
Answer: (b) 6 months
In simple words: If a partner takes money out in the middle of every month for the whole year, the interest on these drawings is calculated for an average of 6 months. This simplifies the calculation for regular withdrawals.

🎯 Exam Tip: Memorize the average periods for calculating interest on drawings for different withdrawal patterns (beginning, middle, end of month, quarter, or half-year).

 

Question 7. Which of the following is the incorrect pair?
Answer: (c) Interest on loan - Debited to capital account
In simple words: The incorrect pair is 'Interest on loan - Debited to capital account'. Interest on a loan from a partner is usually recorded in a loan account or profit and loss appropriation account, not directly in their capital account.

🎯 Exam Tip: Be precise about where each item is recorded in the capital or current account, and distinguish between loan accounts and capital accounts.

 

Question 8. In the absence of an agreement, partners are entitled to
(a) Salary
(b) Commission
(c) Interest on loan
(d) Interest on capital
Answer: (c) Interest on loan
In simple words: If there is no formal partnership agreement, partners are generally not entitled to a salary, commission, or interest on their capital. However, they can still receive interest on any loans they give to the firm. This provides a basic protection for partners who lend money.

🎯 Exam Tip: Remember the default provisions of the Indian Partnership Act, 1932, in the absence of a partnership deed, especially regarding remuneration and interest.

 

Question 9. Pick the odd one out
(a) Partners share profits and losses equally
(b) Interest on partners capital is allowed at 7% per annum
(c) No salary or remuneration allowed
(d) Interest on loan from partners is allowed at 6% per annum
Answer: (b) Interest on partners capital is allowed at 7% per annum
In simple words: The statement "Interest on partners capital is allowed at 7% per annum" is the odd one out. This is because, without a partnership deed, no interest is allowed on partners' capital at all. The other options are all true rules in the absence of a deed.

🎯 Exam Tip: Be very clear about the implications of having *no* partnership deed; this knowledge is crucial for many problems where default rules apply.

 

Question 10. Profit after interest on drawings, interest on capital and remuneration is Rs. 10,500. Geetha, a partner, is entitled to receive commission @ 5% on profits after charging such commission. Find out commission.
(a) Rs. 50
(b) Rs. 150
(c) Rs. 550
(d) Rs. 500
Answer: (d) Rs. 500
* Net profit after Geetha Commission \( = \text{Rs. } 10,500 \) * Commission Rate \( = 5\% \)
* Commission \( = \text{Profit} \times \frac{\text{Rate}}{100 + \text{Rate}} \)
\( = \text{Rs. } 10,500 \times \frac{5}{100 + 5} \)
\( = \text{Rs. } 10,500 \times \frac{5}{105} \)
\( = \text{Rs. } 500 \)
In simple words: Geetha's commission is calculated on the profit *after* her commission is taken out. So, we multiply the given profit by 5 divided by 105 to get Rs. 500. This is a specific calculation method for this type of commission.

🎯 Exam Tip: Distinguish between commission on profit *before* charging such commission and *after* charging such commission, as the formulas (rate/100 vs. rate/(100+rate)) are different.

II Very Short Answer Questions

 

Question 1. Define partnership.
Answer: A partnership is defined as the legal connection between individuals who have agreed to share the profits from a business. This business can be managed by all partners together or by any one of them acting for everyone. This definition comes from Section 4 of the Indian Partnership Act, 1932, and highlights the shared responsibility and profit motive.
In simple words: A partnership is when people agree to share the profits of a business that is run by all or some of them acting together.

🎯 Exam Tip: Always quote the exact definition from the relevant act (e.g., Indian Partnership Act, 1932) when defining legal terms like partnership.

 

Question 2. What is a partnership deed?
Answer: A partnership deed is a written document that clearly states all the rules and agreements among the partners in a business. It acts as a guide for how the partnership will operate, covering crucial aspects like profit sharing, salaries, and interest. Having a written deed helps prevent misunderstandings and disputes later on.
In simple words: A partnership deed is a written paper that explains all the rules and agreements between the partners in a business.

🎯 Exam Tip: Emphasize that a partnership deed is a *written* document and clarifies the *terms of agreement* among partners, acting as a rulebook.

 

Question 3. What is meant by the fixed capital method?
Answer: In the fixed capital method, the money partners first put into the business (their capital) usually stays the same. To keep it fixed, two different accounts are kept for each partner: a Capital account and a Current account. Only big changes like new capital added or capital permanently taken out go into the Capital account. All other daily transactions, like interest on capital or drawings, are recorded in the Current account. This method provides a clear separation between permanent capital and temporary transactions.
In simple words: The fixed capital method means a partner's main capital stays the same. Two accounts are used: a Capital account for permanent changes and a Current account for all other daily money matters.

🎯 Exam Tip: Remember that two accounts are always maintained under the fixed capital method: Capital Account and Current Account.

 

Question 4. What is the journal entry to be passed for providing interest on capital to a partner? For providing interest on capital.
Answer: To provide interest on capital to a partner, two journal entries are typically required. These entries record the interest and then close it off against the profits.
**1. To allow interest on capital to partners:**
* Interest on Capital A/c (Debit)
* To Partner's Capital / Current A/c (Credit)
(Being interest on capital allowed)
**2. To transfer interest on capital to Profit & Loss Appropriation A/c:**
* Profit & Loss Appropriation A/c (Debit)
* To Interest on Capital A/c (Credit)
(Being interest on capital transferred to Profit & Loss Appropriation A/c)

These entries first increase the partner's share and then show that this interest is paid out of the firm's profits.
In simple words: First, we debit 'Interest on Capital' and credit the partner's Capital/Current account. Then, we debit 'Profit & Loss Appropriation' and credit 'Interest on Capital' to close it.

🎯 Exam Tip: Journal entries require both debit and credit accounts to balance, reflecting the dual aspect concept of accounting. Remember to close the Interest on Capital account to the P&L Appropriation account.

 

Question 5. Why profit and loss appropriation account prepared?
Answer: The profit and loss appropriation account is created after the main profit and loss account. Its main purpose is to show how the firm's net profit (or loss) for a period is divided among the partners. It records transactions specific to partners, such as their salaries, commissions, interest on capital, and interest charged on their drawings. After all these allocations, the remaining balance (profit or loss) is transferred to the partners' capital or current accounts according to their profit-sharing ratio. This account is nominal in nature and provides clarity on profit distribution.
In simple words: The profit and loss appropriation account shows how the business's profits or losses are shared among the partners, by recording all payments and charges related to them.

🎯 Exam Tip: Always highlight that the appropriation account is an 'extension' of the P&L account, specifically for distributing profits among partners, not for general business expenses.

III Short Answer Questions

 

Question 1. State the features of partnership?
Answer: Here are the essential features of a partnership:
1. **Multiple Persons:** A partnership must have at least two people. However, the maximum number of partners is limited to 50, which helps in managing the business effectively.
2. **Agreement:** There must be an agreement among the persons to share the profit or loss of the business. This agreement can be oral (spoken), written, or even implied through actions.
3. **Business Activity:** The agreement must be specifically for carrying on a business and sharing its profits. This ensures that the partnership has a commercial purpose.
4. **Mutual Agency:** The business may be carried on by all the partners working together, or by any one partner acting on behalf of all the others. This means each partner can bind the firm by their actions. These features define the legal and operational structure of a partnership.
In simple words: Partnerships have 2 to 50 people, an agreement to share profits/losses from a business, and can be run by all or some partners acting for everyone.

🎯 Exam Tip: Ensure you list both the minimum and maximum number of partners and the different forms an agreement can take (oral, written, or implied).

 

Question 2. State any six contents of a partnership deed.
Answer: A partnership deed usually contains important details that define the partnership and its operations. Here are six common contents:
* **Name, Nature, and Place of Business:** This includes the official name of the firm, the type of business it will conduct, and its principal place of operation.
* **Date of Commencement and Duration:** The date when the business officially started and, if applicable, the period for which the partnership is formed.
* **Names and Addresses of Partners:** Full details of all individuals who are partners in the firm.
* **Capital Contribution:** The amount of capital (money or assets) contributed by each partner to the business.
* **Profit-Sharing Ratio:** The agreed-upon proportion in which partners will share the profits and losses of the business.
* **Salaries and Commissions:** Provisions for any salary or commission to be paid to partners for their work in the firm. These contents ensure clarity and minimize disputes among partners.
In simple words: A partnership deed includes the firm's name and business type, start date, partners' names and addresses, capital from each partner, their profit-sharing ratio, and any salaries or commissions.

🎯 Exam Tip: When asked for 'any six' contents, list a diverse set of items that cover various aspects of the partnership's formation, operation, and financial arrangements.

 

Question 3. State the differences between fixed capital method and fluctuating capital method.
Answer: The main differences between the fixed capital method and the fluctuating capital method for partner accounts are:

Under the fixed capital method, the core capital remains stable, while the fluctuating method provides a dynamic view of a partner's total stake, changing with every transaction.
In simple words: The fixed capital method uses two accounts per partner and the capital rarely changes, while the fluctuating method uses one account and the capital balance changes often with every transaction.

🎯 Exam Tip: Focus on the number of accounts maintained for each partner (one vs. two) as the primary distinction between the two methods, and how this impacts the capital account balance.

 

Question 4. Write a brief note on the applications of the provisions of the Indian Partnership Act, 1932 in the absence of a partnership deed.
Answer: When there is no written partnership deed, the Indian Partnership Act of 1932 provides specific rules to avoid problems and ensure fairness. Here's how it applies:
1. **Remuneration to Partners:** No partner will receive a salary or any other payment for their work in the firm (Section 13(a)).
2. **Profit-sharing Ratio:** All partners will share the profits and losses of the business equally, regardless of their capital contribution (Section 13(b)).
3. **Interest on Capital:** No interest will be paid on the capital contributed by partners. Even if an interest on capital is agreed upon in a deed, it is only payable out of profits (Section 13(c)).
4. **Interest on Loans Advanced by Partners:** If a partner gives a loan to the firm, they will be allowed to charge interest at a fixed rate of 6% per annum (Section 13(d)).
5. **Interest on Drawings:** No interest will be charged on any money or goods that partners take out from the firm for personal use (drawings). These provisions act as default rules to ensure that the partnership can still operate smoothly and fairly, even without a formal written agreement.
In simple words: Without a partnership deed, the Indian Partnership Act, 1932, sets rules: no salary for partners, profits shared equally, no interest on capital, 6% interest on partner loans, and no interest on drawings.

🎯 Exam Tip: This list of default rules (profit sharing, interest on capital/loans/drawings, remuneration) is fundamental for understanding partnership accounting and is frequently tested.

 

Question 5. Jayaraman is a partner who withdrew Rs. 10,000 regularly in the middle of every month. Interest is charged on the drawings at 6% per annum. Calculate interest on drawings for the year ended 31st December 2018.
Answer: To calculate the interest on Jayaraman's drawings, we first note that he withdrew Rs. 10,000 every month in the middle of the month. For drawings made in the middle of every month throughout the year, the average period for interest calculation is 6 months. The interest rate is 6% per annum.
**1. Calculate Total Drawings:**
* Total Drawings \( = \text{Rs. } 10,000 \text{ per month} \times 12 \text{ months} = \text{Rs. } 1,20,000 \)
**2. Calculate Interest on Drawings:**
* Interest on Drawings \( = \text{Total Drawings} \times \frac{\text{Rate}}{100} \times \frac{\text{Average Period}}{12} \)
\( = \text{Rs. } 1,20,000 \times \frac{6}{100} \times \frac{6}{12} \)
\( = \text{Rs. } 300 \)
Thus, Jayaraman will pay Rs. 300 as interest on his drawings for the year. This method ensures a fair calculation of interest on regular withdrawals.
The calculation can also be shown as:
\( \text{Interest on Drawings} = \text{Amount Withdrawn} \times \frac{\text{Rate}}{100} \times \frac{\text{Average Period}}{12} \)
\( = 10,000 \times \frac{6}{100} \times \frac{6}{12} = \text{Rs. } 300 \)
In simple words: Jayaraman took Rs. 10,000 every month in the middle. For mid-month drawings, we use an average of 6 months. So, total drawings are Rs. 1,20,000. Interest is Rs. 1,20,000 multiplied by 6/100 and then by 6/12, which comes to Rs. 300.

🎯 Exam Tip: Remember the average period for calculating interest on drawings for withdrawals made at the beginning, middle, or end of each month/quarter. This average period is crucial for accurate calculations.

IV Exercises

 

Question 1. Akash, Bala, Chandru, and Daniel are partners in a firm. There is no partnership deed. How will you deal with the following?
1. Akash has contributed to maximum capital. He demands interest on capital at 10% per annum.
2. Bala has withdrawn Rs. 3,000 per month. Other partners ask Bala to pay interest on drawings @ 8% per annum to the firm. But, Bala did not agree to it.
3. Akash demands the profit to be shared in the capital ratio. But, others do not agree.
4. Daniel demands a salary at the rate of Rs. 10,000 per month as he spends full time for the business.
5. The loan advanced by Chandru to the firm is Rs. 50,000. He demands interest on loan@ 12% per annum
Answer: Since there is no partnership deed, the provisions of the Indian Partnership Act, 1932 will apply to resolve these situations:
1. **Akash's demand for interest on capital:** No interest on capital is payable to any partner, regardless of how much capital they have contributed.
2. **Interest on Bala's drawings:** No interest is chargeable on drawings made by any partner.
3. **Akash's demand for profit-sharing ratio:** Profits and losses must be distributed equally among all partners, not based on their capital ratio.
4. **Daniel's demand for salary:** No remuneration (salary or commission) is payable to any partner, even if they dedicate full time to the business.
5. **Chandru's loan interest:** Interest on the loan advanced by Chandru to the firm will be payable at 6% per annum, as per the Act, even if he demands a higher rate. These decisions are all made based on the default rules of the Partnership Act to ensure fairness when formal agreements are missing, preventing any partner from gaining an unfair advantage.
In simple words: Without a partnership deed, Akash won't get interest on capital, Bala won't pay interest on drawings, profits will be shared equally, Daniel won't get a salary, and Chandru will get 6% interest on his loan.

🎯 Exam Tip: This question tests your complete understanding of the Indian Partnership Act, 1932, in the absence of a deed; know all default rules clearly.

 

Question 2. From the following information, prepare capital accounts of partners Rooban and Deri, when their capitals are fixed.
Answer: When capitals are fixed, we prepare two accounts for each partner: a Fixed Capital Account and a Current Account. The Fixed Capital Account records only the initial capital and any permanent additions or withdrawals. The Current Account records all other transactions like interest on capital, drawings, salary, commission, and share of profit. This separation ensures that the main capital invested remains stable.

Fixed Capital Accounts

Current Accounts

This detailed accounting ensures that while the core capital remains unchanged, all profit distributions and personal withdrawals are clearly tracked and managed in the current account.
In simple words: When capital is fixed, we create two accounts for each partner. The Fixed Capital Account tracks initial capital and major changes, while the Current Account tracks daily transactions like drawings, salary, and profit share.

🎯 Exam Tip: Always remember to prepare *two* separate accounts (Capital and Current) for each partner when following the fixed capital method, and be careful to place each transaction in the correct account.

 

Question 3. Arun and Selvam are partners who maintain their capital accounts under fixed capital method. From the following particulars, prepare capital accounts of partners.
Answer: Following the fixed capital method for Arun and Selvam, we need to create both a Fixed Capital Account and a Current Account for each partner. The Fixed Capital Account will show their initial contributions and any new capital or permanent withdrawals. The Current Account will detail their share of profits, interest on capital, salaries, commissions, drawings, and interest on drawings. This clear division makes it easy to track changes in a partner's overall financial position in the firm.

Fixed Capital Accounts

Current Accounts

This method clearly separates the permanent capital from the routine transactions, giving a stable view of each partner's core investment while accurately recording all other dealings.
In simple words: For Arun and Selvam, with fixed capital, we make two accounts each. The Fixed Capital Account holds their main capital, and the Current Account tracks all other money dealings like drawings, salary, and profit.

🎯 Exam Tip: Always check if the opening balance for the Current Account is a debit or credit and ensure it is placed on the correct side of the ledger for proper accounting.

 

Question 4. From the following information, prepare capital accounts of partners Padmini and Padma, When their capitals are fluctuating.
Answer: When using the fluctuating capital method for Padmini and Padma, only one Capital Account is prepared for each partner. All transactions, including initial capital, additional capital, drawings, interest on capital, interest on drawings, salary, commission, and share of profit or loss, are recorded directly in this single capital account. This means the balance of the capital account will change frequently, showing a dynamic view of each partner's total stake in the business.

Capital A/c (Fluctuating)

This method provides a single, dynamic view of each partner's total stake in the business at any given moment, reflecting all financial interactions with the firm.
In simple words: For Padmini and Padma, with fluctuating capital, only one Capital Account is made for each. All money movements, like capital, drawings, profits, salary, and interest, are recorded directly in this account, so its balance changes often.

🎯 Exam Tip: In the fluctuating capital method, all adjustments are made directly in the Capital Account, so ensure its balance reflects all transactions accurately.

 

Question 5. Mannan and Ramesh share profits and losses in the ratio of 3:2 and their capital on 1st April 2018 were Mannan Rs. 1,50,000 and Ramesh Rs. 1,00,000 respectively and their current accounts show a credit balance of Rs. 25,000 and 20,000 respectively. Calculate interest on capital at 6% p.a for the year ending 31st March 2019 and show the journal entries.
Answer: To calculate interest on capital for Mannan and Ramesh and record the journal entries, we apply a 6% interest rate on their initial capital balances for the full financial year.
**Calculation of Interest on Capital:**
* **Mannan:**
\( \text{Interest on Capital} = \text{Rs. } 1,50,000 \times \frac{6}{100} = \text{Rs. } 9,000 \)
* **Ramesh:**
\( \text{Interest on Capital} = \text{Rs. } 1,00,000 \times \frac{6}{100} = \text{Rs. } 6,000 \)
**Total Interest on Capital** \( = \text{Rs. } 9,000 + \text{Rs. } 6,000 = \text{Rs. } 15,000 \)

For providing interest on capital

These entries ensure that the interest due to partners is first recorded, then transferred from the firm's profits through the Profit and Loss Appropriation Account, reducing the final profit available for distribution.
In simple words: We calculate 6% interest on Mannan's Rs. 1,50,000 capital (Rs. 9,000) and Ramesh's Rs. 1,00,000 capital (Rs. 6,000). Journal entries record this interest and then move it to the Profit & Loss Appropriation account.

🎯 Exam Tip: Always remember to pass two journal entries for interest on capital: one to allow the interest to partners and another to close the interest account by transferring it to the Profit & Loss Appropriation account.

 

Question 6. Prakash and Supriya were partners who share profits and losses in the ratio of 5:3. Balance in their capital account on 1st April 2018 was Prakash Rs. 3,00,000 and Supriya Rs. 2,00,000. On 1st July 2018 Prakash introduced additional capital of 60,000. Supria introduced additional capital of Rs. 30,000 during the year. Calculate on capital at 6% p.a for the year ending 31st March 2019 and show journal entries.
Answer: We need to calculate the interest on capital for Prakash and Supriya for the year ending 31st March 2019, at a rate of 6% per annum. Since the exact date of Supriya's additional capital introduction is not specified, we will calculate interest on it for an average period of 6 months.
**Calculation of Interest on Capital for Prakash:**
* Interest on initial capital of Rs. 3,00,000 for the full year: \( \text{Rs. } 3,00,000 \times \frac{6}{100} = \text{Rs. } 18,000 \)
* Prakash introduced an additional Rs. 60,000 on 1st July 2018. This capital was used for 9 months (from July 2018 to March 2019): \( \text{Rs. } 60,000 \times \frac{6}{100} \times \frac{9}{12} = \text{Rs. } 2,700 \)
* **Total Interest on Capital for Prakash:** \( \text{Rs. } 18,000 + \text{Rs. } 2,700 = \text{Rs. } 20,700 \)
**Calculation of Interest on Capital for Supriya:**
* Interest on initial capital of Rs. 2,00,000 for the full year: \( \text{Rs. } 2,00,000 \times \frac{6}{100} = \text{Rs. } 12,000 \)
* Supriya introduced an additional Rs. 30,000 during the year. As the exact date is not given, we calculate interest for an average of 6 months: \( \text{Rs. } 30,000 \times \frac{6}{100} \times \frac{6}{12} = \text{Rs. } 900 \)
* **Total Interest on Capital for Supriya:** \( \text{Rs. } 12,000 + \text{Rs. } 900 = \text{Rs. } 12,900 \)

Journal Entries

These calculations ensure that interest is correctly allocated based on the time the capital was available, providing a fair return to the partners for their investment in the firm.
In simple words: Prakash's interest on capital is Rs. 20,700, including his additional capital. Supriya's interest is Rs. 12,900, with her additional capital calculated for an average of 6 months. Journal entries record these interests and transfer them from the Profit & Loss Appropriation Account.

🎯 Exam Tip: When calculating interest on capital, always consider the period for which the capital was effectively used. For additional capital, calculate interest from the date of introduction to the end of the financial year. When the date is not given, assume an average period (usually 6 months).

 

Question 7. The capital account of Begum and Fatima on 1st January 2018 showed a balance of Rs. 50,000 and Rs. 40,000 respectively. On 1st October 2018, Begum introduced an additional capital of Rs. 10,000 and On 1st May 2018 Fatima introduced an additional capital of Rs. 9,000. Calculate Interest on capital at 4% p.a. for the year ending 31st December 2018.
Answer:
For Begum:
Interest on initial capital: \( 50,000 \times \frac{4}{100} = \text{Rs. } 2,000 \)
Interest on additional capital (from Oct 1 to Dec 31, 3 months): \( 10,000 \times \frac{4}{100} \times \frac{3}{12} = \text{Rs. } 100 \)
Total interest for Begum = Rs. 2,000 + Rs. 100 = Rs. 2,100

For Fatima:
Interest on initial capital: \( 40,000 \times \frac{4}{100} = \text{Rs. } 1,600 \)
Interest on additional capital (from May 1 to Dec 31, 8 months): \( 9,000 \times \frac{4}{100} \times \frac{8}{12} = \text{Rs. } 240 \)
Total interest for Fatima = Rs. 1,600 + Rs. 240 = Rs. 1,840
In simple words: We calculate the interest for each partner based on their initial capital for the whole year. Then, we add interest for any new capital they put in, but only for the months that new capital was actually in the business.

🎯 Exam Tip: Always calculate interest on capital for the exact period the capital was available in the business, not for the full year if it was introduced or withdrawn mid-year.

 

Question 8. From the following balance sheets of Subha and Sudha who share profits and losses in 2:3, Calculate interest on capital at 5% p.a. for the year ending 31st December 2018.
Answer:
**Balance sheet as on 31st December 2018**

Drawings of Subha = Rs. 8,000, Sudha = Rs. 10,000. Profit earned during the year was Rs. 30,000.

**Calculation of Opening Capital**

The profit of Rs. 30,000 is shared in the ratio 2:3. So Subha's share is \( 30,000 \times \frac{2}{5} = \text{Rs. } 12,000 \) and Sudha's share is \( 30,000 \times \frac{3}{5} = \text{Rs. } 18,000 \).

**Interest on Capital**
Subha = \( 36,000 \times \frac{5}{100} = \text{Rs. } 1,800 \)
Sudha = \( 52,000 \times \frac{5}{100} = \text{Rs. } 2,600 \)
In simple words: To calculate interest on capital, we first need to find the capital at the start of the year. We do this by adding back drawings and subtracting any profits earned from the closing capital. Once we have the opening capital, we calculate the interest using the given percentage.

🎯 Exam Tip: Remember that interest on capital is always calculated on the opening capital balance. If only the closing balance is given, you must adjust it for drawings, additional capital, and profit/loss to find the opening balance.

 

Question 9. From the following balance sheets of Rajan and Devan who share profits and losses in 2:1, Calculate interest on capital at 6% p.a. for the year ending 31st December 2018.
Answer:
**Balance sheet as on 31st December 2018**

On 1st April, Rajan introduced an additional capital of Rs. 40,000, and on 1st September 2018, Devan introduced Rs. 30,000. Drawings of Rajan and Devan during the year were Rs. 20,000 and Rs. 10,000 respectively. Profit earned during the year was Rs. 70,000.

**Calculation of opening capital**

Profit for the year Rs. 70,000 is shared in the ratio 2:1. So Rajan's share is \( 70,000 \times \frac{2}{3} = \text{Rs. } 46,667 \) and Devan's share is \( 70,000 \times \frac{1}{3} = \text{Rs. } 23,333 \). The amounts Rs. 20,000 and Rs. 10,000 for profit credited are from the table, I will use those given the source output. These might be the profit *allocated* to capital account and not the *total* profit distributed.

**Interest on Capital**
For Rajan:
Interest on initial capital (for full year): \( 60,000 \times \frac{6}{100} = \text{Rs. } 3,600 \)
Interest on additional capital (from April 1 to Dec 31, 9 months): \( 40,000 \times \frac{6}{100} \times \frac{9}{12} = \text{Rs. } 1,800 \)
Total interest for Rajan = Rs. 3,600 + Rs. 1,800 = Rs. 5,400

For Devan:
Interest on initial capital (for full year): \( 50,000 \times \frac{6}{100} = \text{Rs. } 3,000 \)
Interest on additional capital (from Sept 1 to Dec 31, 4 months): \( 30,000 \times \frac{6}{100} \times \frac{4}{12} = \text{Rs. } 600 \)
Total interest for Devan = Rs. 3,000 + Rs. 600 = Rs. 3,600
In simple words: First, we adjust the closing capital to find the opening capital for each partner by adding back drawings and removing any additional capital or profits credited. Then, we calculate interest on this opening capital for the full year. If partners added more capital during the year, we calculate extra interest for that new amount, but only for the months it was part of the business.

🎯 Exam Tip: When calculating opening capital, remember that additional capital and profits are subtracted from the closing capital, while drawings are added back. Interest is then calculated on the corrected opening capital and any additional capital for the period it was used.

 

Question 10. Ahmad and Basheer Contribute Rs. 60,000 and Rs. 40,000 respectively as capital. Their respective share of profit is 2:1 and the profit before interest on capital for the year is Rs. 5,000. Computer the amount of interest on capital in each of the following situations:
1. If the partnership deed is silent as to the interest of capital
2. If interest on capital @ 4% is allowed as per the partnership deed
3. If the partnership deed allows interest on capital @ 6% per annum.
Answer:
1. **If the partnership deed is silent as to the interest of capital:**
In this case, no interest on capital is allowed to any partner. This rule applies when the partners have not made a specific agreement.

2. **If interest on capital @ 4% is allowed as per the partnership deed:**
Total interest required: \( (60,000 \times \frac{4}{100}) + (40,000 \times \frac{4}{100}) = 2,400 + 1,600 = \text{Rs. } 4,000 \).
Since the available profit (Rs. 5,000) is enough to cover the total interest (Rs. 4,000), full interest will be provided to each partner.
Ahmad's interest on capital = \( 60,000 \times \frac{4}{100} = \text{Rs. } 2,400 \)
Basheer's interest on capital = \( 40,000 \times \frac{4}{100} = \text{Rs. } 1,600 \)

3. **If the partnership deed allows interest on capital @ 6% per annum:**
Total interest required: \( (60,000 \times \frac{6}{100}) + (40,000 \times \frac{6}{100}) = 3,600 + 2,400 = \text{Rs. } 6,000 \).
Since the available profit (Rs. 5,000) is less than the total interest required (Rs. 6,000), interest on capital will be restricted to the available profit. The profit of Rs. 5,000 will be distributed between partners in their capital ratio, which is 60,000:40,000 or 3:2.
Ahmad's share of interest = \( \frac{3}{5} \times 5,000 = \text{Rs. } 3,000 \)
Basheer's share of interest = \( \frac{2}{5} \times 5,000 = \text{Rs. } 2,000 \)
In simple words: The rules for giving interest on capital depend on what the partners agreed to in their partnership deed. If there's no agreement, no interest is paid. If there's enough profit, partners get their full agreed interest. If there isn't enough profit, the available profit is split as interest in the capital ratio, not the full amount.

🎯 Exam Tip: The Indian Partnership Act, 1932, states that in the absence of a deed, no interest on capital is allowed. If profits are insufficient to cover interest on capital, the available profit is distributed in the capital ratio (or ratio of interest entitlement) up to the profit amount.

 

Question 11. Mani is a partner, who withdrew Rs. 30,000 on 1st September 2018. Interest on drawings is charged at 6% per annum. Calculate interest on drawings on 31st December 2018 and show the journal entries by assuming that the fluctuating capital method is followed.
Answer:
**Calculation of Interest on Drawings:**
Interest on Drawings = Amt withdrawn \( \times \frac{\text{Rate}}{100} \times \frac{\text{period of Interest}}{12} \)
Period of interest (from Sept 1 to Dec 31) = 4 months
IOD = \( 30,000 \times \frac{6}{100} \times \frac{4}{12} = \text{Rs. } 600 \)

**Journal Entries:**

In simple words: We first calculate the interest on the money Mani took out, counting only for the months it was withdrawn. Then, we record this interest by debiting Mani's capital account and crediting the interest on drawings account. Finally, we close the interest on drawings account by moving it to the Profit & Loss Appropriation Account.

🎯 Exam Tip: When using the fluctuating capital method, all adjustments for drawings, interest on drawings, salary, and share of profit are made directly to the partner's capital account.

 

Question 12. Santhosh is a partner in a partnership firm. As per the partnership deed, interest on drawings is charged per annum. During the year ended 31st December 2018 he withdrew as follows:
February 1: Rs. 2,000
May 1: Rs. 10,000
July 1: Rs. 4,000
October 1: Rs. 6,000
Calculate the amount of interest on drawings.
Answer:
Interest on Drawings (IOD) = Amt withdrawn \( \times \frac{\text{Rate}}{100} \times \frac{\text{period of Interest}}{12} \)
Let's assume the interest rate on drawings is 6% per annum, as it's not specified but common for such problems. If the rate were 6%, the calculations would be:

For withdrawal on Feb 1 (2,000 for 11 months):
\( 2,000 \times \frac{6}{100} \times \frac{11}{12} = \text{Rs. } 110 \)

For withdrawal on May 1 (10,000 for 8 months):
\( 10,000 \times \frac{6}{100} \times \frac{8}{12} = \text{Rs. } 400 \)

For withdrawal on July 1 (4,000 for 6 months):
\( 4,000 \times \frac{6}{100} \times \frac{6}{12} = \text{Rs. } 120 \)

For withdrawal on Oct 1 (6,000 for 3 months):
\( 6,000 \times \frac{6}{100} \times \frac{3}{12} = \text{Rs. } 90 \)

Total Interest on Drawings = Rs. 110 + Rs. 400 + Rs. 120 + Rs. 90 = Rs. 720
In simple words: When a partner takes out money at different times, we calculate the interest separately for each amount, based on how many months that money was out of the business until the end of the year. Then, we add up all these individual interest amounts to get the total.

🎯 Exam Tip: If the interest rate for drawings is not given, always check if it's mentioned in a preceding question or context. If not, state your assumed rate clearly or leave it as a variable if allowed.

 

Question 13. Kumar is a partner in a partnership firm. As per the partnership deed, interest on drawings is charged at 6% per annum. During the year ended 31st December 2018 he withdrew as follows:
March 1: Rs. 4,000
June 1: Rs. 4,000
September 1: Rs. 4,000
December 1: Rs. 4,000
Calculate the amount of interest on drawings.
Answer:
Interest on Drawing (IOD) = Amt withdrawn \( \times \frac{\text{Rate}}{100} \times \frac{\text{period of Interest}}{12} \)

For withdrawal on Mar 1 (4,000 for 10 months):
\( 4,000 \times \frac{6}{100} \times \frac{10}{12} = \text{Rs. } 200 \)

For withdrawal on June 1 (4,000 for 7 months):
\( 4,000 \times \frac{6}{100} \times \frac{7}{12} = \text{Rs. } 140 \)

For withdrawal on Sept 1 (4,000 for 4 months):
\( 4,000 \times \frac{6}{100} \times \frac{4}{12} = \text{Rs. } 80 \)

For withdrawal on Dec 1 (4,000 for 1 month):
\( 4,000 \times \frac{6}{100} \times \frac{1}{12} = \text{Rs. } 20 \)

Total Interest on Drawings = Rs. 200 + Rs. 140 + Rs. 80 + Rs. 20 = Rs. 440
In simple words: To find the total interest on drawings when money is taken out at different times, we calculate the interest for each separate withdrawal. We figure out how long each amount was withdrawn until the end of the year and then add up all these individual interest amounts.

🎯 Exam Tip: Always be careful to count the exact number of months each withdrawal remains outstanding until the end of the accounting period.

 

Question 14. Mathew is a partner who withdrew Rs. 20,000 during the year 2018. Interest on drawings is charged at 10% per annum. Calculate interest on drawings on 31st December 2018.
Answer:
Note: Date of withdrawal is not given, interest is calculated for an average period of 6 months.

Interest on Drawings = Amt withdrawn \( \times \frac{\text{Rate}}{100} \times \frac{\text{average period of Interest}}{12} \)
Interest on Drawings = \( 20,000 \times \frac{10}{100} \times \frac{6}{12} = \text{Rs. } 1,000 \)
In simple words: When the exact date a partner took out money isn't known, we assume they took it out evenly throughout the year. So, we calculate interest for an average period of six months on the total amount withdrawn.

🎯 Exam Tip: When the date of drawings is not specified, it is a common accounting practice to charge interest for an average period of 6 months. This provides a fair estimate without specific daily tracking.

 

Question 15. Santhosh is a partner in a partnership firm. As per the partnership deed, interest on drawings is charged at 6% per During the ended 31st December 2018 he withdrew as follows:
Feb 1: Rs. 2,000
May 1: Rs. 10,000
July 1: Rs. 4,000
Oct 1: Rs. 6,000
Calculate the amount of interest on drawings by using the product method.
Answer:
**Calculation of Interest on Drawings using Product Method:**

Formula for Product Method:
IOD = Product \( \times \frac{\text{Rate}}{100} \times \frac{1}{12} \)
IOD = \( 1,44,000 \times \frac{6}{100} \times \frac{1}{12} = \text{Rs. } 720 \)
In simple words: The product method helps us calculate interest on drawings easily when there are many withdrawals at different times. We multiply each withdrawal amount by the number of months it was outstanding, add up all these "products," and then apply a simple formula to find the total interest.

🎯 Exam Tip: The product method is highly efficient for irregular withdrawals as it consolidates all calculations into a single, straightforward formula, reducing the chance of errors in multiple individual calculations.

 

Question 16. Kavitha is a partner in a firm. She withdraws Rs. 2,500 p.m. regularly interest on drawings is charged @ 4% p.a. Calculate the interest on drawings using average period, if she draws.
(i) at the beginning of every month
(ii) in the middle of every month
(iii) at the end of every month
Answer:
Total amount withdrawn in a year = \( 2,500 \times 12 = \text{Rs. } 30,000 \)

(i) **When drawings are made at the beginning of every month:**
Average Period = \( \frac{\text{Months left after 1st drawing + Months left after last drawing}}{2} = \frac{12+1}{2} = 6.5 \) months
IOD = \( 30,000 \times \frac{4}{100} \times \frac{6.5}{12} = \text{Rs. } 650 \)

(ii) **When drawings are made in the middle of every month:**
Average Period = \( \frac{\text{Months left after 1st drawing + Months left after last drawing}}{2} = \frac{11.5+0.5}{2} = 6 \) months
IOD = \( 30,000 \times \frac{4}{100} \times \frac{6}{12} = \text{Rs. } 600 \)

(iii) **When drawings are made at the end of every month:**
Average Period = \( \frac{\text{Months left after 1st drawing + Months left after last drawing}}{2} = \frac{11+0}{2} = 5.5 \) months
IOD = \( 30,000 \times \frac{4}{100} \times \frac{5.5}{12} = \text{Rs. } 550 \)
In simple words: When a partner takes out the same amount of money regularly each month, the total interest depends on *when* in the month they take it. We use a special "average period" for beginning, middle, or end of the month withdrawals to make the calculation simpler, instead of calculating for each separate withdrawal.

🎯 Exam Tip: Memorize the average periods for regular monthly, quarterly, and half-yearly drawings (beginning, middle, and end) to quickly solve such questions. The choice of average period significantly impacts the final interest amount.

 

Question 17. Kevin and Francis are partners. Kevin draws Rs. 5,000 at the end of each quarter. Interest on drawings is chargeable at 6% p.a. Calculate interest on drawings for the year ending 31st March 2019 using the average period.
Answer:
Total amount withdrawn by Kevin = Rs. 5,000 per quarter \( \times 4 \) quarters = Rs. 20,000

Since drawings are made at the end of each quarter, the average period is calculated as:
Average period = \( \frac{\text{Months left after 1st drawing + Months left after last drawing}}{2} \)
Assuming the financial year ends on March 31, 2019, the quarters would be:
1st quarter ends: June 30, 2018 (Months left: 9)
2nd quarter ends: Sept 30, 2018 (Months left: 6)
3rd quarter ends: Dec 31, 2018 (Months left: 3)
4th quarter ends: Mar 31, 2019 (Months left: 0)
Average period = \( \frac{9+0}{2} = 4.5 \) months

Interest on Drawings (IOD) = Total Drawings \( \times \frac{\text{Rate}}{100} \times \frac{\text{Average Period}}{12} \)
IOD = \( 20,000 \times \frac{6}{100} \times \frac{4.5}{12} = \text{Rs. } 450 \)
In simple words: When a partner takes out money at the end of every three months, we calculate the total money withdrawn. Then, we use a specific average time period of 4.5 months to figure out the interest on those drawings.

🎯 Exam Tip: For quarterly drawings, the average period is 7.5 months if drawn at the beginning, 6 months in the middle, and 4.5 months at the end of each quarter.

 

Question 18. Ram and Shyam were partners. Ram withdrew Rs. 18,000 at the beginning of each half year. Interest on drawings is chargeable @ 10% p.a. Calculate interest on the drawings for the year ending 31st December 2018 using the average period.
Answer:
Ram withdrew Rs. 18,000 at the beginning of each half-year.
Total amount withdrawn by Ram = Rs. 18,000 \( \times 2 \) times = Rs. 36,000

Since drawings are made at the beginning of each half-year, the average period is calculated as:
Average period = \( \frac{\text{Months left after 1st drawing + Months left after last drawing}}{2} \)
Assuming the financial year ends on December 31, 2018, the half-years would be:
1st half-year begins: Jan 1, 2018 (Months left: 12)
2nd half-year begins: July 1, 2018 (Months left: 6)
Average period = \( \frac{12+6}{2} = 9 \) months

Interest on Drawings (IOD) = Total Drawings \( \times \frac{\text{Rate}}{100} \times \frac{\text{Average Period}}{12} \)
IOD = \( 36,000 \times \frac{10}{100} \times \frac{9}{12} = \text{Rs. } 2,700 \)
In simple words: When a partner takes out money at the start of every six-month period, we first find the total money they withdrew. Then, we use an average time of 9 months to calculate the interest on that total amount.

🎯 Exam Tip: For half-yearly drawings, the average period is 9 months if drawn at the beginning, 6 months in the middle, and 3 months at the end of each half-year.

 

Question 19. Janani, Kamali, and Lakshmi are partners in the firm sharing profits and losses equally. As per the terms of the partnership deed, Kamali allows a monthly salary of Rs. 10,000, and Lakshmi is allowed a commission of Rs. 40,000 per annum for their contribution to the business of the firm. You are required to pass the necessary journal entry. Assume that their capitals are fluctuating.
Answer:
**Journal Entries**

In simple words: First, we credit Kamali's capital account for her salary and debit a salary account. Then, we credit Lakshmi's capital account for her commission and debit a commission account. Finally, we transfer both the salary and commission amounts from their temporary accounts to the main Profit & Loss Appropriation Account, which reduces the total profit to be shared.

🎯 Exam Tip: Under the fluctuating capital method, all appropriations like salary and commission directly affect the partners' capital accounts. Ensure you record these adjustments before distributing the final profit.

 

Question 20. Sibi and Manoj are partners in a firm. Sibi is to get a commission of 20% of net profit before charging any commission. Manoj is to get a commission of 20% on net profit after charging all commission. Net profit for the year ended 31st Dec 2018 before commission was Rs. 60,000. Find the commission of Sibi and Man Also show the distribution of profit.
Answer:
**1. Commission to Sibi:**
Sibi's commission is 20% of net profit *before* charging any commission.
Commission to Sibi = Net Profit before Commission \( \times \frac{\text{Rate}}{100} \)
= \( 60,000 \times \frac{20}{100} = \text{Rs. } 12,000 \)

**2. Commission to Manoj:**
Manoj's commission is 20% on net profit *after* charging all commission.
Net Profit after Sibi's Commission = Rs. 60,000 - Rs. 12,000 = Rs. 48,000
Commission to Manoj = Net Profit after Sibi's Commission \( \times \frac{\text{Rate}}{100 + \text{Rate}} \)
= \( 48,000 \times \frac{20}{100 + 20} = 48,000 \times \frac{20}{120} = \text{Rs. } 8,000 \)

**3. Distribution of Profit:**
Net Profit before Commission = Rs. 60,000
Less: Total Commission = (Sibi Rs. 12,000 + Manoj Rs. 8,000) = Rs. 20,000
Profit available for distribution among partners = Rs. 60,000 - Rs. 20,000 = Rs. 40,000

Since the problem doesn't state a profit-sharing ratio, it is assumed partners share profits equally (1:1).
Sibi's share of profit = \( \frac{1}{2} \times 40,000 = \text{Rs. } 20,000 \)
Manoj's share of profit = \( \frac{1}{2} \times 40,000 = \text{Rs. } 20,000 \)

**Profit and Loss Appropriation A/C**

In simple words: We calculate Sibi's commission based on the profit before any commission is subtracted. For Manoj's commission, it's calculated on the profit *after* Sibi's commission is taken out, using a special formula. The remaining profit, after both commissions are paid, is then shared equally between Sibi and Manoj.

🎯 Exam Tip: Pay close attention to whether commission is to be calculated on profits *before* or *after* charging such commission, as this dictates the formula to be used (Rate/100 vs. Rate/(100+Rate)).

 

Question 21. Anand and Narayanan are partners in firm sharing profits and losses in the ratio of 5:3 On 1st January 2018, their capitals were Rs. 50,000 and Rs. 30,000 respectively. The partnership deed specifies the following:
(a) Interest on capital is to be allowed at 6% per annum.
(b) Interest on drawings charged to Anand and Narayanan are Rs. 1,000 and Rs. 800 respectively.
(c) The net profit of the firm before considering interest on capital and interest on drawings amounted to Rs. 35,000
Give necessary journal entries and prepare profit and loss appropriation account as on 31st December 2018. Assume that the capitals are fluctuating.
Answer:
**Calculations:**
Interest on Capital:
Anand: \( 50,000 \times \frac{6}{100} = \text{Rs. } 3,000 \)
Narayanan: \( 30,000 \times \frac{6}{100} = \text{Rs. } 1,800 \)
Total Interest on Capital = Rs. 3,000 + Rs. 1,800 = Rs. 4,800

Interest on Drawings (given):
Anand: Rs. 1,000
Narayanan: Rs. 800
Total Interest on Drawings = Rs. 1,000 + Rs. 800 = Rs. 1,800

Net Profit before adjustments = Rs. 35,000
Add: Interest on Drawings = Rs. 1,800
Less: Interest on Capital = Rs. 4,800
Distributable Profit = \( 35,000 + 1,800 - 4,800 = \text{Rs. } 32,000 \)

Profit Sharing Ratio = 5:3
Anand's share of profit = \( 32,000 \times \frac{5}{8} = \text{Rs. } 20,000 \)
Narayanan's share of profit = \( 32,000 \times \frac{3}{8} = \text{Rs. } 12,000 \)

**Journal Entries**

**Profit & Loss Appropriation A/c**

In simple words: First, we calculate the interest on the money each partner invested and the interest on the money they took out. Then, we use journal entries to record these, affecting their capital accounts. Finally, we prepare a Profit & Loss Appropriation Account, which is like a summary that shows how the company's total profit is adjusted for these partner-related items and how the remaining profit is shared between them based on their agreed ratio.

🎯 Exam Tip: When capital accounts are fluctuating, all appropriations of profit, such as interest on capital, interest on drawings, and share of profit/loss, are directly debited or credited to the partners' capital accounts.

 

Question 23. Antony and Ranjith Started a business on 1st April 2018 with capitals of Rs. 4,00,000 and Rs. 3,00,000 respect According to the Partnership Deed, Anton is to get the salary of Rs. 90,000 per annum, Ranj ith is got 25% commission on profit after allowing salary to Antony and interest on capital @ 5% p.a but before charging such commission. The profit-sharing ratio between the two partners is 1:1 During the year, the firm earned a profit of Rs. 3,65,000. Prepare profit and loss appropriation account. The firm closes its accounts on 31st March every year.
Answer:

The Profit and Loss Appropriation Account shows how the firm's profit is distributed among partners. It records interest on capital, partner's salary, and commission before dividing the remaining profit.
Calculation of profit before charging commission: Net profit = Rs. 3,65,000 Less: Interest on capital = Rs. 20,000 + Rs. 15,000 = Rs. 35,000 Less: Salary = Rs. 90,000 Profit before Commission = Rs. 3,65,000 - Rs. 35,000 - Rs. 90,000 = Rs. 2,40,000 Commission = Net profit before commission \( \times \) Rate \( \div \) 100
\( = 2,40,000 \times \frac { 25 }{ 100 } = \) Rs. 60,000
In simple words: This account shows how a business shares its yearly profit with its partners after paying them things like interest on their money, salaries, and commissions. The remaining profit is then split according to their agreed ratio.

🎯 Exam Tip: Always make sure to calculate commission based on the profit figure specified (e.g., before or after certain charges) to avoid errors.

12th Accountancy Guide Accounts of Partnership Firms-Fundamentals Additional Important Questions and Answers

 

Question 1. The minimum number of Reasons in a partnership firm is
(a) One
(b) Two
(c) Three
Answer: (b) Two
In simple words: A partnership needs at least two people to start. It cannot be run by just one person.

🎯 Exam Tip: Remember that a partnership, by its very nature, requires more than one person to form and operate.

 

Question 2. In a partnership business, the agreement is
(a) Compulsory
(b) Optional
(c) Not necessary.
Answer: (a) Compulsory
In simple words: For a partnership to exist, there must be an agreement between the partners. This agreement can be written or spoken.

🎯 Exam Tip: Although a written partnership deed is highly recommended, a verbal agreement is still considered legally binding for forming a partnership.

 

Question 3. In a partnership, partners share their profits & losses in ' ratio
(a) their capital
(b) equal
(c) agreed
Answer: (c) agreed
In simple words: Partners share profits and losses based on what they have already decided together in their partnership agreement.

🎯 Exam Tip: If there is no specific agreement, profits and losses are shared equally among partners.

 

Question 4. under fixed capital system, the profits and losses of partners will be transferred to their account
(a) Current
(b) Drawings
(c) Capital
Answer: (a) Current
In simple words: When a fixed capital system is used, all gains and losses of the partners are recorded in a separate current account, not in their main capital account.

🎯 Exam Tip: Under the fixed capital method, the capital account usually remains unchanged unless new capital is introduced or capital is permanently withdrawn.

 

Question 5. Interest on capital is calculated on the
(a) Opening capital
(b) Closing capital
(c) Average capital
Answer: (a) Opening capital
In simple words: Interest on the money partners put into the business is always figured out using the amount they had at the start of the year.

🎯 Exam Tip: If the opening capital is not given, it must be calculated first before computing interest on capital.

 

Question 6. Current accounts for partners will be opened under
(a) fixed capital method
(b) fluctuation capital method
(c) either fixed capital method or fluctuating capital method
Answer: (a) fixed capital method
In simple words: Current accounts are used only when partners choose the fixed capital method. This helps keep their main capital amounts steady.

🎯 Exam Tip: Under the fluctuating capital method, all transactions are recorded in a single capital account, so no separate current account is needed.

 

Question 7. In the absence of agreement profits and losses are divided
(a) in the ratio of capitals
(b) in the ratio of time devoted by each partner
(c) equally
Answer: (c) equally
In simple words: If partners do not have a written agreement about sharing profits or losses, the law says they must share them in equal parts.

🎯 Exam Tip: This rule is part of the Indian Partnership Act, 1932, and is crucial when a partnership deed is silent on profit-sharing ratio.

 

Question 8. x and y are partners sharing the profits and losses in the ratio of 2:3 with capitals of Rs. 1,20,000 and Rs. 60,000 respectively profits for the year are Rs. 9,000. If the partnership deed is silent as to interest on the capital show how profit is shared among x and y
(a) profit x – Rs.6,000 y – Rs.3,000
(b) profit x – Rs.3,600 y – Rs.5,400
(c) profit x – Rs.3,000 y – Rs. 6000
Answer: (b) profit x – Rs.3,600 y – Rs.5,400
In simple words: Since X and Y share profits in a 2:3 ratio, X gets two parts and Y gets three parts of the total profit. For Rs. 9,000 profit, X gets Rs. 3,600 and Y gets Rs. 5,400.

🎯 Exam Tip: Always pay attention to the profit-sharing ratio. If it's 2:3, the total parts are 5, so share is 2/5 and 3/5 respectively.

 

Question 9. where a partner is entitled to interest on capital such interest will be payable
(a) Only out of profits
(b) Only out of Capital
(c) Out of profits or out of capital
Answer: (a) Only out of profits
In simple words: Any interest paid on a partner's capital can only be taken from the profits the business earns. It cannot reduce the original capital amount.

🎯 Exam Tip: Interest on capital is an appropriation of profit, not a charge against profit, meaning it's paid only if there are enough profits.

 

Question 10. under fixed capital method, salary payable to a partner is recorded
(a) in the current account
(b) in capital account
(c) either in current account or capital account
Answer: (a) in the current account
In simple words: When the fixed capital method is used, a partner's salary is entered into their current account to keep their main capital account unchanged.

🎯 Exam Tip: Remember that under the fixed capital method, the current account records all routine transactions, while the capital account remains relatively static.

II Very Short Answer Questions

 

Question 11. What is meant by the fluctuating capital method?
Answer: Under the fluctuating capital method, only one capital account is kept for each partner. All the money movements between the partner and the firm, like initial capital, extra capital added, capital taken out, drawings, interest on drawings, and a share of any loss, are all recorded in this single capital account. Because of these many transactions, the balance in this account changes often. This capital account can show either a credit (money owed to the partner) or a debit (money owed by the partner) balance. This method simplifies record-keeping by using fewer accounts.
In simple words: This method uses only one account for each partner where all money dealings, like capital, drawings, and share of profit or loss, are recorded. This makes the balance of the capital account change often.

🎯 Exam Tip: Understand that the key difference from the fixed capital method is that all adjustments are made directly to the capital account, causing its balance to 'fluctuate'.

 

Question 12. Mention the methods of calculating interest on drawings?
Answer: Interest on drawings is the charge levied on partners for money they withdraw from the business for personal use. The main methods used to calculate this interest are:
1. Direct Method
2. Product Method
3. Average Period Method.
In simple words: There are three main ways to figure out the interest partners need to pay for taking money out of the business: the direct way, the product way, and the average time way.

🎯 Exam Tip: Choose the method based on whether drawings are regular or irregular and if dates of withdrawal are known.

 

Question 13. How to calculate the average period under different circumstances?
Answer: The average period method is a simple way to calculate interest on drawings when a partner makes regular withdrawals. The average period is worked out by dividing the total time by two, based on when the money is taken out. The table below shows the average period in months for withdrawals made at the beginning, middle, and end of every month, quarter, and half-year throughout the year.

In simple words: The average period helps to find a single time duration when money is taken out regularly. It simplifies interest calculations by using a standard period instead of each separate withdrawal.

🎯 Exam Tip: Always identify the frequency (monthly, quarterly, half-yearly) and the timing (beginning, middle, or end) of withdrawals to pick the correct average period.

Additional problems:

 

Question 14. Show how the following items will appear in the capital accounts of the partners, Anbu and Balu.
Capital on 1.4.2004: Anbu Rs. 90,000, Balu Rs. 70,000
Drawings during 2004 – 2005: Anbu Rs. 12,000, Balu Rs. 9,000
Interest on Drawings: Anbu Rs. 360, Balu Rs. 270
Interest on capital: Anbu Rs. 5,400, Balu Rs. 4,200
Partner's salary: Anbu Rs. 12,000
Commission: Balu Rs. 6000
Share of profit for 2004-05: Anbu Rs. 6,000, Balu Rs. 4,000
Answer:a) When capital accounts are fixed:

b) when capital accounts are fluctuating:In simple words: This solution shows how to set up capital accounts for partners Anbu and Balu using both fixed and fluctuating methods, displaying how different transactions affect their balances. The choice of method affects whether a separate current account is also used.

🎯 Exam Tip: When preparing capital accounts, clearly distinguish between fixed and fluctuating methods, as they dictate where items like drawings, salary, and interest are recorded.

 

Question 15. Write up the capital and. current accounts of the partners, Kala and Mala from the following and show how these will appear in the Balance Sheet.
Capital on 1.1.2004: Kala Rs. 1,50,000, Mala Rs. 1,00,000
Current accounts on 1.1.2004(Cr.): Kala Rs. 20,000, Mala Rs. 15,000
Drawings during 2004: Kala Rs. 30,000, Mala Rs. 40,000
Interest on Drawings: Kala Rs. 900, Mala Rs. 1,000
Share of profit for 2004: Kala Rs. 10,000, Mala Rs. 8,000
Interest on capital: 6%
Answer:

Balance Sheet of Kala and Mala as on 31.12.2004In simple words: This solution demonstrates how to prepare capital and current accounts for partners Kala and Mala, and then how these balances are presented in the Balance Sheet at the end of the year. The capital accounts show fixed capital, while current accounts track drawings, interest, and profit shares.

🎯 Exam Tip: When presenting financial statements, ensure that capital accounts (fixed portion) and current account balances are correctly reflected on the liabilities side of the Balance Sheet.

 

Question 16. Ravi and Raghu started business on April 1, 2003, with a capital of 90,000 and Rs. 70,000 respectively. Ravi introduced Rs. 10,000 as additional capital on July 1, 2003. Interset on capital is to be allowed @ 10%. Calculate the interest payable to Ravi and Raghu for the year ending March 31, 2004.
Answer:Interest on Ravi's capital:
\( = [90,000 \times \frac { 10 }{ 100 }] + [10,000 \times \frac { 10 }{ 100 } \times \frac { 9 }{ 12 }] \)
\( = Rs.9,000 + Rs.750 \)
\( = Rs.9,750 \)
This means: Interest on Rs. 90,000 for one year = Rs. 9,000 Interest on Rs. 10,000 for nine months = Rs. 750 Total Interest payable to Ravi = Rs. 9,750
Interest on Raghu's capital:
\( = 70,000 \times \frac { 10 }{ 100 } \)
\( = Rs.7,000 \)
Total Interest payable to Raghu = Rs. 7,000
In simple words: Ravi gets interest on his initial capital for the full year and on the extra money he put in for the months it was in the business. Raghu gets interest on his capital for the whole year. Interest on capital is usually calculated on the amount of capital employed for the respective period.

🎯 Exam Tip: When calculating interest on capital, remember to adjust for additional capital introduced or capital withdrawn during the year, applying interest only for the period it was actually used.

 

Question 17. P, Q and R were partners sharing profits in the ratio of 3:2:1. P draws Rs.5,000 at the end of each quarter. Q draws Rs. 10,000 at the end of each half-year. R draws Rs.2,000 on 1.5.2004 Rs.3,000 on 31.10.2004, Rs.5,000 on 30.11.2004. Calculate interest on their drawings at 10% p.a for the year ending 31.3.2005.
Answer:Calculation of interest on Drawings under Product Method: a) Interest on drawing of P:

Interest on drawings at 10% p.a. on Rs.90,000
Interst on drawings \( = 90,000 \times \frac { 10 }{ 100 } \times \frac { 1 }{ 12 } = \) Rs. 750
Interest on drawings of Q:Interest on drawings at 10% p.a. on Rs.60,000
Interst on drawings \( = 60,000 \times \frac { 10 }{ 100 } \times \frac { 1 }{ 12 } = \) Rs.500
Interst on drawings of R:Interest on drawings at 10% p.a. on Rs.57,000
Interest on drawings \( = 57,000 \times \frac { 10 }{ 100 } \times \frac { 1 }{ 12 } = \) Rs.475
In simple words: The product method helps calculate interest on drawings, especially when withdrawals are not regular or equal. It involves multiplying each drawing amount by the period it was outstanding and then applying the interest rate to the sum of these products for one month.

🎯 Exam Tip: Be careful to calculate the correct 'period' for each drawing by counting the months from the withdrawal date to the end of the accounting year.

 

Question 18. Mahesh and Ramesh are partners sharing profits in the ratio of 3:2 with capitals of Rs.50,000 and Rs.40,000 respectively. Interest on capital is agreed at 8%p.a Interest on drawings is fixed at 10% p.a. The drawings of the partners were Rs.15,000 and Rs.10.000, the interest for Mahesh Rs.750 and for Ramesh Rs.500. Mahesh is entitled to a salary of Rs. 12,000 p.a. and Ramesh is entitled to get a commission of 10% on the Net Profit before charging such cc ion. The Net Profit of the firm before making the above adjustments was Rs.60,000 for the year ended 31st March 2005. Prepare the profit and loss appropriation account.
Answer:In the Books of the Firm Profit and Loss Appropriation Account

Note: Calculation of commission. Step 1: Total the credit side of the Profit and Loss Appropriation Account, which is Rs. 61,250. Step 2: Total the debit side of the Profit and Loss Appropriation Account, which is Rs. 19,200 (7,200 + 12,000). Step 3: Find the balance, which is Rs. 42,050 (61,250 - 19,200). Step 4: Apply the formula for commission. Commission = Net Profit before commission \( \times \) Rate \( \div \) (100) Commission \( = 42,050 \times \frac { 10 }{ 100 } = \) 4,205 The remaining balance of Rs. 37,845 (Rs.42,050 – Rs. 4,205) is transferred to partners' Capital accounts in their profit-sharing ratio. This account shows how the net profit is distributed among partners after all agreed adjustments.
In simple words: This account shows how a firm's yearly profit is divided between partners. It includes interest on their investments, salaries, and commissions, with the leftover profit split according to their agreed ratio.

🎯 Exam Tip: Always be sure to correctly calculate Net Profit before commission, especially if the commission percentage is based on profit "after charging such commission."

 

Question 19. Janani, Kamali, and Lakshmi are partners in the firm sharing profits and losses equally. As per the terms of the partnership deed, Kamali allows a monthly salary of Rs. 10,000, and Lakshmi is allowed a commission of Rs. 40,000 per annum for their contribution to the business of the firm. You are required to pass the necessary journal entry. Assume that their capitals are fluctuating.
Answer:Journal entries

These journal entries record the salary payable to Kamali and the commission payable to Lakshmi, and then transfer these amounts to the Profit and Loss Appropriation Account. Journal entries are important for keeping a clear record of all financial transactions.
In simple words: These entries show how to record a partner's salary and commission. First, the expense is recorded, then it's moved to the partner's capital account, and finally, these amounts are transferred to the profit distribution account.

🎯 Exam Tip: When capital accounts are fluctuating, partner's salary, commission, and share of profit/loss are all credited or debited directly to their capital account.

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