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

Answer:

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

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

K, cannot become the partner of the firm.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Current Account of each partner is debited with:-

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

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

Two methods of maintaining Capital Account of Partners:-

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

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

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

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

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

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

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

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

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

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

Current Account of each partner is credited with:-

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

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

Current Account of each partner is debited with:-

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Interest on loan will be payable @ 6%.

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

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

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

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

No, there is no interest chargeable on drawings.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Question 42. What is Profit and Loss Appropriation Account?

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

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

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

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

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

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

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

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

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

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

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

(a)  The amount of drawings is uniform

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

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

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

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

Calculation of Interest on Drawings:-

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

Calculation of Interest on Drawings:-

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

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

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

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

(a)  All the remaining partners in an agreed ratio

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Short Answer Type Questions

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

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

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

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

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

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

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

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

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

Question 4. State any four features of a Partnership.

The essential characteristics of partnership are:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Question 7. Distinguish between Fixed and Fluctuating Capitals.

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

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

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

EXERCISE ::---->

Partnership Deed

Question 1: In the absence of Partnership Deed, what are the rules relation to :
(a) Salaries of partners.
(b) Interest on partner’s capitals.
(c) Interest on partner’s loan.
(d) Division of profit.
(e) Interest on partner’s drawings.
(f) Interest on Loan to partner’s

a) Salaries of Partners – No Salary are Payable to any partner.
b) Interest on Partners Capital – No interest on capital is allowed or paid to any partner.
c) Interest on Partners Loan – Interest on Partner’s Loan is allowed @ 6% to the partners.
d) Division of Profit – Profit are divided equally.
e) Interest on Partner’s drawings – No interest on Partner’s drawings is charged from the Partners.
f) Interest on Loan to partners – No interest on Loan’s drawings is charged from the Partners.

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

Question 2: Mahesh, Ramesh, and Suresh are partners in a firm. They do not have a Partnership Deed. At the end of the first year of the Business, they faced the following problems:
a) Mahesh wants that interest on capital should be allowed to the partners but Ramesh and Suresh do not agree.
b) Ramesh wants that the partners should be allowed to draw salaries but Mahesh and Suresh do not agree.
c) Mahesh and Ramesh want that Suresh should pay interest on the loan given to him by the firm but Suresh does not agree.
d) Mahesh and Ramesh having contributed larger amounts of capital, desire that the profits should be distributed in the ratio of their capital contribution but Suresh does not agree.
State how will these disputes be settled.

Answer:

a) In the absence of a partnership deed. Provisions of the Indian Partnership Act 1932 would apply. No interest on the partner’s capital would be allowed. Ramesh and Suresh both are correct.
b) In the absence of a partnership deed. Provisions of the Indian Partnership Act 1932 would apply. No salary would be allowed to partners. Mahesh and Suresh are correct.
c) In the absence of a partnership deed. Provisions of the Indian Partnership Act 1932 would apply. No interest on a loan to a partner by the firm is charged. Mahesh and Ramesh are incorrect
d) In the absence of a partnership deed. Provisions of the Indian partnership Act 1932 would apply. The Profit-Sharing ratio would be equal (1:1:1). Mahesh and Suresh are incorrect.

Question 3: Following difference has arisen among P, Q, and R. State who is correct in each case:
a) P used ₹ 50,000 belonging to the firm and earned a profit of ₹ 5000. Q and R want the amount to be given to the firm.
b) Q used ₹ 10,000 belonging to the firm and incurred a loss of ₹ 1,000. He wants the firm to bear the loss.
c) P and Q want to purchase goods from Star Ltd. R does not agree.
d) Q and R want to admit W as a partner, but P does not agree.
e) R had given a loan of ₹ 2,00,000 to the firm and demanded interest @ 10%. P and Q do not want to pay the interest.

Answer:

a) If any partner uses the money of the firm and earned a profit. He has to pay back the used money with profit. Hence, p has to back ₹ 55,000 to the firm.
b) If any partner uses the firm money and incurred a loss. He has to bear the loss and the full amount of money taken by the partner has to return back the firm. Hence Q has to pay ₹ 10,000 to the firm.
c) Any business decision is decided by the majority. Hence P and Q want to purchase goods from star Ltd is accepted as there are only 3 partners and the majority.
d) W as a partner cannot be admitted as to admit a new partner, all partners must agree.
e) In the absence of a partnership deed. Provisions of the Indian Partnership Act 1932 would apply. Only a 6% p.a. rate of interest on the loan of partners to the firm would be charged. Hence, In the place of 10% p.a., only a 6% p.a. rate of interest would be charged.

Question 4: Barun, Tarun, and Shivam are partners in a firm and do not have a partnership Deed. Barun introduced further capital of ₹ 5,00,000 on 1st October 2022. Whereas Shivam took a loan of ₹ 50,000 from the firm on 1st October 2022. Disputes have arisen among them on the following: 
a) Barun demands interest @ 10% p.a. on ₹ 5,00,000 being his extra capital. 
b) Tarun desires that his son Deep should be admitted as a partner and he will give him half of his share. Barun and Shivam do not agree.
c) Barun and Tarun are of the view that Shivam should be charged interest on loans from the firm at the lending rate of the banks, which is 12% p.a. 
d) Tarun has withdrawn ₹ 50,000 from the firm for his personal use. Barun and Shivam are of the view that Tarun should be charged interest @ 10% p.a. 
Give a Solution to each issue of dispute.

Answer:

a) In the case of the absence of a Partnership deed. Provisions of the Indian Partnership Act 1932 would apply. No interest on capital would be allowed.
b) In the case of the absence of a partnership deed. Provisions of the Indian Partnership Act 1932 would apply. Tarun’s son Deep would not be admitted. As all partners do not agree.
c) In the case of the absence of a Partnership deed. Provisions of the Indian Partnership Act 1932 would apply. No interest on a loan to Shivam from the firm is charged
d) In the case of the absence of a partnership deed. Provisions of the Indian Partnership Act 1932 would apply. No interest on drawing would be charged.

Point of Knowledge:-
In the absence of Partnership deed Profit will be equally divided between partners.

 Question 5: Harshad and Dhiman are in partnership since 1st April, 2023. No partnership agreement was made. They contributed Rs. 4,00,000 and 1,00,000 respectively as capital. In addition, Harshad advance an amount of Rs. 1,00,000 to the firm on 1st October, 2023. Due to long illness, Harshad could not participate in business activities from 1st August to 30th September, 2023. The profit for the year ended 31st March, 2024 amounted to Rs 1,80,000. Dispute has arisen between Harshad and Dhiman. 
Harshad Claims:
(i) He should be given interest @ 10% per annum on capital and loan; 
(ii) Profit should be distributed in proportion of capital;
Dhiman Claims: 
(i) Profit should be distributed equally; 
(ii) He should be allowed Rs. 2,000 p.m. as remuneration for the period he managed the business in the absence of Harshad; 
(iii) Interest on Capital and loan should be allowed @ 6% p.a.
You are required to settle the dispute between Harshand and Dhiman. Also prepare Profit and Loss Appropriation Account.

Answer:

 Question 6: A and B are partners from 1st April, 2024, without a Partnership Deed and they introduced capitals of Rs. 35,000 and Rs. 20,000 respectively. On 1st October, 2024, A advances a loan of Rs. 8,000 to the firm without any agreement as to interest. The profit and Loss Account for the year ended 31st March, 2025 shows a profit of Rs. 15,000 but the partners cannot agree on payment of interest and on the basis of division of profits. 
You are required to divide the profits between them giving reasons for your method.

Answer:

About Solution:
Section 4 of the Indian partnership act 1932 defines 
Partnership is the relation between person who have agreed to share the profit of a business carried on by all or any of them acting for all 

Things to Remember:
Two or more person – there must be at least two person to form a partnership and such person must be competent to contract as per the Indian contract act, 1872 every person expect the following and competent to contract:- 
1) Minor
2) Person of unsound mind 
3) Person disqualified by any law 

Important Notes:
Partnership act does not specify the maximum number of partner but the central government has prescribed maximum number of partners in a firm to be 50 vide rule 10 of the companies (miscellaneous) rules 2014  

Interest on partner’s loan to the firm

Question 7: Sita and Geeta are partners in a firm sharing profits in the ratio of 3:2. They had given a loan to the firm Rs. 30,000 in their profit-sharing ratio on 1st October, 2023. The Partnership Deed is silent on interest on loans from partners. Compute interest payable by the firm to the partners, assuming the firm closes its books every year on 31st March.

Answer:

Interest on Partner’s Loan to the Firm:
According to the Indian Partnership Act, 1932 in the absence of any information and Partnership Deed, the interest on partner’s loan will be allowed at 6% p.a

About Solution:
Interest on partner’s loan being a charge against profit is paid or credited to partner’s loan Account even if profit is less than the amount of interest on loan. The resulting loss is distributed among partners in the profit sharing ratio.

Things to Remember:
A minor cannot be admitted as a partner in the firm however, he is allowed to participate in the profit of the firm. 

Important Notes:
Partnership is the result of an agreement it must come into existence by an agreement and not by and operation of on the country a hindu undivided into family comes into existences by the operation of law and not by and agreement such and agreement can be either oral or in writing the agreement forms the basis of mutual rights and duties of partners. 

Question 8: Bat and Ball are partners sharing profits and losses in the ratio of 2:3 with capitals Rs. 1,20,000 and Rs. 60,000 respectively. On 1st October, 2023, Bat and Ball gave loans of Rs. 2,40,000 and Rs. 1,20,000 respectively to the firm. Bat had allowed the firm to use his property for business for a monthly rent of Rs. 5,000. Loss for the year ended 31st March 2024 before rent and interest amounted to Rs. 9,000. Show distribution of profit/loss.

Answer:

Calculation of Partner’s Share in Profit and Loss:-

About Solution:
1) As per the provision of Indian Partnership Act, 1932, partner’s loan is repayable on dissolution before payment of capital to partners.
2) In the absence of any agreement, partners are entitled to get interest @ 6% p.a. on loan advanced whereas they are not entitled to interest on capital.

Things to Remember:
Partnership can be formed for the purpose of carrying on some business with the intention of earning profit and such business must be legal a joint ownership of some property by itself cannot be called a partnership.

Important Notes:
The agreement between the partners must be aimed at sharing the profit of business if some person join hands to run some charitable activity it will not be called partnership further if a partner is deprived of his right to share the profit of the business he cannot be called a partner but it is not necessary that all partner should share the loss also it may be agreed between the partner that one or  more of them shall not be liable for losses. 

Question 9: Akhil, Sunil, and Parvesh are partners sharing profits in the ratio of 3:2:1. Sunil had given a loan to the firm on 1st November 2022 of ₹ 4,00,000. Interest payable was agreed @ 12% p.a. Interest was paid by cheque up to February 2023 on 1st March 2023 and the balance was yet to be paid. Pass the Journal entries for interest on the loan by the partner.

Answer:

Things to Remember:
Each partner is an agent as well as a principal of the firm an agent because he can bind the other partners by his act and a principal because of himself can be bound by the acts of the other partners.

Important Notes:
It means that each partner’s can participants in the conduct of business and each partner’s is bound by the act of other partner in respect to the business of the firm. 

Question 10: Akhil and Bimal are partners sharing profits in the ratio of 3:2. Akhil gave a loan to the firm of ₹ 1,00,000 on 1st January 2024. On the same date, the firm gave a loan to Bimal of ₹ 1,00,000. They do not have an agreement as to interest. Akhil had also given his personal property for the firm’s godown at a monthly rent of ₹5,000. Firm earned a profit of ₹1,03,000 (before the above adjustments) for the year ended 31st March 2024. Show the distribution of profit for the year.

Answer:

Interest on Akhil’s Loan (1st Jan to 31st March)= Rs. 1,00,000 × 6/100 × 3/12 
Interest on Akhil’s Loan (1st Jan to 31st March)= Rs. 1,500

Rent on Akhil’s Property = Rs. 5,000 × 12 = Rs. 60,000
Distributable Profit = Rs. 1,03,000 – Rs. 6,000 – Rs. 1,500
Distributable Profit = Rs. 41,500

Akhil’s Share in Profit = Rs. 41,500 × 3/5
Akhil’s Share in Profit = Rs. 24,900

Bimal’s Share in Profit = Rs. 41,500 × 2/5
Bimal’s Share in Profit = Rs. 16,600 

Things to Remember:
A partnership firm has no separate existence form its member it mean all agreement entered with the firm will be enforceable against each partner separately (however, partnership firm is a separate business entity form accounting point of view). 

Important Notes:
1) Every Partner has the right to share profit or losses with their partner in the agreed ratio. 
2) Every Partner has the right to take part in the conduct of the business.

Question 11: Nirmal and Pawan are partners sharing profits in the ratio of 3:2. The firm had given loan to Pawan of Rs. 5,00,000 on 1st April, 2023. Interest was to be charged @10% p.a. The firm took loan of Rs. 2,00,000 from Nirmal on 1st December, 2023. Before giving effect to the above, the firm incurred a loss of Rs. 10,000 for the year ended 31st March, 2024. Determine the amount to be transferred to Profit and loss Appropriation Account.

Answer:

Interest on Loan given by firm to Pawan (1st April to 31st March)= Rs. 5,00,000 × 10/100
Interest on Loan given by firm to Pawan = Rs. 50,000

Interest on Loan of Nirmal to Firm (1st Dec. to 31st March)= Rs. 2,00,000 × 6/100× 4/12
Interest on Loan given by firm to Pawan = Rs. 4,000

Net Profit transferred to Profit and Loss Appropriation = Loss + Interest on Loan to Pawan – Interest on Loan by Nirmal
Net Profit transferred to Profit and Loss Appropriation = -10,000 + 50,000 – 4,000
Net Profit transferred to Profit and Loss Appropriation = 36,000

About Solution:
Here Net Profit is given after debiting Z’s Salary, so we have to add Z’s Salary to net profit given in question.

Things to Remember:
1) Every partner has to right to be consulted in the matter related to partnership business.
2) Every partner has the right to inspect and have a copy of the books of account.

Important Notes:
1) Every partner has a right to disallow the admission of a new partner.
2) Every partner is the joint owner of the partnership property. 

Question 12: Ankit, Bhanu, and Charu are partners in a firm sharing profits and losses equally with a capital of ₹ 2,50,000 each. On 1st October 2023, Ankit and Bhanu gave loans of ₹ 2,50,000 each to the firm whereas Charu took a loan of ₹ 1,00,000 from the firm on 1st November, 2023. It was agreed among the partners that Charu will be charged interest @ 6% p.a.. Interest on loans from partners was paid on 10th April 2024. The firm closes its books on 31st March each year.
Pass the Journal entries in the books of the firm for the year ended 31st March 2024.

Answer:

About Solution:
Calculation of Partners Loan:-
Interest on Ankit’s Loan to Firm (1st Oct. to 31st March) = Rs. 2,50,000 × 6% × 6/12
Interest on Ankit’s Loan to Firm = Rs. 7,500

Interest on Bhanu’s Loan to Firm (1st Oct. to 31st March) = Rs. 2,50,000 × 6% × 6/12
Interest on Bhanu’s Loan to Firm = Rs. 7,500

Interest on Bhanu’s Loan to Firm (1st Nov. to 31st March) = Rs. 1,00,000 × 6% × 5/12
Interest on Bhanu’s Loan to Firm = Rs. 2,500

Things to Remember:
If a partner has given loan to a firm he has a right to receive interest agreed rate. 
If the rate of interest is not agreed it is paid @6%p.a.

Important Notes:
If a partner incurs expenses or makes payment on behalf of the firm he has a right to be indemnified by the firm. 

Question 13: Atul, Jetha, and Tarak are partners sharing profits equally. Jetha was given a loan by the firm on 1st July 2023 of ₹ 6,00,000. Books are closed on 31st March, What Journal entries will be passed if
(a) Rate of Interest is not agreed; and
(b) Rate of interest to be charged is agreed @ 10% p.a.?

Answer:

Case-A
No Journal Entries will pass as Interest on loan to Jetha’s Loan is not agreed. 

Things to Remember:
The limited liability partnership (LLPs) in India came into existence with the enactment of limited liability partnership act 2008 which lay down the law for the formation and regulation of limited liability partnerships  
Important Notes:
1) A LLP is a body corporate formed and incorporated under this act 
2) It is a legal entity separate from that of its partners 

Question 14: Parul, Paresh, and Rahul are partners in a firm. The firm gave a loan to Rahul on 1st February 2024 of ₹ 6,00,000. Interest was agreed to be charged @ 6% p.a. Interest was paid by cheque up to February 2024 by Rahul on 5th March 2024 and the balance was paid by him on 5th April, 2024.
Pass the Journal entries for interest on loan to partners.

Answer:

Working Note:
1.) Calculation of Interest on loan:-
Interest on Rahul’s Loan = Rs. 6,00,000 × 6% × 1/12 
Interest on Rahul’s Loan = Rs. 3,000

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

Things to Remember:
1) A LLP shall have perpetual succession.
2) Any change in the partner of a LLP shall not affect the existence right or liability of the LLP.

Important Notes:
Since partnership is the outcome of an agreement it is essential that there must be some term and condition agreed upon by all the partners such term and condition may be either oral or written the law does not make it compulsory to have a written agreement duty and signed and registered and under the act such a written document which contain the term of agreement is called partnership deed it is also called partnership article of partnership.

Question 15: Vinod and Mohan are partners. Vinod’s Capital is Rs. 1,00,000 and Mohan’s Capital is Rs. 60,000. Interest on Capital is payable @6% p.a. Vinod is to get a salary of Rs. 3,000 per month. Net profit for the year is Rs. 80,000.
Prepare Profit and Loss Appropriation Account.

Answer:

About Solution:
1) It regulates the rights, duties and liabilities of each partner 
2) It helps to avoid any misunderstanding amongst the partner because all the term and condition of partnership have been laid down before hand in the deed.

Important Notes:
In the absence of a partnership deed or verbal agreement or if the partnership deed is a silent on a certain point the following provision of partnership act, 1932. 

Question 16: X, Y, and Z are partners in a firm sharing profits in the ratio of 2:2:1. Fixed Capitals of the partners were: X ₹ 5,00,000; Y ₹ 5,00,000 and Z ₹ 2,50,000 respectively. The Partnership Deed provides that interest on capital is to be allowed @ 10% p.a. Z is to be allowed a salary of ₹ 2,000 per month. Profit of the firm for the year ended 31st March, 2024 after Z’s salary was ₹ Prepare Profit and Loss Appropriation Account.

Answer:

About Solution:
In the absence of partnership deed profits and losses are to be shared equally irrespective of their capital contribution.

Things to Remember:
1) In the absence of partnership deed no interest on capital shall be allowed to be partners if there is a provision for the interest on capitals in the partnership deed it will be allowed only when there is a profit. 
 
Important Notes:
In the absence of partnership deed no interest to be charged on drawings 

Question 17: X and Y are partners sharing profits in the ratio of 3 : 2 with capitals of ₹ 8,00,000 and ₹ 6,00,000 respectively. Interest on capital is agreed @ 5% p.a. Y is to be allowed an annual salary of ₹ 60,000 which has not been withdrawn. Profit for the year ended 31st March 2024 before interest on capital but after charging Y’s salary was ₹ 2,40,000.
A provision of 5% of the net profit is to be made in respect of commission to the Manager. Prepare a Profit and Loss Appropriation Account showing the allocation of profits.

Answer: 

About Solution:
In the absence of partnership deed no partner is entitled to any salary or commission for taking part in running the firm’s business.

Things to Remember:
In the absence of partnership deed interest on the rate of 6% per annum is to be allowed on a partner’s loan to the firm such interest shall be paid even if there are losses to the firm.

Important Notes:
In the absence of partnership deed without the consent for all existing partners no new partner can be admitted to the firm. 

Question 18: Atul and Mithun are partners sharing profits in the ratio of 3 : 2. Balances as on 1st April 2023 were as follows: 
Capital Accounts (Fixed): Atul – ₹ 5,00,000 and Mithun – ₹ 6,00,000. 
Loan Account: Atul – ₹ 3,00,000 (Cr.) and Mithun – ₹ 2,00,000 (Dr.) 
It was agreed to allow and charge interest @ 8% p.a. Partnership Deed was provided to allow interest on capital @ 10% p.a. Interest on Drawings was charged ₹ 5,000 each.
Profit before giving effect to above was ₹ 2,28,000 for the year ended 31st March 2024.
Prepare Profit and Loss Appropriation Account.

Answer:

Working capital:

1.  Calculation of interest on partners Loan:- 
Interest on Loan to Mithun = Rs. 2,00,000 × 8% 
Interest on Loan to Mithun = Rs. 16,000
Interest on Loan from Mithun = Rs. 3,00,000 × 8% 
Interest on Loan from Mithun = Rs. 24,000

2.  Calculation of Interest on Capital:-
Interest on Atul’s Capital = Rs. 5,00,000 × 10% 
Interest on Loan to Mithun = Rs. 50,000
Interest on Mithun’s Capital = Rs. 6,00,000 × 10% 
Interest on Mithun’s Capital = Rs. 60,000

About Solution:
In the absence of partnership deed each partner can participate in the conduct of business. 

Things to Remember:
Entry of transfer of net profit to profit & loss appropriation account:- 
Profit and loss A/C
    To Profit and Loss Appropriation A/C
(Net profit transferred) 

Important Notes:
Profit and Loss a/c is prepared just after the profit and loss account hence it is an extension of profit and loss account it is prepared only by partnership deed. 

Question 19: Reema and Seema are partners sharing profits equally. The Partnership Deed provides that both Reema and Seema will get a monthly salary of ₹ 15,000 each, Interest on Capital will be allowed @ 5% p.a. and Interest on Drawings will be charged @ 10% p.a. Their capitals were ₹ 5,00,000 each and drawings during the year were ₹ 60,000 each. 
The firm incurred net loss of ₹ 1,00,000 during the year ended 31st March 2024. 
Prepare Profit and Loss Appropriation Account for the year ended 31st March 2024.

Answer:

About Solution:
Any amount payable to a partner such a salary, commission , interest on capital etc ( except interest on a partner ‘loan and rent payable to a partner) is treated as appropriation of profit and not a charge against profit hence  these item are debited to profit and loss appropriation a/c instead of profit and loss a/c 

Things to Remember:
Profit and loss A/C is a nominal account it shows how the net profit for the accounting period is appropriated (distributed) among the partner. 

Important Notes:
 1) On allowing interest on capital
Interest on capital account 
     To partner’s capital account            Dr
( interest on capital at …..%p.a.)
 
2) On closure of interest on capital A/C:
Interest on capital is closed by transferring it to the debit side of profit and loss appropriation a/c as this is expenses for the firm the entry will be 
Profit and loss appropriation A/c                            Dr
To interest on capital A/c

Question 20: Bhanu and Partap are partners sharing profits equally. Their fixed capitals as on 1st April 2023 were ₹ 8,00,000 and ₹ 10,00,000 respectively. Their drawings during the year were ₹ 50,000 and ₹ 1,00,000 respectively. Interest on Capital is a charge and is to be allowed 10% p.a. and interest on drawings is to be charged @ 15% p.a. Net Profit for the year ended 31st March 2024 before giving effect to the above) was ₹ 1,20,000. 
Prepare Profit and Loss Appropriation Account.

Answer:

About Solution:
Profit and loss A/C entries in this account are made giving effect to the partnership deed and /or the Indian partnership act, 1932.

Things to Remember:
Entry for interest on Drawing:
1) On charging interest on drawing:
Partner’s capital A/c                 Dr.
To interest on drawing A/c

2) On closure on interest on drawing A/c 
Interest on drawing is closed by transferring it to the credit side of profit and loss appropriation A/c as these the income of the firm the entry will be: 
Interest on drawing A/c        Dr.
To Profit & Loss appropriation A/C 

Important Notes:
As already stated interest on partner’s capital is to be allowed only when it is expressly agreed to among partner if interest on capital is to be allowed as per agreement it should be calculated with respect to the time rate of interest and the amount of capital.

Question 21: Amit and Sumit entered into a partnership on 1st April 2023 and invested ₹ 1,50,000 and ₹ 2,50,000 respectively as capital. The Partnership Deed provided for interest on capital @ 10% p.a. It also provided that Capital Accounts shall be maintained following the Fixed Capital Accounts Method. The firm earned a net profit of ₹ 1,00,000 for the year ended 31st March 2024. Pass the Journal entry for interest on capital.

Answer:

Working Note:-
Calculation of Interest on Capital:-
Interest on Amit’s Capital = 1,50,000 × 10%
Interest on Amit’s Capital = 15,000 
Interest on Sumit’s Capital = 2,50,000 × 10%
Interest on Sumit’s Capital = 25,000

Question 22: Kamal and Kapil are partners having fixed capitals of ₹ 5,00,000 each as on 1st April 2023. Kamal introduced further capital of ₹ 1,00,000 on 1st January 2024 whereas Kapil withdrew ₹ 1,00,000 on 1st January 2024 out of capital. 
Interest on capital is to be allowed @ 10% p.a.
The firm earned a net profit of ₹ 6,00,000 for the year ended 31st March 2024. Pass the Journal entry for interest on capital and prepare Profit and Loss Appropriation Account.

Answer:

Point of Knowledge:

Calculation of Interest on Partners Capital:-
Kamal’s Interest on Capital:-
(1st April to 30th September) = Rs. 5,00,000 × 10% × 9/12
(1st April to 30th September) = Rs. 37,500
(1st Oct to 31th March) = Rs. 6,00,000 × 10% × 3/12
(1st Oct to 31th March) = Rs. 15,000
Total Interest on Komal’s Capital = Rs. 37,500 + Rs. 15,000 = Rs. 52,500

Kapil’s Interest on Capital:-
(1st April to 30th September) = Rs. 5,00,000 × 10% × 9/12
(1st April to 30th September) = Rs. 37,500
(1st Oct to 31th March) = Rs. 4,00,000 × 10% × 3/12
(1st Oct to 31th March) = Rs. 10,000
Total Interest on Komal’s Capital = Rs. 37,500 + Rs. 10,000 = Rs. 47,500

Question 23: Simran and Reena are partners sharing profits in the ratio of 3:2. Their capital as on 1st April, 2023 were Rs. 2,00,000 each whereas Current Account had balance of Rs. 50,000 and Rs. 25,000 respectively. Interest on capital is to be allowed @5% p.a. Net profit of the firm for the year ended 31st March, 2024 was Rs. 3,00,000.
Pass the Journal entries for interest o capital and distribution of profit. Also prepare Profit and Loss Appropriation Account for the year.

Answer:

Points of knowledge:

1. Calculation of Interest on Capital:-
Interest on Simran’s Capital = 2,00,000 × 5/100
Interest on Simran’s Capital = Rs. 10,000
Interest on Reema’s Capital = 2,00,000 × 5/100
Interest on Reema’s Capital = Rs. 10,000

2. Calculation of Partner’s Share in Profit:- 
Simran’s Share in Profit = Rs. 2,80,000 × 3/5
Simran’s Share in Profit = Rs. 1,68,000
Reema’s Share in Profit = Rs. 2,80,000 × 2/5
Reema’s Share in Profit = Rs. 1,12,000

Question 24: Anita and Ankita are partners sharing profit equally. Their capital, maintained following Fluctuating Capital Accounts Method, as on 1st April, 2023 were Rs. 5,00,000 and Rs. 4,00,000 respectively. Partnership Deed provided to allow interest on capital @10% p.a. The firm earned net profit of Rs. 2,00,000 for the year ended 31st March, 2024.
Pass the Journal entry for interest on capital.

Answer:

Question 25: Ashish and Aakash are partners sharing profits in the ratio of 3:2. Their Capital Accounts had credit balances of Rs. 5,00,000 and Rs. 6,00,000 respectively as on 31st March, 2024 after debit of drawings during the year of Rs. 1,50,000 and Rs. 1,00,000 respectively. Net profit for the year ended 31st March, 2024 was Rs. 5,00,000. Interest on capital is to be allowed @ 10% p.a.
Pass the journal entry for interest on capital and prepare Profit and Loss Appropriation Account.

Answer:

Working Note:-

Calculation of opening capital of Ashish:-
Opening Capital = Closing Capital + Drawings
Opening Capital = Rs. 5,00,000 + Rs. 1,50,000
Opening Capital = Rs. 6,50,000

Calculation of opening capital of Aakash:-
Opening Capital = Closing Capital + Drawings
Opening Capital = Rs. 6,00,000 + Rs. 1,00,000
Opening Capital = Rs. 7,00,000

Calculation of Partners interest on capital:-
Interest on Capital of Ashish = Rs. 6,50,000 × 10%
Interest on Capital of Ashish = Rs. 65,000
Interest on Capital of Aakash = Rs. 7,00,000 × 10%
Interest on Capital of Aakash = Rs. 70,000

Question 26: Naresh and Sukesh are partners with capitals of Rs. 3,00,000 each as on 31st March, 2023. Naresh had withdrawn Rs. 50,000 against capital on 1st October, 2022 and also Rs. 1,00,000 besides the drawings against capital. Sukesh also had drawings of Rs. 1,00,000. Interest on capital is to be allowed @ 10% p.a. Net profit for the year was Rs. 2,00,000, which is yet to be distributed. Pass the journal entries for interest on capital and distribution of profit.

Answer:

Question 27: On 1st April, 2013, Jay and Vijay entered into partnership for supplying laboratory equipment to government schools situated in remote and backward areas. They contributed capitals of Rs. 80,000 and Rs. 50,000 respectively and agreed to share the profits in the ratio of 3:2. The partnership Deed provided that interest on capital shall be allowed at 9% per annum. During the year the firm earned a profit of Rs. 7,800. Showing your calculations clearly, prepares 'Profit and Loss Appropriation Account' of Jay and Vijay for the year ended 31st March, 2014.

About Solution:
No partner can transfer his/her share to anyone including his/her family member without the consent of all other partners.

Things to Remember:
The persons who have agreed to carry on a business and share its profits and losses. They are the persons who have agreed upon the terms and conditions of partnership.

Important Notes:
Partners who carry on the business are collectively known as firm. The name under which the business is carried on is called firm name.

Question 28: A and B are partners in the ratio of 3 : 2. The firm maintains Fluctuating Capital Accounts and the balance of the same as on 31st March 2020 amounted to ₹ 1,60,000 ad ₹ 1,40,000 for A and B respectively. Their drawings during the year were ₹ 30,000 each.
As per Partnership Deed, interest on capital @ 10% p.a. on opening capitals had been provided to them. Calculate the opening capital of partners given that their profit was ₹ 90,000. Show your working clearly.

Answer:

Working Note:-
Total Opening Capital of the Firm = Closing Capital of the Partners + Drawing – Profit 
Total Opening Capital of the Firm = 1,60,000 – 1,40,000 + 30,000 + 30,000 – 90,000
Total Opening Capital of the Firm = Rs. 2,70,000

Distribution of Profit:-
A’s Profit Share = 63,000 × 3/5 
A’s Profit Share = Rs.37,800 
B’s Profit Share = 63,000 × 2/5 
B’s Profit Share = Rs.25,200

Question 29: Following is the extract of the Balance Sheet of Neelkant and Mahadev as on 31st March, 2024.

During the year, Mahadev's drawings were Rs. 30,000. Profits during the year ended 31st March, 2024 is Rs. 10,00,000. Calculate interest on capital @ 5% p.a. for the year ending 31st March, 2024.

Answer:

Calculation of interest of capital:-
1. Interest on capital of Neelkant = Rs. 10,00,000  × 5/100
Interest on capital of Neelkant = Rs. 50,000 
2. Interest on capital of Mahadev = Rs. 10,00,000  × 5/100
Interest on capital of Mahadev = Rs. 50,000

About Solution:
The Capital of both the partners are fixed as current accounts are given in the balance sheet.Hence interest on capital will be calculated on fixed capital balances.

Things to Remember
Sometimes, a partner is admitted in the firm on guarantee in respect of his minimum share of profit from the business. Such a guarantee can be given even to an existing partner also
(a) The firm i.e. by all the old partners in an agreed ratio, or 
(b) Some of the old partners or any one of the old partners

Important Note:
When all the partners guarantee that one of the partners shall be given a minimum amount of profit, we should calculate the following two amounts separately:
1) Share of profit of the guaranteed partner as per profit sharing ratio, and
2)  Minimum guaranteed amount of profit of the granted partner.

Question 30: From the following Balance Sheet of Long and Short, calculate interest on capital @ 8% p.a. for the year ended 31st March, 2024.

During the year, Long withdrew Rs. 40,000 and Short withdrew Rs. 50,000. Profit for the year wasRs.1,50,000 out of whichRs.1,00,000 was transferred to General Reserve.

Answer:

About Solution:
1. Interest on capital is calculated on opening capital balances only.
2. In the absence of any profit sharing ratio it will be taken as equal.
3. Drawings given in the additional information has been deducted out of opening capital and drawings if given in the asset side of the balance sheet indicates no deduction of drawings out of capital. 

Things to Remember:
The higher of the above two is to be given to that partner. The balance of profit (total profit minus profit given to the guaranteed partner) is to be shared by the remaining partners in their respective profit -sharing ratio. When the new partner’s share of profit is more than the guaranteed amount, his actual share of profit is given to him instead of the guaranteed amount of profit.

Important Note:
Sometimes, after closing the accounts of the partnership firm at the end of the financial year, it is discovered that there had been some errors or omissions in the accounts. In such cases, instead of altering the old accounts and the signed Balance Sheet an adjustment entry for such errors or omissions is made at the beginning of the next year

Question 31: Amit and Bramit started business on 1st April, 2023 with capitals of Rs. 15,00,000 and Rs. 9,00,000 respectively. On 1st October, 2023, they decided that their capitals should be Rs. 12,00,000 each. The necessary adjustments in capitals were made by introducing or withdrawing by cheque. Interest on capital is allowed @ 8% p.a. Compute interest on capital for the year ended 31st March, 2024.

Answer:

Calculation of Interest on Capital:-

About Solution:
Charge means full interest is to be allowed whether there are profits or losses.

Things to Remember: 
Appropriation means interest is to be allowed only out of profits. It means that the interest on capital cannot exceed the amount of profit.

Important Note: 
It the partnership deed is silent, no interest will be allowed on capital.

Question 32: Moli and Bholi contribute Rs. 20,000 and Rs. 10,000 respectively towards capital. They decide to allow interest on capital @ 6% p.a. Their respective share of profits is 2 : 3 and the net profit for the year is Rs. 1,500. Show distribution of profits: 
(i) Where there is no agreement except for interest on capitals; and 
(ii) Where there is an agreement that the interest on capital as a charge.

Question 33: Shiv, Moha and Gopal are partners sharing profits and losses in the ratio of 2:2:1 respectively. A is entitled to a commission of 10% on the net profit. Net profit for the year is Rs. 1,10,000. Determine the amount of commission payable to A.

Answer:

Question 34: Abha, Bobby, and Vineet are partners sharing profits and losses equally. As per Partnership Deed, Vineet is entitled to a commission of 10% on the net profit after charging such commission. Net Profit before charging commission is ₹ 2,20,000. Determine the amount of commission payable to Vineet.

Answer:

Question 35: A, B, C, and D are partners in a firm sharing profits as 4 : 3 : 2 : 1. The firm earned net profit of Rs. 1,80,000 for the year ended 31st March, 2024. As per the Partnership Deed, they are to charging the commission @ 20% of the profit after charging such commission which they will share as 2:3:2:3. You are required to show appropriation of profits among the partners.

Answer:

About Solution:
1) Distribution of Profit: Partners are entitled to share profits equally. 
2)  Interest on Capital: Interest on capital is not allowed.
3)  Interest on Drawings: No interest on drawing of the partners is to be charged. 

Things to Remember:
1) Interest on Partner’s Loan: A Partner is allowed interest @ 6% per annum on the amount of loan given to the firm by him/her.
2) Salary and Commission to Partner: A partner is not entitled to any salary or commission or any other remuneration for managing the business.

Important Note:
Partners contribute their share of capital in business. These are recorded in their respective accounts named as capital accounts. Suppose there are two partners A and B, there will be A’s capital account and B’s capital account. These accounts may be maintained in two ways.

Question 36: X and Y are partners in a firm. X is entitled to salary of Rs. 10,000 per month and commission of 10% of the net profit after partners' salaries but before charging commission. Y is entitled to a salary of Rs. 25,000 p.a. and commission of 10% of the net profit after charging all commission and partners' salaries. Net profit before providing for partners' salaries and commission for the year ended 31st March, 2023 was Rs. 4,20,000, show distribution of profit.

Answer:

Working Capital:

1. Calculation of salary given to both partners:-
X is taking salary Rs. 10,000 per months 
X’s salary = Rs. 10,000 × 12 
X’s salary = Rs. 1,20,000
Y’s salary = Rs. 25,000

2. Calculation of distribution of commission to both partners
Distributable Profit = Net profit - salary 
Distributable Profit = 4,20,000- 1,45,000   
Distributable Profit= 2,75,000
X is taking 10% before charging commission
X’s share in commission = 2,75,000 × 10/100
X’s share in commission = 27,500
Y is taking 10% after charging such commission 
Y’s share in commission = 2,75,000 – 27500(x’scommission) = 2,47,500
Y’s share in commission= 2,47,500 × 10/110  = 22,500
Total commission given to both the partners is 27500 + 22500 = 50,000

3. Calculation of distribution Net profit among partners  
Total profit = 4,20,000 – 1,45,000 (salary)  – 50,000 (commission) = 2,25,000
Profit / Loss Sharing Ratio =1:1
Sum of Ratio = 1+1 = 2
X’s share in profit = Rs. 2,25,000 × 1/2
X’s share in profit = Rs. 1,12,500
Y’s share in profit = Rs. 2,25,000 × 1/2
Y’s share in profit is = Rs. 1,12,500

About Solution:
In fixed capital account, the closing balance of the capital account is same as that of opening balance except when additional capital is introduced or there is permanent withdrawal during the current accounting year. Items relating to capital account such as interest on capital, interest on drawings and share of profit etc., are recorded incapital account. But in this case a separate account is opened for each partner to record these items. This account is known as ‘current account’. A current account may show a debit or a credit balance. Format of the fixed capital account and the current account is as under

Things to Remember:
When capital account for each partner is so maintained that in addition to the capital amount other items related to capital account such as interest on capital, drawings, net profit or net loss etc. are written in this account, it is termed as fluctuating capital. In this case there is no need to maintain a separate account for recording of these adjustments.

Important Note:
Let us now study about calculation of interest on capital. As you know that, interest on capital is allowed when it is provided in the Partnership Deed. If it is so provided, therate of interest will be as agreed upon by the partners. Interest is charged on the opening balance of the partner’s capital account. When additional capital is introduced and some capital is withdrawn permanently, the interest will be calculated on the amount of the capital used in the business during a particular period. Interest is treated as an expense as it is a charge on the profits of the firm.

Question 37: Ram and Mohan, two partners, drew for their personal use Rs. 1,20,000 and Rs. 80,000. Interest is chargeable @ 6% p.a. on the drawings. What is the amount of interest chargeable from each partner?

Answer:

Calculation of interest on drawings of both the partners:
Interest is chargeable on drawings is 6% p.a:-
Interest on Ram’s drawings = 1,20,000 × 6 / 12 × 6 / 100
Interest on Ram’s drawings = 3,600
Interest on Mohan’s drawings = 80,000 × 6 / 12 × 6 / 100
Interest on Mohan’s drawings = 2,400
Total interest on drawing = Rs. 3,600 + Rs. 2,400 
Total interest on drawing = 6,000

About Solution:
When the rate of is interest is given without the words ‘per annum’ interest will be charged without considering time of date of drawings . in other words interest will be charged for 12 months.

Things to Remember:
The higher of the above two is to be given to that partner. The balance of profit (total profit minus profit given to the guaranteed partner) is to be shared by the remaining partners in their respective profit -sharing ratio. When the new partner’s share of profit is more than the guaranteed amount, his actual share of profit is given to him instead of the guaranteed amount of profit.

Important Note:
Sometimes, after closing the accounts of the partnership firm at the end of the financial year, it is discovered that there had been some errors or omissions in the accounts. In such cases, instead of altering the old accounts and the signed Balance Sheet an adjustment entry for such errors or omissions is made at the beginning of the next year.

Question 38: Brij and Mohan are partners in a firm. They withdrew Rs. 48,000 and Rs. 36,000 respectively during the year evenly in the middle of every month. According to the partnership agreement, interest on drawings is to be charged @ 10% p.a. Calculate interest on drawings of the partners using the appropriate formula.

Answer:

Calculation of interest on drawings of both the partners
Interest is chargeable on drawings is 10% p.a.
Interest on Brij’s drawings = Rs. 48,000 × 6 / 12 × 10 / 100
Interest on Brij’s drawings = Rs. 2,400
Interest on Mohan’s drawings = Rs. 36,000 × 6 / 12 × 10 / 100
Interest on Mohan’s drawings = Rs. 1,800

About Solution:
When a partner withdrawn an equal amount at the middle of the every month, then Interest on drawings is to be calculated for six months.

Things to Remember:
For Interest on Capital
Interest on Capital A/c Dr.
         To Partner’s Capital A/c (Individually) 
(Crediting ‘Interest on Capital’ to Capital Account)

Important Note:
Interest can be calculated directly i.e. simple interest is to be calculated by taking the principal amount, period and rate of interest. Alternately interest can be calculated by product method i.e. by converting the principal amount into monthly products depending upon number of months for which principal amount remained in business. Then the interest is calculated by taking monthly rate of interest.

Question 39: Dev withdrew ₹ 10,000 on the 15th day of every month. Interest on drawings was to be charged @ 12% per annum. Calculate interest on Dev’s Drawings.

Answer:

Question 40: One of the partners in a partnership firm has withdrawn Rs. 9,000 at the end of each quarter, throughout the year, Calculate interest on drawings at the rate of 6% per annum.

Answer:

Calculation of interest on drawings when one of the partner’s has withdrawn Rs. 9,000 at the end of each quarter throughout the year:
Interest on drawings =

About Solution:
When a partner withdrawn an equal amount at the beginning of every month for the first six Months then interest on drawings is to be calculated for 4.5 months.

Things to Remember:
A fixed amount may be withdrawn every month/ half yearly/ annually. The interest has to be calculated for the period for which the amount has been utilised for personal purposes by the partners. The calculation of amount of interest to be charged in different situations is shown as under 

Important Note:
A fixed amount is withdrawn by the partners, at equal time interval, say each month or each quarter. The calculation of total time period, in such situations will depend upon whether the money was withdrawn at the beginning of the month, middle of the month or at the end of the month.

Question 41: A and B are partners sharing profits equally. A drew regularly Rs. 4,000 in the beginning of every month for six months ended 30th September, 2023. Calculate interest on drawings @ 5% p.a. for a period of six months ended 30th September, 2023.

Answer:

Calculation of interest on drawings 
Interest is chargeable on drawings is 5 % p.a
Interest on A’s drawings = Rs. 4,000 × 6 × 5/100 × 3.5/12
Interest on A’s drawings = Rs. 350

About Solution:
When a partner withdrawn an equal amount at the beginning of every month for the first six Months then interest on drawings is to be calculated for 3.5 months.

Things to Remember:
When a partner withdraws cash from the firm for domestic use, the withdrawal of cash is termed as drawings. If the partnership deed has a provision of charging interest on drawings, the firm may charge interest on drawings from partners. Interest on drawing is a gain for the firm. It is calculated at the agreed rate. The amount of interest on drawings will be credited to Profit and Loss Appropriation Account and will be debited to partner’s capital account/current account (Individually)

Important Note:
The journal entry will be:
Partner’s Capital/Current A/c Dr. 
       To Interest on Drawings A/c 
(Charging interest on drawings to Partner’s Capital account)

Question 42: A and B are partners sharing profits equally. A drew regularly Rs. 4,000 at the end of every month for six months ended 30th September, 2023. Calculate interest on drawings @ 5% p.a. for a period of six months ended 30th September, 2023.

calculation of interest on drawings

Interest is chargeable on drawings is 5 % p.a

About Solution:
When a partner withdrawn an equal amount at the end of every month for the first six Months then interest on drawings is to be calculated for 2.5 months.

Things to Remember:
If the money is withdrawn by the partners in the beginning of each quarter, the interest is calculated on total money withdrawn during the year for an average period of seven and half months. 

Important Note:
When the amounts are withdrawn at the end of each quarter the amount of interest is calculated on total drawings for a period of four and a half months.

Question 43: B and C are partners sharing profits equally. C regularly withdrew ₹ 5,000 per month in the beginning of the month for six months ended 30th September 2023. Calculate interest on drawings @ 12% p.a. for the year ended 31st March 2024.

Answer:

Question 44: Calculate interest on drawings of Sanjay @ 10% p.a. for the year ended 31st March, 2024, in each of the following alternative cases:
Case 1.  If he withdrew Rs. 7,500 in the beginning of each quarter.
Case 2.  If he withdrew Rs. 7,500 at the end of each quarter.
Case 3.  If he withdrew Rs. 7,500 during the middle of each quarter.

Answer:

Question 45: The capital accounts of Tisha and Divya showed credit balances of ₹ 10,00,000 and ₹ 7,50,000 respectively after taking into account drawings and net profit of ₹ 5,00,000. The drawings of the partners during the year ended 31st March, 2024 were: 
(i) Tisha withdrew ₹ 25,000 at the end of each quarter
(ii) Divya’s drawings were:

Calculate interest on partner’s Capitals @ 10% p.a. and interest on partner’s drawings @ 6% p.a. for the year ended 31st March 2024.

Answer:

Interest on Divya’s Drawings = Rs. 1,562.5 or Rs. 1,563 (round off)

Calculation of Interest on Tisha’s Capital:-
Opening Capital = Closing Capital + Drawings – Profit
Opening Capital = Rs. 10,00,000 + Rs. 1,00,000 – Rs. 2,50,000
Opening Capital = Rs. 8,50,000 
Tishs’s Interest on Capital = Rs. 8,50,000 × 10% 
Tishs’s Interest on Capital = Rs. 85,000

Calculation of Interest on Divya’s Capital :-
Opening Capital = Closing Capital + Drawings – Profit
Opening Capital = R. 75,000 + Rs. 50,000 – Rs. 2,50,000
Opening Capital = Rs. 5,50,000 
Tishs’s Interest on Capital = 8,50,000 × 10% 
Tishs’s Interest on Capital = 85,000

Question 46: A, B, and C are partners. During the year ended 31st March 2023, each of the partners withdrew ₹ 10,000 regularly. A withdrew in the beginning of the first 6 months of the year, B withdrew in the middle of the month for the first 6 months of the year and C withdrew at the end of the month for the first 6 months. Calculate interest on drawings @ 6% p.a. for the year ended 31st March 2023.

Answer:

Question 47: Calculate the amount of Manan’s monthly drawings for the year ended 31st March, 2024, in the following alternatives cases when Partnership Deed allows interest on drawings @ 10% p.a.:
(i) If interest on drawings is ₹ 1,950 and he withdrew a fixed amount in the beginning of each month.
(ii) If interest on drawings is ₹ 2,400 and he withdrew a fixed amount in the middle of each month.
(iii) If interest on drawings is ₹ 2,750 and he withdrew a fixed amount at the end of each month.

Answer:

Question 48: Calculate the amount of Shiv’s quarterly drawings for the year ended 31st March 2024, in the following alternative cases when Partnership Deed allows interest on drawings @ 12% p.a.:
(i) If interest on drawings is ₹ 1,500 and he withdrew a fixed amount in the beginning of each quarter.
(ii) If interest on drawings is ₹ 1,200 and he withdrew a fixed amount in the middle of each quarter.
(iii) If interest on drawings is ₹ 900 and he withdrew a fixed amount at the end of each quarter.

Answer:

Question 49: Piyush, Harmesh, and Atul are partners. Each partner regularly withdrew ₹ 20,000 per month is given below.
a) Piyush withdrew in the beginning of the month;
b) Harmesh withdrew in the middle of the month; and
c) Atul withdrew at the end of the month.
Interest on drawings charged for the year ended 31st March 2023 was ₹ 15,600, ₹ 14,400, and ₹ 13,200 respectively.
Determine the rate of interest charged on drawings.

Answer:

Question 50: Calculate the Rate of interest on Drawings of Mohan in the following cases:
a) If he withdrew ₹ 6,000 in the beginning of each quarter for the year ended 31st March 2023 and interest on drawings is ₹ 1,500.
b) If he withdrew ₹ 6,000 at the end of each quarter for the year ended 31st March 2023 and interest on drawings is ₹ 900.
c) If he withdrew ₹ 6,000 per quarter for the year ended 31st March 2023 and interest on drawings is ₹ 1,200.

Answer:

Question 51: Amit and Vijay started a partnership business on 1st April 2022. Capital invested by them were ₹ 2,00,000 and ₹ 1,50,000 respectively. The partnership deed provided as follows:
(a) Interest on Capital be allowed @ 10% p.a.
(b) Amit to get a salary of ₹ 2000 per month and Vijay ₹ 3000 per month.
(c) Profits are to be shared in the ratio of 3 : 2.
Net Profit for the year ended 31st March 2023 was ₹ 2,16,000. Interest charged on drawings was ₹ 2,200 for Amit and ₹ 2,500 for Vijay.
Prepare Profit and Loss Appropriation Account.

Answer:

Question 52: A and B are partners sharing profits and losses in the ratio of 3:1. On 1st April, 2023, their capitals were: Rs. 5,00,000 and B Rs. 3,00,000. During the year ended 31st March, 2024 they earned a net profit of Rs. 5,00,000. The terms of partnership are: 
(a) Interest on capital is to allowed @ 6% p.a. 
(b) A will get a commission @ 2% on net sales. 
(c) B will get a salary of Rs. 5,000 per month. 
(d) B will get commission of 5% on profits after deduction of all expenses including such commission. 
Partners' drawings for the year were: A Rs. 80,000 and B Rs. 60,000. Net Sales for the year was Rs. 30,00,000. After considering the above facts, you are required to prepare Profit and Loss Appropriation Account and Partners' Capital Accounts.

Answer:

About Solution:
In the absence of information, manager’s commission will be calculated on profit before any adjustment is made according to partnership deed i.e. before adjustment in respect of partner’s salary interest of capital etc.

Things to Remember: 
Manager’s commission is a charge against the profit and not an appropriation of profit, Hence is debited to profit & loss account and not profit and loss appropriation account.

Important Note:
If a partner has given loan to the firm he is entitled to receive interest loan at an agreed rate of interest However, if there is no agreement as to the rate of interest he is entitled to receive interest on loan 6% per annum.

Question 53: A, B and C were partners in a firm having capitals of Rs. 50,000; Rs. 50,000 and Rs. 1,00,000 respectively. Their Current Account balances were A: Rs. 10,000; B: Rs. 5,000 and C: Rs. 2,000 (Dr.). According to the Partnership Deed the partners were entitled to an interest on Capital @ 10% p.a. C being the working partner was also entitled to a salary of Rs. 12,000 p.a. The profits were to be capitals: 
(a) The first Rs. 20,000 in proportion to their capitals. 
(b) Next Rs. 30,000 in the ratio of 5 : 3 : 2. 
(c) Remaining profits to be shared equally. 
The firm earned net profit of Rs.1,72,000 before charging any of the above items. Prepare Profit and Loss Appropriation Account and pass necessary Journal entry for the appropriation of profits.

Answer:

About Solution:
1. Profit Distribution among partners will be as follows:
A:B:C = First  Rs. 20,000 in Capital Ratio of 1:1:2.
A:B:C = Second Rs. 30,000 in given profit Sharing Ratio of 5:3:2 .
A:B:C = Rest Rs. 1,40,000 – 50,000 = 90,000 in given ratio of 1:1:1 
2. Interest on Capital has been calculated on opening capitals. 
3. Current account balances are not required for solving problems.

Things to Remember: 
Interest on partner’s loan is a charge against the profit and hence, such interest is allowed whether there are profits or not.

Important Note: 
It is treated as charge against the profits and hence, interest on partner’s loan is debited profit & loss A/c and not to profit & loss appropriation A/c.

Question 54: Amit, Binita and Charu are three partners. On 1st April, 2024, their Capitals stood as: Amit Rs. 1,00,000, Binita Rs. 2,00,000 and Charu Rs. 3,00,000. It was decided that: 
(a) they would receive interest on Capital @ 5% p.a.,
(b) Amit would get a salary ofRs10,000 per month,
(c) Binita would receive commission @ 5% of net profit after deduction of commission, and
(d) 10% of the net profit would be transferred to the General Reserve. Before the above items were taken into account, the profit for the year ended 31st March, 2024 was Rs. 5,00,000. Prepare Profit and Loss Appropriation Account and the Capital Accounts of the partners.

Answer:

About Solution:
Each member of the company serves as both a principal and an agent. An agent because he has the power to obligate the other partners by his actions, and a principle because he has the power to be obligated by the other partners' actions

Things to Remember:
A partnership business does not exist independently of its partners. It denotes that any contracts made with the company will be enforceable against each partner both individually and collectively.

Important Note:
A partnership is the outcome of an agreement between two or more people who have agreed to split a business's earnings. It is clear that they have all agreed to some rules and regulations.

Question 55: Yadu, Vidu, and Radhu were partners in a firm sharing profits in the ratio of 4 : 3 : 3. Their fixed capitals on 1st April 2018 were ₹ 9,00,000, ₹ 5,00,000 and ₹ 4,00,000 respectively. On 1st November 2018, Yadu gave a loan of ₹ 80,000 to the firm, as per the partnership agreement.
(i) The partners were entitled to an interest on capital @ 6% p.a.
(ii) Interest on partner’s drawings was to be charged @ 8% p.a.
The firm earned a profit of ₹ 2,53,000 (after interest on Yadu’s Loan) during the year 2018-19. Partner’s drawings for the year amounted to:
Yadu – ₹ 80,000, Vidu – ₹ 70,000 and Radhu – ₹ 50,000. Prepare profit and loss Appropriation account for the year ending 31st March, 2024

Answer:

Question 56: Sajal and Kajal are partners sharing profits and losses in the ratio of 2 : 1. On 1st April, 2023 their Capitals were: Sajal–Rs. 5,00,000 and Kajal–Rs. 4,00,000.
Prepare Profit and Loss Appropriation Account and the Partners' Capital Accounts for the year ended 31st March, 2024 from the following information:
(a) Interest on Capital is to be allowed @ 5% p.a.
(b) Interest on the loan advanced by Kajal for the whole year, the amount of loan being Rs. 30,000.
(c) Interest on partners' drawings @ 6% p.a. Drawings: Sajal Rs. 10,000 and Kajal Rs. 8,000.
(d) 10% of the divisible profit is to be transferred to General Reserve.
Profit, before giving effect to the above, for the year ended 31st March, 2024 Rs. 7,02,600.

Answer:

Question 57: Ali the Bahadur are partners in a firm sharing profits and losses as Ali 70% and Bahadur 30%. Their respective capitals as at 1st April, 2023 stand as Ali Rs. 2,50,000 and Bahadur Rs. 2,00,000. The partners are allowed interest on capitals @ 5% p.a. Drawings of the partners during the year ended 31st March, 2024 amounted to Rs. 35,000 and Rs. 25,000 respectively. 
Profit for the year, before charging interest on capital and annual salary of Bahadur @ Rs. 30,000, amounted to Rs. 4,00,000, 10% of divisible profit is to be transferred to Reserve. 
Prepare Partners’ Current Accounts and Capital Accounts recording the above transactions.

Answer:

About Solution:
A partnership must be formed by a minimum of two people who are all legally capable of entering into contracts. Except for the following, all people are permitted to engage into partnership agreements in accordance with the Indian Contract Act of 1872.

Things to Remember:
The maximum number of partners is not spelled out in the Partnership Act. Nevertheless, the Companies Act of 2013 (section 464) gives the federal government the authority to impose a cap on the number of partners in a business at 100.

Question 58: Kabir, Zoravar, and Parul are partners sharing profits in the ratio of 5 : 3 : 2. Their capitals as on 1st April 2022 were: Kabir – ₹ 5,20,000, Zoravar – ₹ 3,20,000 and Parul – ₹ 2,00,000.
The Partnership Deed provided as follows:
(i) Kabir and Zoravar each will get a salary of ₹ 24,000 p.a.
(ii) Parul will get a commission of 2% of Net Sales
(iii) Interest on Capital is to be allowed @ 5% p.a.
(iv) Interest on Drawings is to be charged @ 5% p.a.
(v) 10% of the Divisible Profit is to be transferred to General Reserve.
Net Sales for the year ended 31st March 2023 were ₹ 50,00,000. Drawings by each of the partners during the year were ₹ 60,000. Net Profit for the year was ₹ 1,55,500.
Prepare Profit and Loss Appropriation Account for the year ended 31st March 2023.

Answer:

Available profit for distribution:-
Available Profit = Net Profit + Interest on Drawings
Available Profit = 1,55,500 + 4,500
Available Profit = 1,60,000

Profit Distributed in 5:4:11
Kabir’s Profit Share = 1,60,000 × 5/20 
Kabir’s Profit Share = Rs. 40,000

Zoraver’s Profit Share = 1,60,000 × 4/20 
Zoraver’s Profit Share = Rs. 32,000

Parul’s Profit Share = 1,60,000 × 11/20 
Parul’s Profit Share = Rs. 88,000

Working note:

1. Calculation of General Reserve:
After deducting Interest on Capital – Salary – commission 
Rs. 4,59,500 (Net Profit)  – Rs. 42,000 (Interest on Capital) – Rs. 1,50,000 (Salary) – Rs. 17,500 (Commission)
= Rs. 2,50,000  × 20/(100 )
= Rs. 50,000 

About Solution: 
Profit and Loss appropriation account is only a little Account.It displays how the partners allocated the net profit and loss for the accounting period.

Things to Remember:
The Partnership Deed and/or the Indian Partnership Act of 1932 are both given effect when entries are made in this account.    

Important Note:
A few things that relate to partners are charged against profits rather than being included in the profit and loss appropriation account.

Question 60: Aditi, Bobby and Krish were partners in a firm sharing profits and losses in the ratio of 5:3:2. Their capitals were ₹ 5,00,000, ₹ 4,00,000 and ₹ 2,00,000 respectively. The partnership deed provided for the following:
(a) Interest on capital @ 10% per annum.
(b) Interest on drawings @ 6% per annum.
(c) Interest on partner’s loan to the firm @ 9% per annum.
During the year, Aditi had withdrawn ₹ 60,000 and Bobby ₹ 50,000. On 1st September 2021, Krish had given a loan of ₹ 40,000 to the firm.
Pass necessary Journal entries in the books of the firm for the following transactions for the year ended 31st March, 2022:
(i) Allowing interest on Bobby’s capital.
(ii) Charging interest on Aditi’s drawings.
(iii) Providing interest on Krish’s Loan to the firm.
Also pass transfer entries in the Profit & Loss Account/Profit & Loss Appropriation Account, as the case may be.

Answer:

Question 61: Reya, Mona and Nisha shared profit in the ratio of 3:2:1. The profit for the last three years were Rs. 1,40,000; Rs. 84,000; and Rs. 1,06,000 respectively. These profit were by mistake shared equally. It is now decided to correct the error.
Give the necessary rectification Journal entry.

Answer:

About Solution:
Any items that raise capital account balances are placed on the credit side. And the goods that diminish the capital account balances are recorded on the debit side.

Things to Remember:
If a partner contributes anything in kind (asset), the credit side of the capital account will be credited with the name and value of the item. For example, if a partner presents a Machine worth Rs. 50,000 as Capital, the Capital account will be credited with the following information: By Machinery A/C in the particulars column and Rs. 50,000 in the amount column.

Important Note:
In Exam, you can compute interest on capital using whatever technique you like. Capital interest is always computed on the opening capital. If you are provided Closing Capital, you must first compute Starting Capital.

Question 62: Azad and Benny are equal partners. Their capitals are Rs. 40,000 and Rs. 80,000 respectively. After the accounts for the year have been prepared, it is discovered that interest @ 5% p.a. as provided in the partnership agreement has not been credited to the Capital Accounts before distribution of profits. It is decided t make an adjustment entry in the beginning of the next year. Record the necessary journal entry.

Answer:

About Solution: 
A partnership agreement specifies who the profit and losses of the firm will be shared by the partner.

Things to Remember:
Since the partners are the agents as well as principal of the firm such business of the partnership firm can be carried on by all or any of the partners acting for all.

Important Note:
A LLP is a corporate business vehicles that enable professional expertise and entrepreneurial initiative to combine an operate in flexible innovative and efficient manner providing benefits of limited liability while allowing its member the flexibility for organisation there internal structure as the partnership.

About Solution: 
Sometime after the accounts of the partnership firm have been closed after the financial year, it is discovered that there have been some errors or omissions in the accounts. 

Things to Remember:
Usually the following types of errors and omissions are discovered:
1. When Interest on capitals or drawings may have been omitted.
2. When profit and losses have been distributed among the partners in a wrong proportion.
3. When profit sharing ratio has been altered with effect from some past date.
4. When salary or commission payable to a person has been omitted.

Important Note:
These errors or omission may be rectified in two ways:
1. By passing a single adjustment entry with the net effect of the error and omission.
2. By passing separate adjustment entries for each error and omission.

.

About Solution:
In partnership firm separate capital account are maintain for each partners as each of the partners is the owner and separate transaction with the firm. These partners’ capital account can be maintained by following any of the two methods.
1. Fixed Capital Account
2. Fluctuating Capital Account

Things to Remember:
In this method the capital amount invested by each of the partners in the firm remain fixed or unaltered unless a partner introduces addition capital or withdraw out of his or her capital. Such fixed capital is recorded in the capital account and for recording all transaction other than transaction related to capital such as drawings, interest on capital ,interest on drawings , salary , commission , shares of profit /loss etc. current account are maintained in addition to the capital account.

Important Note:
Fixed Capital method, only one account is maintained which is capital account. All the transaction related to the addition or withdrawal of capital, salary, commission , interest on capital , interest on drawings, shared of profit and losses etc. are recoded  this capital account only. This method is follow for maintaining capital account and therefore .in the absence of any instruction, these methods should be followed for maintaining the partner’s capital account.

Question 65: Profits earned by a partnership firm for the year ended 31st March, 2022 were distributed equally between the partners – Pankaj and Anu – without allowing interest on capital. Interest due on capital was Pankaj–Rs. 3,000 and Anu–Rs. 1,000.

Answer:

About Solution:
To form a partnership there must be at least 2 partner who are competent to contract and who are not minor person of unsound mind and disqualified by law the maximum number of the partner in the firm cannot exceed 50 vide rule 10 of the companies rules 2014 as prescribed by the central government.

Things to Remember:
It is a legal document signed by all partner a written agreement containing the term and condition of partnership and because of which the partnership comes into existence is knows as partnership deed.

Important Note:
A partnership is formed to do a lawful business which includes trade vocation and profession. Any type of charitable institution running as a not for profit organization will not be consider as a business.

Question 66: Ram, Mohan, and Sohan were partners sharing profits in the ratio of 2 : 1 : 1. Ram withdrew ₹ 3,000 every month and Mohan withdrew ₹4,000 every month. Interest on drawings @ 6% p.a. was charged, whereas the partnership deed was silent about interest on drawings. 
Showings, your working clearly, pass the necessary adjustment entry to rectify the error.

Answer:

Question 67: Simrat and Bir are partners in a firm sharing profits and losses in the ratio of 3:2. On 31st March, 2024 after closing the books of account, their Capital Accounts stood at Rs. 4,80,000 and Rs. 6,00,000 respectively. On 1st May, 2023, Simrat introduced an additional capital of Rs. 1,20,000 and Bir withdrew Rs. 60,000 form his capital. On 1st October, 2023, Simart withdrew Rs. 2,40,000 from his capital and Bir introduced Rs. 3,00,000 . Interest on capital is allowed at 6% p.a. Subsequently, it was discovered that interest on capital @ 6% p.a. had been omitted. The profits for the year ended 31st March, 2024 amounted to Rs. 2,40,000 and the partners' drawings had been: Simrat–Rs. 1,20,000 and Bir–Rs. 60,000. 
Compute the interest on capital if the capitals are (a) Fixed, and (b) Fluctuating.

Answer:

(A)  Computation of interest on capital if capitals are fixed

Profit and Loss Appropriation Account and Partner’s Capital Account

About Solution:
Interest on capital will be allowed even if firm incurs loss. It means interest on capital is a charge against profit. As such it would be debited to profit and loss and not to profit and loss appropriation account.

Important Note: 
When the rate of interest is given without the word ‘per annum’ interest will be charged without considering time or date of drawing. In other words, interest will be charged for 12 months.  

Question 69: A, B, and C were partners. Their fixed Capitals were ₹ 60,000, ₹ 40,000, and ₹ 20,000 respectively. Their profit-sharing ratio was 2 : 2 : 1. According to the Partnership Deed, they were entitled on capital @ 5% p.a. In addition, B was also entitled to draw a salary of ₹ 1,500 per month. C was entitled to a commission of 5% on the profits after charging the interest on capital, but before charging the salary payable to B. The net profits for the year, ₹ 80,000, were distributed in the ratio of their capitals without providing for any of the above adjustments. Showing your workings clearly, pass the necessary adjustment entry.

Answer:

Question 70: Pranav, Karan and Rahim were partners sharing profits in the ratio of 3 : 2 : 1. Their capitals were ₹ 5,00,00, ₹ 3,00,000, and ₹ 2,00,000 respectively as on 1st April, 2022. According to the partnership deed, they were entitled to an interest on capital at 10% p.a. For the year ended 31st March 2022, a profit of ₹ 78,000 was distributed among the partners without providing for interest on capital.
Pass the necessary adjusting entry and show the working clearly.

Answer:

Question 71: On 31st March 2023, after the closing of the accounts, Capital Accounts of P, Q, and R stood in the books of the firm at ₹ 40,000; ₹ 30,000, and ₹ 20,000 respectively. Subsequently, it was noticed that interest on capital @ 5% had been omitted. Profit for the year ended 31st March 2023 was ₹ 60,000 and the partner’s drawings had been P – ₹ 10,000, Q – ₹ 7,500, and R – ₹ 4,500. The profit-sharing ratio of P, Q, and R is 3 : 2 : 1.
Pass necessary adjusting entry.

Answer:

Working Note:-

Calculation of Interest on Capital:-
Opening Capital of P = Closing Capital + Drawings – Profit
Opening Capital of P = Rs. 40,000 + Rs. 10,000 – Rs. 30,000
Opening Capital of P = Rs. 20,000

Interest on Capital = Rs. 20,000 × 5%
Interest on Capital = Rs. 1,000

Opening Capital of Q = Closing Capital + Drawings – Profit
Opening Capital of Q = Rs. 30,000 + Rs. 7,500 – Rs. 20,000
Opening Capital of Q = Rs. 17,500

Interest on Capital = Rs. 17,500 × 5%
Interest on Capital = Rs. 875

Opening Capital of R = Closing Capital + Drawings – Profit
Opening Capital of R = Rs. 20,000 + Rs. 4,500 – Rs. 10,000
Opening Capital of R = Rs. 14,500

Interest on Capital = Rs. 14,500 × 5%
Interest on Capital = Rs. 725

About Solution: 
In order to compensate the partner for looking after the business the firm pays salary or commission to the partners such salary or commission can be allowed to the partners only if the partnership deed allow it to be paid.

Things to Remember:
Such amount paid to the partners is an appropriation of the profit and not a change against the profit therefore if can be paid only if the firm is makings profit during the year.

Important Note: 
Salary to partners is normally started as an amount whereas the profit consider can be either before commission or after commission.

Question 73: Mudit, Sudhir and Uday are partners in a firm sharing profit in the ratio of 3:1:1. Their fixed capital balances are Rs. 4,00,000, Rs. 1,60,000 and Rs. 1,20,000 respectively. Net profit for the year ended 31st March, 2023 distributed amongst the partners was Rs. 1,00,000, without taking into account the following adjustments:
(a) Interest on Capital @ 2.5% p.a.;
(b) Salary to Mudit Rs. 18,000 p.a. and commission to Uday Rs. 12,000.
(c) Mudit was allowed a commission of 6% of divisible profit after charging such commission.
Pass a rectifying Journal entry in the books of the firm. Show working clearly.

Answer:

About Solution:
Such minimum capital of an LLP is not specified and therefore the partners of the LLP decide how much capital will be contributed by each partner.

Things to Remember:
A minimum of 2 member are required to established an LLP who shall also be the designed partner and shall have director identification number(DIN) there is no limit on the maximum number of partners. 

Important Note:
Audit of an LLP is not compulsory except for the following: 
1) If the contribution of the LLP exceed Rs. 25 lakhs. 
2.) If the annual turnover of the LLP exceed Rs. 40 lakhs.

Question 74: Piya and Bina are partners in a firm sharing profits and losses in the ratio of 3 : 2. Following was the Balance Sheet of the firm as on 31st March, 2023:

The profits Rs. 30,000 for the year ended 31st March, 2023 were divided between the partners without allowing interest on capital @ 12% p.a. salary to Piya @Rs. 1,000 per month. During the year Piya withdrew Rs. 8,000 and Bina withdrew Rs. 4,000. Showing your working notes clearly, pass the necessary rectifying entry.

Question 75: Naveen, Qadir, and Rajesh were partners doing an electronic goods business in Uttarakhand. After the accounts of the partnership were drawn up and closed, it was discovered that interest on capital has been allowed to partners @ 6% p.a. for the years ending 31st March 2017 and 2018, although there is no provision for interest on capital in the Partnership Deed. On the other hand, Naveen and Qadir were entitled to a salary of ₹ 3,500 and ₹ 4,000 per quarter respectively, which has not been taken into consideration. Their fixed capitals were ₹ 4,00,000, ₹ 3,60,000 and ₹ 2,40,000 respectively. During the last two years, they had shared the profits and losses as follows:

Pass necessary adjusting entries for the above adjustments in the books of the firm on 1st April 2018. Show your workings clearly.

Answer:

Working Note:-
Calculation of Interest on Capital:-
Naveen’s Interest on Capital = Rs. 4,00,000 × 6% = Rs. 24,000
Qadir’s Interest on Capital = Rs. 3,60,000 × 6% = Rs. 21,600
Rajesh’s Interest on Capital = Rs. 2,40,000 × 6% = Rs. 14,400

Question 76: Mannu and shristhi are partners in a firm sharing profit in the ratio of 3 : 2. Following is the balance sheet of the firm as on 31st March 2024:

Profit for the year ended 31st March, 2024 was Rs. 50,000 which was divided in the agreed ratio, but interest @ 5% p.a. on capital and @ 6% p.a. on drawings was inadvertently enquired. Adjust interest on drawings on an average basis for 6 months. Give the adjustment entry.

Answer:

About Solution: 
According to section 32 a partner may retire from the firm either with the consent of the entire order partner or in accordance with an express agreement among the partners.

Things to Remember:
According to section 69 registration of the firm is optional and not compulsory section 35 unless otherwise agreed by the partner in the partnership deed a firm is dissolved on the death of a partner 

Important Note:
An LLP has a separate legal entity and therefore, LLP and its partners is district from each other.

Question 77: On 31st March 2018, the balances in the Capital Accounts of Abhir, Bobby and Vineet, after making adjustments for profits and drawings were ₹ 8,00,000, ₹ 6,00,000, and ₹ 4,00,000 respectively.
Subsequently, it was discovered that interest on capital and interest on drawings had been mitted. The partners were entitled to interest on capital @ 10% p.a. and were to be charged interest on drawings @ 6% p.a. The drawings during the year were: Abhir – ₹ 20,000 drawn at the end of each month, Bobby – ₹ 50,000 drawn at the beginning of every half year, and Vineet – ₹ 1,00,000 withdrawn on 31st October 2017. The net profit for the year ended 31st March 2018 was ₹ 1,50,000. The profit-sharing ratio was 2 : 2 : 1.
Pass necessary adjusting entries for the above adjustments in the books of the firm. Also, show your workings clearly.

Answer:

Working Note:-

Calculation of Interest on Abhir’s Capital:-
Opening Capital of Abhir = Closing Capital + Drawings – Profit 
Opening Capital of Abhir = Rs. 8,00,000 + Rs. 2,40,000 – Rs. 60,000
Opening Capital of Abhir = Rs. 9,80,000
Interest on Abhir’s Capital = Rs. 9,80,000 × 10%
Interest on Abhir’s Capital = Rs. 98,000

Calculation of Interest on Bobby’s Capital:-
Opening Capital of Bobby = Closing Capital + Drawings – Profit 
Opening Capital of Bobby = Rs. 6,00,000 + Rs. 1,00,000 – Rs. 60,000
Opening Capital of Bobby = Rs. 6,40,000
Interest on Bobby’s Capital = Rs. 6,40,000 × 10%
Interest on Bobby’s Capital = Rs. 64,000

Calculation of Interest on Vineet’s Capital:-
Opening Capital of Vineet = Closing Capital + Drawings – Profit 
Opening Capital of Vineet = Rs. 4,00,000 + Rs. 1,00,000 – Rs. 30,000
Opening Capital of Vineet = Rs. 4,70,000
Interest on Bobby’s Vineet = Rs. 4,70,000 × 10%
Interest on Bobby’s Vineet = Rs. 47,000

Calculation of Interest on Drawings:- 
Interest on Abhir’s Drawings = (Rs. 20,000 × 12) × 6% × 5.5/12
Interest on Abhir’s Drawings = Rs. 6,600
Interest on Bobby’s Drawings = (Rs. 20,000 × 12) × 6% × 9/12
Interest on Bobby’s Drawings = Rs. 4,500
Interest on Vineet’s Drawings = (Rs. 20,000 × 12) × 6% × 5/12
Interest on Vineet’s Drawings = Rs. 2,500

About Solution: 
If the partnership deed provides for charging interest on such amount withdraw by the partners against profit such interest is termed as interest on drawings.

Things to Remember:
It is important to note that such interest is not charged on the drawings that are made against capital.

Important Note: 
Such interest charged on drawings is credited to the profit and loss appropriation account and debited to partner’s capital account or partners current accounts.

Question 79: Capitals of Kajal, Neerav, and Alisha as on 31st March 2023 were ₹ 90,000, ₹ 3,30,000, and ₹ 6,60,000 respectively. Profit of ₹ 1,80,000 for the year ended 31st March 2023 was distributed in the ratio of 4:1:1 after allowing interest on capital @ 10% p.a. During the year, each partner withdrew ₹ 3,60,000. The Partnership Deed was silent as to profit sharing ratio bu provided for interest on capital @ 12% p.a.
Pass the necessary adjustment entry showing the working clearly.

Answer:

Working Capital:-

Calculation of Interest on Capital:-
Interest on Kajal’s Capital = Rs. 3,00,000 × 12% = Rs. 36,000
Interest on Neerav’s Capital = Rs. 6,00,000 × 12% = Rs. 72,000
Interest on Alisha’s Capital = Rs. 3,00,000 × 12% = Rs. 1,08,000

Question 80: Mohit and Sobhit are partners sharing profits in the ratio of 3:2. Rohit was admitted for 1/6th share of profit with a minimum guaranteed profit of ₹ 10,000. At the close of the first financial year, the firm earned a profit of ₹ 54,000. Find the share of profit which Mohit, Sobhit, and Rohit will get.

Answer:

Rohit’s Share in Profit = Rs. 54,000 × 1/6
Rohit’s Share in Profit = Rs. 9,000

Minimum Guarantee of Mohit in Profit = Rs. 10,000
Remaining Profit after Mohit’s share (54,000 – 10,000) = Rs. 44,000
It would be distributed between Mohit and Sobhit in their Profit Sharing Ratio in 3:2.

Mohit’s Share in Profit = Rs. 44,000 × 3/5
Mohit’s Share in Profit = Rs. 26,400

Sobhit’s Share in Profit = Rs. 44,000 × 2/5
Sobhit’s Share in Profit = Rs. 17,600

Rohit’s Share in Profit (Minimum Guarantee) = Rs. 10,000

Question 81: A, B and C were in partnership sharing profits and losses in the ratio of 4:2:1 respectively. It was provided that C's share in profit for a year would not be less then Rs. 75,000. The profit for the year ended 31st March, 2024 amounted to Rs. 3,15,000. You are required to show the appropriation among the partners. The profit and Loss Appropriation Account is not required.

Answer:

Working Note:
Here the initial distribution of profit among 3,000 distributed or taken out of A : B in 4 : 2 or 2:1 ratio in the absence of any information in the question . No profit   and loss account is required. So we can appropriate the profit as shown below. 
A = 18,000 - 2,000 = 16,000
B = 9,000 - 1,000 = 8,000
C = 4,500 + 3,000 = 7,500

About Solution:
Such terms and conditions, however, may be expressed orally. Yet, it is regarded as good practice if all terms and conditions agreed upon by the partners are set down in writing

Things to Remember:
A partnership deed is a written document that includes all of the terms and conditions that have been agreed upon as well as the pertinent business information.

Important Note:
It is not necessary for partners to have a formal agreement, nevertheless. Nonetheless, a written contract known as a partnership deed is a legal document and may be used to resolve disagreements between partners if they occur in the future.

Question 82: Asha, Disha and Raghav were partners in a firm sharing profits in the ratio of 2 : 3 : 1. According to the partnership agreement, Raghav was guaranteed an amount of ₹ 40,000 as his share of profits. The net profit for the year ended 31st March, 2022 amounted to ₹ 1,20,000. Prepare Profit & Loss Appropriation Account of the firm for the year ended 31st March, 2024.

Answer:

Question 83: X, Y and Z entered into partnership on 1st October, 2023 to share profits and losses in the ratio of 4:3:3. X, personally guaranteed that Z's share of profit after charging interest on capital @ 10% p.a. would not be less then Rs. 80,000 in any year. The capital contributions were: X–Rs 3,00,000, Y–Rs 2,00,000 and Z–Rs 1,50,000.
The profit for the year ended 31st March, 2024 amounted to Rs. 1,60,000. Prepare Profit and Loss Appropriation Account.

Answer:

Working Note:-
1. The net profit has been distributed as follows:
X’s share of profit = Rs. 1,27,000 × 4/10
X’s share of profit = Rs. 51,000 – Rs. 1,750
X’s share of profit = Rs. 49,250

Y’s share of profit = Rs. 1,27,500 × 3/10
Y’s share of profit = Rs. 38,250

Z’s share of profit = Rs. 1,27,500 × 3/10
Z’s share of profit = Rs. 38,250 + Rs. 1,750
Z’s share of profit = Rs. 40,000
(Rs. 80,000 × 6/12 for half year)

About Solution:
First 10,000 distributed in ratio 50% : 30% : 20 % Rest 6,000 distributed in ratio 1:1:1.

Things to Remember:
Under the method, interest on drawing is calculated separately on each amount of drawing;from the date of drawing till the close of accounting period interest on each amount of drawing is calculated with the help of the following formula:
Interest on drawings = Amount of drawings × (rate of interest / 100 × months / 12

Important Note:
Under this method, first of all the product are computed by multiplying the each set of drawing from its duration thereafter the different products are added and the interest is calculated on the total of product so arrived at for one month the advantage of this system is that separate calculation are not required each time following formula is used for the calculation of interest under this method:
Interest on drawing =Total of product × (rateof interest / 100 × 1 / 12

Question 84: A, B and C are partners sharing profits in the ratio of 5:4:1. C is given a guarantee that his minimum share of profit in any given year would be at least Rs. 50,000. Deficiency, if any, would be borne by A and B equally. Profit for the year ended 31st March, 2024 was Rs. 4,00,000.
Pass necessary Journal entries in the books of the firm.

Answer:

About Solution:
Always remember that interest paid on partner’s loan is a charge against profits and hence will be debited to profit and loss A/c even if the firm incurs a loss.

Things to Remember: 
If the firm does not incur loss during the year partners will be allowed and interest on capital nor any salary also there is no profit to be appropriated as such profit & loss appropriation account will not be prepared and the losses will be distributed through profit and loss account. 

Important Note: 
In case where appropriation such as interest on capital salary of partners etc. is more than available profit the profit will be distributed in ratio of appropriation.

Question 85: Atul, Bipul, and Charu are partners sharing profits equally. Bipul is guaranteed a minimum profit of ₹ 2,00,000 per annum. Salary is payable to Bipul of ₹ 10,000 per month. Net Profit for the year ended 31st March 2024 is ₹ 6,60,000.
Prepare profit and Loss Appropriation Account for the year.

Answer:

Question: Parul, Prerna, and Kaushal are partners sharing profits equally. Parul is guaranteed a minimum annual profit of ₹ 2,00,000. Kaushal is to get a commission @ 5% of Net Sales and the commission is determined at ₹ 50,000. Net Profit for the year ended 31st March 2023 is ₹ 2,50,000. Prepare Profit and Loss Appropriation Account for the year.

Answer 86:

Working Note:-
Distributable Profit = Net Profit – Partner’s Commission
Distributable Profit = Rs. 2,50,000 – Rs. 50,000
Distributable Profit = Rs. 2,00,000

Minimum Guarantee to Parul = Rs. 2,00,000
Remaining profit for other partners = Rs. Rs. 2,00,000 – Rs. 2,00,000 = Rs. 0

Question 87: Nimrat, Maira, and Kabir are partners sharing profits in the ratio of 2:2:1. Nimrat is guaranteed a minimum profit of ₹ 1,60,000 per annum. Net Profit for the year ended 31st March 2023 is ₹ 1,00,000. Prepare Profit and Loss Appropriation Account for the year.

Answer:

Working Note:-
Distributable Profit = Rs. 1,00,000
Distributable Profit = Rs. 1,00,000 – Rs. 1,60,000
Distributable Profit = Rs. 60,000

Remaining loss will born by Mira and Kabir in profit sharing ratio 2:1
Mira’s share in Loss = Rs. 60,000 × 2/3 = Rs. 40,000
Kabir’s share in Loss = Rs. 60,000 × 1/3 = Rs. 20,000

Question 88: Ashmit, Abbas, and Karman are partners sharing profits in the ratio of 3:2:1. Abbas is guaranteed a minimum profit of ₹ 1,50,000 per annum. The firm incurred a loss for the year ended 31st March 2024 of ₹ 30,000.
Prepare Profit and Loss Appropriation Account for the year.

Answer:

Working Note:-
Distributable Profit = Net Loss + Abbas Minimum guarantee of profit
Distributable Profit = Rs. 30,000 – Rs. 1,50,000
Distributable Profit = Rs. 1,80,000

Remaining loss will born by Mira and Kabir in profit sharing ratio 2:1
Ashmit’s share in Loss = Rs. 1,80,000 × 3/4 = Rs. 1,35,000
Karman’s share in Loss = Rs. 1,80,000 × 1/4 = Rs. 45,000

About Solution:
Interest on partner’s loan being a charge against profit is paid or credited to partner’s loan Account even if profit is less than the amount of interest on loan. The resulting loss is distributed among partners in the profit sharing ratio.

Things to Remember:
A minor cannot be admitted as a partner in the firm however, he is allowed to participate in the profit of the firm.

Important Notes:
Partnership is the result of an agreement it must come into existence by an agreement and not by and operation of on the country a Hindu undivided into family comes into existences by the operation of law and not by any agreement such an agreement can be either oral or in writing the agreement forms the basis of mutual rights and duties of partners.

Question 90: P and Q were partners in a firm sharing profits in the ratio of 5:3. On 1st April 2023 they admitted R as a new partner for 1/8th share in the profits with a guaranteed profit of ₹ 75,000. The new profit-sharing ratio between P and Q will remain the same but they agreed to bear any deficiency on account of the guarantee to R in the ratio of 3:2. The profit of the firm for the year ended 31st March 2024 was ₹ 4,00,000.
Prepare Profit and Loss Appropriation Account of P, Q, and R for the year ended 31st March 2024.

Answer:

Working Note:-

Guarantee given to R = Rs. 75,000
Deficiency in R’s Profit = Rs. 75,000 – Rs. 50,000
Deficiency in R’s Profit = Rs. 25,000

Deficiency in R’s Profit recovered by P and Q in 3:2
P will bear = 25,000 × 3/5 = Rs. 15,000
Q will bear = 25,000 × 2/5 = Rs. 10,000

Question 91: A and B are in partnership sharing profits and losses in the ratio of 3 : 2. They decided to admit C, their Manager, as a partner with effect from 1st April, 2023, for 1/4th share of profits. C, while a Manager, was in receipt of a salary of Rs. 27,000 p.a. and a commission of 10% of the net profits after charging such salary and commission.
In terms of the Partnership Deed, and excess amount, which C will be entitled to receive as a partner over the amount which would have been due to him if he continued to be the manager, will be borne by A. Profit for the year ended 31st March, 2024 amounted to Rs. 2,25,000.
 Prepare Profit and Loss Appropriation Account for the year ended 31st March, 2024.

Answer:

Points to Remember:
1.  Excess amount Payable to C will be personally borne by A.
2. This excess amount of 11,250 then added back to A and B in 3 : 2 ratio .
3.  This has been done as C is already taking 56,250 but not 45,000.
4.  The Net profit has been distributed as follows:
C’s share of profit = Rs. 2,25,000 × 1/4 = Rs. 56,250
A’s share of profit = Rs. 2,25,000 – Rs. 56,250 × 3/5 = Rs. 1,01,250
B’s share of profit = Rs. 2,25,000–Rs. 56,250 × 2/5 = Rs. 56,250

About Solution: 
Such minimum capital of an LLP is not specified and therefore the partners of the LLP decide how much capital will be contributed by each partner. 

Things to Remember:
A minimum of 2 member are required to established an LLP who shall also be the designed partner and shall have director identification number (DIN) there is no limit on the maximum number of partners. 

Important Note:
Audit of an LLP is not compulsory except for the following 1) if the contribution of the LLP exceed Rs. 25 lakhs or if the annual turnover of the LLP exceed Rs. 40 lakhs.

Question 92: Asgar, Chaman and Dholu are partners in a firm. Their Capital Accounts stood at Rs. 6,00,000; Rs. 5,00,000 and Rs. 4,00,000 respectively on 1st April, 2023. They shared Profits and Losses in the proportion of 4 : 2 : 3. Partners are entitled to interest on capital @ 8% per annum and salary to Chaman and Dholu @Rs. 7,000 per month and Rs. 10,000 per quarter respectively as per the provision of the Partnership Deed. Sholu's share of profit (excluding interest on capital but including salary) is guaranteed at a minimum of Rs. 1,10,000 p.a. Any deficiency arising on that account shall be met by Asgar. The profit for the year ended 31st March, 2023 amounted to Rs. 4,24,000. Prepare Profit and Loss Appropriation Account for the year ended 31st March, 2024.

Answer:

Points of Knowledge:

1. Calculation of Distribution of net profit between partners.
Total Profit = Rs. 4,24,000  – 1,20,000( int on capital ) – 1,24,000 (salary) 
Total Profit = Rs. 1,80,000

Profit / Loss Sharing Ratio = 4:2:3, Sum of Ratio = 4:2:3 = 9

Asgar’s share in profit is = Rs. 1,80,000 × 4/9
Asgar’s share in profit is = Rs. 80,000 – Rs. 10,000 
Asgar’s share in profit is = Rs. 70,000

Chaman’s share in profit is = 1,80,000 × 2/9
Chaman’s share in profit is = 40,000

Dholu’s share in profit is = Rs. 1,80,000 × 3/9
Dholu’s share in profit is = Rs. 60,000 + Rs. 10,000 
Dholu’s share in profit is = Rs. 70,000

About Solution:
In the absence of partnership deed profits and losses are to be shared equally irrespective of their capital contribution.

Things to Remember:
In the absence of partnership deed no interest on capital shall be allowed to be partners if there is a provision for the interest on capitals in the partnership deed it will be allowed only when there is a profit. 

Important Notes:
In the absence of partnership deed no interest to be charged on drawings.

Working Note:-

Divisible Profits = Profits before Adjustment – (Salary + Bhanu’s Commission)
Divisible Profits = 80,000 – (36,000 + 4,000)
Divisible Profits = Rs. 40,000

Alia’s Share of Profits = Rs. 40,000 × 3/8= Rs. 15,000
Short amount in Alia’s Profits = Total Profit – Profit received
Short amount in Alia’s Profits = Rs. 35,000 – 15,000 
Short amount in Alia’s Profits = Rs. 20,000

(Paid by Bhanu and Chand in equal ratio 1 : 1)
Profit paid by Bhanu for of Alia = Rs. 20,000 × 1/2 = Rs. 10,000
Profit paid by Chand for of Alia = Rs. 20,000 × 1/2 = Rs. 10,000

Alia’s Profit = Rs. 40,000 × 3/8
Alia’s Profit = Rs. 15,000 + Rs. 10,000 + Rs. 10,000 
Alia’s Profit = Rs. 35,000

Bhanu’s Profits = (40,000 × 3/8) – 10,000 
Bhanu’s Profits = Rs. 5,000

Chand’s Profits = (40,000 × 3/8) – 10,000
Chand’s Profits = Nil

About Solution:
Any items that raise capital account balances are placed on the credit side. And the goods that diminish the capital account balances are recorded on the debit side.

Things to Remember:
If a partner contributes anything in kind (asset), the credit side of the capital account will be credited with the name and value of the item. For example, if a partner presents a Machine worth Rs. 50,000 as Capital, the Capital account will be credited with the following information: By Machinery A/C in the particulars column and Rs. 50,000 in the amount column.

Important Note:
In Exam, you can compute interest on capital using whatever technique you like. Capital interest is always computed on the opening capital. If you are provided Closing Capital, you must first compute Starting Capital.

About Solution: 
In partnership firm separate capital account are maintain for each partners as each of the partners is the owner and separate transaction with the firm. These partners’ capital account can be maintained by following any of the two methods.
1. Fixed Capital Account
2. Fluctuating Capital Account

Things to Remember:
In this method the capital amount invested by each of the partners in the firm remain fixed or unaltered unless a partner introduces addition capital or withdraw out of his or her capital. Such fixed capital is recorded in the capital account and for recording all transaction other than transaction related to capital such as drawings, interest on capital ,interest on drawings , salary , commission , shares of profit /loss etc. current account are maintained in addition to the capital account.

Important Note:  
Fixed Capital method, only one account is maintained which is capital account. All the transaction related to the addition or withdrawal of capital, salary, commission , interest on capital , interest on drawings , shared of profit and losses etc. are recoded  this capital account only. This method is follow for maintaining capital account and therefore .in the absence of any instruction, these methods should be followed for maintaining the partner’s capital account.

Question 95: Ankur, Bhavna and Disha are partners in a firm. On 1st April, 2022, the balance in their Capital Accounts stood at Rs.14,00,000, Rs. 6,00,000 and Rs. 4,00,000 respectively. They shared profits in the proportion of 7:3:2 respectively. Partners are entitled to interest on capital @ 6% per annum and salary to Bhavna @Rs. 50,000 p.a. and a commission of Rs. 3,000 per month to Disha as per the provisions of the partnership Deed. Bhavna's share of profit (excluding interest on capital) is guaranteed at not less than Rs.1,70,000 p.a. Disha's share of profit (including interest on capital but excluding commission) is guaranteed at not less than Rs.1,50,000 p.a. Any deficiency arising on that account shall be met by Ankur. The profit of the firm for the year ended 31st March, 2024 amounted to Rs. 9,50,000. Prepare Profit and Loss Appropriation Account for the year ended 31st March, 2024.

Answer:

About Solution:
In fixed capital account, the closing balance of the capital account is same as that of opening balance except when additional capital is introduced or there is permanent withdrawal during the current accounting year. Items relating to capital account such as interest on capital, interest on drawings and share of profit etc., are recorded in capital account. But in this case a separate account is opened for each partner to record these items. This account is known as ‘current account’. A current account may show a debit or a credit balance. Format of the fixed capital account and the current account is as under

Things to Remember:
When capital account for each partner is so maintained that in addition to the capital amount other items related to capital account such as interest on capital, drawings, net profit or net loss etc. are written in this account, it is termed as fluctuating capital. In this case there is no need to maintain a separate account for recording of these adjustments.

Important Note:
Let us now study about calculation of interest on capital. As you know that, interest on capital is allowed when it is provided in the Partnership Deed. If it is so provided, the rate of interest will be as agreed upon by the partners. Interest is charged on the opening balance of the partner’s capital account. When additional capital is introduced and some capital is withdrawn permanently, the interest will be calculated on the amount of the capital used in the business during a particular period. Interest is treated as an expense as it is a charge on the profits of the firm.

Question 96: Three Chartered Accountants A, B and C form a partnership, profits being shared in the ratio of 3:2:1 subject to the following:
(a) C's share of profit guaranteed to be not less than Rs. 15,000 p.a.
(b) B gives a guarantee to the effect that gross fee earned by him for the firm shall be equal to his average gross fee of the proceeding five years when he was carrying on profession alone, which on an average works out at Rs. 25,000.
The profits for the first year of the partnership are Rs. 75,000. The gross fee earned by B for the firm is Rs. 16,000. You are required to show Profit and Loss Appropriation Account after giving effect to the above.

Answer:

Working Note:-
B has got profit = 27,000 – 9,000 
B has got profit = 18,600

About Solution:
When a partner withdrawn an equal amount at the beginning of every month for the first six Months then interest on drawings is to be calculated for 4.5 months.

Things to Remember:
A fixed amount may be withdrawn every month/ half yearly/ annually. The interest has to be calculated for the period for which the amount has been utilised for personal purposes by the partners. The calculation of amount of interest to be charged in different situations is shown as under.

Important Note:
A fixed amount is withdrawn by the partners, at equal time interval, say each month or each quarter. The calculation of total time period, in such situations will depend upon whether the money was withdrawn at the beginning of the month, middle of the month or at the end of the month.

Question 97. Xen, Sam, and Tim are partners in a firm. For the year ended 31st March 2024, the profit of the firm ₹ 12,00,000 was distributed equally among them, without giving effect to the following terms of the partnership deed:
i) Sam’s guarantee to the firm that the firm would earn a profit of at least ₹ 1,35,000. Any shortfall in these profits would be met by him.
ii) Profits to be shared in the ratio of 2:2:1.
You are required to pass the necessary Journal entries to rectify the error in accounting.

Answer:

Things to Remember:
The limited liability partnership (LLPs) in India came into existence with the enactment of limited liability partnership act 2008 which lay down the law for the formation and regulation of limited liability partnerships  
Important Notes:
1) A LLP is a body corporate formed and incorporated under this act 
2) It is a legal entity separate from that of its partners

Old Questions

Question: Following differences have arisen among P, Q and R. State who is correct in each case:
(a) P used Rs. 20,000 belonging to the firm and made a profit of Rs. 5,000. Q and R want the amount to be given to the firm?
(b) Q used Rs. 5,000 belonging to the firm and suffered a loss ofRs1000. He wants the firm to bear the loss?
(c) P and Q want to purchase goods from A Ltd., R does not agree?
(d) Q and R want to admit C as partner, P does not agree? 

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

(a) Q and R

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

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

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

(c) P and Q are correct.

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

(d)  P is correct.

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

 Points to Remember:- 
(A) Any profit earned by an agent by using the firm’s property is attributable to the firm. 
(B) Any loss earned by an agent of a partnership firmby using the firm’s property, agent or partner should be responsible for the loss. 
(C) A partner has a right to buy and sell goods without consulting the other partners. 
(D) As per partnership act a new partner could get admitted in the partnership firm only, when all the partners are agree to admit him.

Question: A, B and C are partners in a firm. They do not have a Partnership Deed. At the end of the first year of the commencement of the firm, they have faced the following problems :
(a) A wants that interest on capital should be allowed to the partners but B and C do not agree.
(b) B wants that the partners should be allowed to draw salary but A and C do not agree.
(c) C wants that the loan given by him to the firm should bear interest @ 10% p.a. but A and B do not agree.
(d) A and B having contributed larger amounts of capital, desire that the profits should be divided in the ratio of their capital contribution but C does not agree.
State how you will settle these disputes if the partners approach you for purpose. 

Point of Knowledge:-

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

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

Point of Knowledge:-
In the absence of Partnership deed Profit will be equally divided between partners.

Interest on partner’s loan to the firm

 

Question: X and Y are partners sharing profits and losses in the ratio of 2 : 3 with capitalsRs 2,00,000 and Rs 3,00,000 respectively. On 1st October, 2017, X and Y granted loans ofRs 80,000 andRs 40,000 respectively to the firm. Show distribution of profits/losses for the year ended 31st March, 2018 in each of the following alternative cases:
Case 1 : If the profits before interest for the year amounted toRs 21,000.
Case 2 : If the profits before interest for the year amounted toRs 3,000.
Case 3 : If the profits before interest for the year amounted toRs 5,000.
Case 4 : If the loss before interest for the year amounted toRs 1,400. 

Answer:

 

Point of Knowledge:

1. As per the provision of Indian Partnership Act, 1932, partner’s loan is repayable on dissolution before payment of capital to partners
2. In the absence of any agreement, partners are entitled to get interest @ 6% p.a. on loan advanced whereas they are not entitled to interest on capital.

 

Question: Bat and Ball are partners sharing the profits in the ratio of 2: 3 with capitals of Rs1,20,000 and Rs. 60,000 respectively. On 1st October, 2017, Bat and Ball granted loans of Rs. 2,40,000 and Rs. 1,20,000 respectively to the firm. Bat had allowed the firm to use his property for business for a monthly rent of Rs. 5,000. The loss for the year ended 31st March, 2018 before rent and interest amounted to Rs 9,000. Show distribution of profit/loss. 

Answer:

 

 

 

Profit and Loss Appropriation Account.............

 

Question: X and Y are partners sharing profits in the ratio of 3 : 2 with capitals of Rs. 80,000 and Rs. 60,000 respectively. Interest on capital is agreed @ 5% p.a. Y is to be allowed an annual salary of Rs6,000 which has not been withdrawn. Profit for the year ended 31st march, 2018 before interest on capital but after charging Y's salary amounted toRs24,000.
A provision of 5% of the profit is to be made in respect commission to the manager. Prepare an account showing the allocation profits. 

Answer:

 

 

Point of Knowledge:-

1. Manager’s commission is a charge against profit and it is not an appropriation out of profit. Hence a separate Profit and Loss Account is prepared to charge manager’s commission.   

Calculation of Manager’s Commission:-
Total Profit = 24,000 + 6,000 = Rs. 30,000
Commission = Rs. 30,000 × 5% = Rs.1500

 

Question: Prem and Manoj are partners in a firm sharing profits in the ratio of 3 : 2. The Partnership Deed provided that Prem was to be paid salary of Rs. 2,500 per month and Manoj was to get a commission of Rs. 10,000 per year. Interest on capital was to be allowed @ 5% p.a. and interest on drawings was to be charged @ 6% p.a. Interest on Prem's drawings was Rs. 1,250 and on Manoj's drawings wasRs.425. Interest on Capitals of the partners were Rs. 10,000 and Rs.7,500 respectively. The firm earned a profit of Rs. 90,575 for the year ended 31st March, 2018.
Prepare Profit and Loss Appropriation Account of the firm. 

Answer: