4.2.

APPROPRIATION OF PROFITS

INTRODUCTION
According to section 4 of the Partnership Act, 1932 a Partnership is “the relation between
persons who have agreed to share the profits of a business carried on by all or any one of them
acting for all.”
If we analyse the definition we find three basic element of a Partnership :
(1) It arises out of an agreement made by two or more persons;
(2) The agreement is made regarding sharing profits of a business;
(3) Such business is carried on by all or any one of them acting for all.
(a) Partnership is the result of an agreement. It does not arise from status.
(b) The agreement may be either verbal or in writing. There should be some terms and
conditions binding the Partnership.
(c) The existing law does not enforce that the terms of the Partnership must be in writ-
ing. If written, the agreement is known as Deed or Articles of Partnership.
(d) For the formation of a Partnership more then one person is requires. For a banking
business the maximum number of Partners is 10, in other businesses it is 20.
Partnership Deed
Mode of Appropriation : Among other details the deed contains the mode of appropriation of
profits (or losses) specially regarding interest on partners capitals, salary or commission, etc.
payable to partners and the profit-sharing ratio.
In the absence of deed the following guidelines should be followed :
1. Every Partner should share profits equally [ Section 13 (b)].
2. No interest is to be allowed on Partners’ capitals [ Section 13 (c)].
3. No interest should be charged on the drawings of the Partners.
4. No salary is to be allowed to any partner.
5. Interest on advances made by partners should be provided @ 6% per annum. [Section
13(d)].
6. Every partner should be to have equal share in the property of the Partnership as per
Section 14.
Some Important Considerations
Partners’ Capitals
(a) Where the Partners decide and the agreement provides, the Capitals Accounts of the Part-
ners remain unchanged over years. In that case the Capital Accounts show the original

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 PARTNERSHIP ACCOUNTING

amounts invested by the Partners as capitals unless some change (like change in capital
Ratio etc.) takes place. The Capitals are called Fixed Capitals.
Partners’ Current Accounts are opened and used for recording subsequent trans actions
between the Partner and the firm for salary/commission to Partners, Interest on Partners
Capitals, their drawings and interests on drawings, share of profit/loss and interest on
loans/advances given by Partners to the firm. Where Capitals are Fixed, Current Ac-
counts serve as the appendix.
(b) Where there is no agreement to keep Capitals fixed over years, untried regarding Part-
ners’ drawings, Salary/Commission/Interest on Capital and share profit/loss are recorded
through the Partners’ Capital Accounts. As a result, the Capitals undergo changes from
period to period and are called Fluctuating Capitals.
(c) If any Partner gives any amount as Loan or Advance to the firm separately, Partners Loan
Accounts are opened and maintained. Interest on Loan may be transferred to Loan Ac-
count or to Current Account (if any).
(d) A separate Drawings Account may be maintained to record withdrawals made by the
partners from the firm. On the closing date of a financial period, the balance of the Draw-
ings Account is transferred to Capital Account or to Current Account (if capitals are fixed).
One must remember also that,
(i) A Capital represents a liability. The balances of fixed capitals should always be credit
balances. The balances of Current Accounts may be credit balances or debit balances (Where
a partners’ drawings exceed his share of profits/interests etc).
(ii) The balances of Fluctuating capital may be credit or debit balances.
(iii) Capitals of partners may not be as per their profit sharing ratio.
(iv) A partner may contribute his capitals in cash and also in the form of any other asset in-
cluding goodwill. If he brings in any liability his Capital = Assets brought in – Liabilities
brought in = Net Assets brought in.
Guaranteed Partnership
In a Partnership, there may be special agreement by virtue of which a Partner may get the
guarantee of earning a minimum amount of profit.
This guarantee may be given by one partner in particular or by the firm. It is given generally to
encourage a junior partner or any sincere clerk of the business inducted to the benefits of
Partnership.
(a) Guarantee given by one Partner :
(i) The appropriation of profit should be made in the general course by applying the
existing profit sharing ratio.
(ii) The minimum amount guaranteed is to be decided.

170 Financial Accounting

 (iii) In case the guaranteed amount (ii) is more, the excess should be deducted from the
share of profit of the Partner given guarantee and calculated under (i) above.
The some amount should be added with the original share of profit of the Partner to whom the
guarantee has been given.
Illustration 1 :
X and Y are Partners sharing profit as 5:3. Z is the clerk of their business getting a salary of Rs.
500 p.m. and a commission of 5% of the net profit after deducting his salary and commission.
Now, X guarantee that Z be made a Partners with 1/10th share of profit and nothong clse. If the
annual profits is Rs. 1,32,000.
Steps :
(i) General Application of Profit Z’s Share as clerk : Rs.
Salary 500 * 12 6,000
Commission 5/105 of [1,32,000 – 6,000] 6,000
12,000
Balance of profit 1,20,000 Shared as : X =5/8 x 1,20,000 = Rs. 75,000 ;
Y = 3/8 x 1,20,000 = Rs. 45,000
(ii) Minimum guaranteed share of Z = 1/10th of Rs. 1,32,000 = Rs. 13,200
(ii) Shortfall = Rs. 13,200 – Rs. 12,000 = Rs. 1200 to be deducted from share and added with Z’s
share.
Final appropriation should be –
Rs.
X : Rs. 75,000 – Rs. 1200 73,800
Y: 45,000
Z : Rs. 12,000 + Rs. 1200 13,200
1,32,000
X’s Capital / Current A/c Dr. 1,200
To Z’s Capital / Current A/c 1,200
(Being Guaranteed share of profits provided
Guarantee given by firm :
(i) The share of profit of the guaranteed Partner is to be calculated according to the profit –
sharing ratio.
(ii) His minimum guaranteed amount is ascertained.
(iii) The higher of (i) and (ii) is given or credited to him.
(iv) The remaining profits are shared among the remaining Partners in their remaining ratio.
If the minimum guaranteed amount is more, the shortfall may be agreed to be in a ratio spe-
cially agreed upon.

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 PARTNERSHIP ACCOUNTING

Illustration 2 :
The profit sharing ratio among X, Y and Z three 3: 2: 1. Z is guaranteed as minimum profit of
Rs. 84,000 p.a. Annual profit are Rs. 4,20,000. Show the distribution.
Steps :
(i) Normal Distribution :
X : 3/6 of Rs. 4,20,000 2,10,000
Y : 2/6 of Rs. 4,20,000 1,40,000
Z : 1/6 of Rs. 4,20,000 70,000
(ii) Z’s guaranteed share is Rs. 84,000
(iii) Z’s share should be Rs. 84,000 (higher than Rs. 70,000)
(iv) X’s share [4,20,000 – 84,000] * 3/5 2,01,600
Y’s share [4,20,000 – 84,000] * 2/5 1,34,400
Z 84,000
4,20,000
X’s Capitable / Current A/c Dr. 8,400
Y’s Capitable / A/c Dr. 5600
To Z’s Capitable / Current A/c 14,000

Prior Period Adjustments

Errors committed in making appropriations of profit or in measuring revenues or profits in
any earlier year may be located by a partnership firm in a subsequent year. Such errors may
result from wrong valuation of inventory, incorrect distribution of profit, errors of misposting
or principles, etc. Their adjustments should be made with retrospective effect from the date of
initiation of errors. The adjustment is usually made with the help of adjustment entries made
through the partner’s Capital Accounts. A ‘Prior Period Adjustment Account’ or ‘Profit & Loss
Adjustment Account’ may be used to accommodate the adjustments and the balance of this
account may be transferred either to this Profit & Loss Account of the current year or to the
partners capital accounts.
Also there may be situations involving personal payment of salary by one partner to another,
omission to charge Interests, etc.
Illustrations 3 :
A,B and C are partners sharing profits and as 2 : 2 : 1. They get interest on their Capitals at 5%
p.a and are charged @ 6% p.a on their Drawings.
A and B are paid salary @ Rs 250 per month respectively. A would be paid 6% interest on his
loan. A paid Rs. 25,000 as loan on 1st July, 2007A, B and C withdrew Rs. 10,000 Rs. 8,000 and Rs.
6,000 respectively during 2007. C is entitled to a commission at 2% on total sales which amounted
to Rs. 3,46,000 during the year. On 1st January, 2007 the capital balances of A, B and C were Rs
1,00,000, Rs. 80,000 and Rs. 60,000 respectively. The net profit for the year is Rs. 1,00,000. Pre-
pare the Profit & Loss Appropriation Account and the Capital Accounts of partners.

172 Financial Accounting

Solution :
Profit & Loss Appropriation Account for the year ended 31.12.2007

Dr. Cr.

Particulars Amt Amt Particulars Amt Amt

Rs. Rs. Rs. Rs.

To Salary By Profit & Loss (Net Profit) 100,000

A [250 X 12] 3,000 “ Interest on Drawings :
B [150 X12] 1,800 4,800 @ 6% p.a. on an average
’’ Commission –C 6,920 of 6 months)
[2% of Rs. 3,46,000] A 300
’’ Interest on Capital : B 240
A 5,000 C 180 720
B 4,000
C 3,000 12,000
’’ Interest on Loan – A 750
’’ Share of profits :
A [2/5] 30,500
B [2/5] 30,500
C [1/5] 15,250 76,250
1,00,720 1,00,720

Capital Accounts
Dr. Cr.
Date Particulars A B C Date Particulars A B C
2007 Rs. Rs. Rs. 2007 Rs. Rs. Rs.
31.12 To Drawings 10,000 8,000 6,000 1.1 By balance b/d 1,00,000 80,000 60,000
“ “ Interest on 300 240 180 31.12 “ Salary 3,000 1,800 -
Drawings
“ “Balance c/d 1,28,200 1,08,060 78,990 “ “ Commission - - 6,920
“ Interest on
Capital 5,000 4,000 3,000
“ Share of Profit 30,500 30,500 15,250
1,38,500 1,16,300 85,170 1,38,500 1,16,300 85,170

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 PARTNERSHIP ACCOUNTING

Illustration 4 :
A and B are partners in a firm sharing profits and losses equally. On 1st April, 2007 the balance
of their Capital Accounts were : A Rs. 50,000 and B 40,000. On that date the balances of their
Current Accounts were : A Rs. 10,000 (credit) and B Rs. 3,000 (debit). Interest @ 5% p.a. is to be
allowed on the balance of Capital Accounts as on 1.4.2007 B is to get annual salary of Rs. 3,000
which had not been withdrawn. Drawings of A and B during the year were Rs. 1,000 and Rs.
2,000 respectively. The profit for the year ended 31st March, 2008 before charging interest on
capital but after charging B’s salary was Rs. 70,000. It is decided to transfer 10 % of divisible
profit to a Reserve Account.

Prepare Profit & Loss Appropriation Account for the year ended 31st March, 2008 and show
Capital and Current Accounts of the Partners for the year.

Solution :
Points to be noted :

(i) Profit before charging interest on Capital and Salary to B = Rs. 70,000 + Rs. 3,000
= Rs. 73,000

(ii) Transfer to Reserve = 10 % of Divisible Profits.

Solution :
Dr. Profit & Loss Appropriation Account for the year ended 31.03.2008 Cr.

Particulars Amount Amount Particulars Amount Amount

To Salary - B 3,000 By Profit & Loss (Net 73,000

“ Interest on Capitals : Profit before Charging
A 2,500 Salary and Interest)
B 2,000 4,500
“ Reserve
[10% of 65,500] 6,550
“ Share of Profit

A [1/2] 29,475
B [1/2] 29,475 58,950
73,000 73,000

174 Financial Accounting

 Capital Accounts
Dr. Cr.

Date Particulars A B Date Particulars A B

Rs. Rs. Rs. Rs.

31.3.08 To balance c/d 50,000 40,000 1.4.07 By Balance c/d 50,000 40,000

CurrentAccounts
Dr. Cr.

Date Particulars A B Date Particulars A B

Rs. Rs. Rs. Rs.

1.4.07 To balance b/d - 3,000 1.4.07 By Balance c/f 10,000 -

31.3.08 “ Drawings 1,000 2,000 31.3.08 “ Interest on Capital 2,500 2,000
31.3.08 “ Balance c/d 40,975 29,475 “ “ Salary - 3,000
x “ “ Share of Profit 29,475 29,475
41,975 34,475 41,975 34,475

Calculation of Interest on Drawings

1. If the date of drawings is mentioned, then calculate interest according to the time.
2. If the date of drawings is not mentioned, then calculate interest on the average of the time
period.
i.e. if the accounting period is for one-year, then interest for 6 months, and so on.
3. If unequal amounts are drawn at irregular intervals :
Illustration 5 : Accounting Period : January – December. Interest @ 12% p.a
Month Amount Drawn (Rs.) Period (In Months) Product (Amount × Period)
February 10,000 11 1,10,000
May 5,000 8 40,000
September 15,000 4 60,000
November 10,000 2 20,000
December 20,000 1 20,000
2,50,000
1
Interest = Product × Rate of Interest ×
12
2 1
= 2,50,000 × × = 2500
100 12
4. If equal amounts are drawn at a fixed date every month, throughout the accounting period :
(a) Drawn at the begining of every month
(b) Drawn at the middle of every month
(c) Drawn at the end of every month

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 PARTNERSHIP ACCOUNTING

Interest = Amount Drawn p.m × Rate of Interest × Time

Again, the Accouning Preiod may be for 12 months; 6 months; 3 months or etc. “How to
calculate the time?”
If the Accounting Period is for 12 months : (January – December)

Begining of the month Middle of the month End of the month

One-Year 6-months 3-months One-year 6-months 3-months One-Year 6-months 3-months
January 12 6 3 11.5 5.5 2.5 11 5 2
February 11 5 2 10.5 4.5 1.5 10 4 1
March 10 4 1 9.5 3.5 0.5 9 3 0
April 9 3 6 8.5 2.5 4.5 8 2 3
May 8 2 7.5 1.5 7 1
June 7 1 6.5 0.5 6 0
July 6 21 5.5 18 5 15
August 5 4.5 4
September 4 3.5 3
October 3 2.5 2
November 2 1.5 1
December 1 0.5 0
78 72 66
Time Period :
Accounting Period At the Begining At the Middle At the End
12 months 78/12 72/12 66/12
6 months 21/12 18/12 15/12
3 months 6/12 4.5/12 3/12
Note : It is a general tendency to learn the time period of 6.5, 6 & 5.5, irrespective of
understanding the rationale behind on such.
Refer to he 1st Row (where the amount is drawn at the begining of every month and
throughout the year), we find 78/12 = 6.5, 72/12 = 6 & 66/12 = 5.5.
The rationale is Rate of interest being mentioned as per annum. But, if the rate of interest is
mentioned per month basis, then interest shall be calculated by considering the time period for
78 months, 72 months & so on.
Illustration 6 :
Amount Drawn p.m. Rs. 1000. Rate of Interest @ 12% p.a.
If drawn at the begining of every month.
A/c Period Interest
12 78
12 months = 1000 × × = 780
100 12
12 72
6 months = 1000 × × = 720
100 12
12 66
3 months = 1000 × × = 660
100 12

176 Financial Accounting

 If drawn at the middle of every month.
A/c Period Interest
12 21
12 months = 1000 × × = 210
100 12
12 18
6 months = 1000 × × = 180
100 12
12 15
3 months = 1000 × × = 150
100 12
If drawn at the end of every month.
A/c Period Interest
12 6
12 months = 1000 × × = 60
100 12
12 4.5
6 months = 1000 × × = 45
100 12
12 3
3 months = 1000 × × = 30
100 12

Illustration 7 :

Rani, Rini and Rina are three partners in a firm. According to partnership deed, the partners
are entitled to draw Rs. 800 per month. On 1st day of every month Rani, Rini and Rina drew Rs.
700 Rs. 600 and Rs. 500 respectively. Profit during the year 2008 was Rs. 85,500 out of which Rs
30,000 was transferred to General Reserve. Rini and Rina are entitled to received salary of Rs.
3,000 and Rs. 4,500 p.a. respectively and Rani is entilled to received commission at 10 % of net
distributable profit after charging such commission. On 1st January, 2008 the balance of their
Capital Accounts were Rs. 50,000 Rs. 40,000 and Rs. 35,000 respectively. Interest on Capital
provided at 8 % p.a.

You are required to show Profit & Loss Appropriation Account for the year ended 31st Decem-
ber, 2008 and Capital Accounts of Partners in the book of the firm.

Points to be noted :

1. A partner was allowed to draw Rs. 800 per deed in this case, none of the Partners draw
more than that.
2. Interest on Drawings should be calculated as 1st month’s drawings for 12 months, for
second month’s drawings for 11 months and so on.
Alternatively, 6.5 month interest is to be calculated on total drawings of each partners. (See

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 PARTNERSHIP ACCOUNTING

theoretical discussion regarding interest on drawings.)

Ripa’s total drawings = 700 x 12 = Rs. 8,400; Int. on Drawings = 8,400 x 10/100 x 13/24 = Rs. 455
Rini’s total drawings = 600 x 12 = Rs. 7,200; Int. on Drawings = 7,200 x 10/100 x 13/24 = Rs. 390
Rima’s total drawings = 500 x 12 = Rs. 6,000; Int. on Drawings = 6,000 x 10/100 x 13/24 = Rs. 325

Solution :
Dr. Profit & Loss Appropriation Account for the year ended 31.12.2008 Cr.
Particulars Amount Amount Particulars Amount Amount
Rs. Rs. Rs. Rs.
To General Reserve 30,000 By Profit & Loss 85,500
(Net Profit )
“ Salary - Rini 3,000 on Drawings :
Rina 4,500 7,500 Rani 455
“ Interest on Capital (at 8%) Rini 390
Rani 4,000 Rina 325 1,170
Rini 3,200
Rina 2,800 10,000
“ Commission-Rani-(Note) 3561
“ Share of Profit
Rani [1/3] 11,870
Rini [1/3] 11,870
Rina [1/3] 11,869 35,609
86,670 86,670

Capital Accounts
Dr. Cr.

Date Particulars Rani Rini Rina Date Particulars Rani Rini Rina
2008 Rs. Rs. Rs. 2008 Rs. Rs. Rs.

To Drawings 8,400 7,200 6,000 By Balance b/d 50,000 40,000 35,000

31.12 “ Interest on 455 390 325 31.12 “ Interest on 4,000 3,200 2800
Drawings Capital
“ Balance c/d 60,576 50,480 47,844 “ Salary - 3,000 4,500
“ Commission 3,561 - -
“ Share of Profit 11,870 11,870 11,869
69,431 58,070 54,169 69,431 58,070 54,169

178 Financial Accounting

Working Notes :
Rs.
Net Profit before Commission [86,670 – 30,000 -7,500 – 10,000] 39,170
Less : Rina’s Commission = 10/100 of 39,170 (approx) 3,561
Share of Profit 35,609

Illustration 8 :
Calculation of Interest on Drawings made uniformly at the end of each quarter.

On January 1, 2008, Amethyst and Emerald commenced business as partners introducing capi-
tals of Rs. 20,000 and Rs. 30,000 to their respective accounts. The partnership deed, provided
inter alia that:
(i) Profit/Losses shall be shared in the ratio of 2 : 3 as between Amethyst and Enerald.
(ii) Partners shall be entitled to interest on Capital at the commencement of each year at 6 %
p.a.; and
(iii) Interest on Drawings shall be charged at 8 % p.a.
During the year ended 31.12.2008 the firm made a profit of Rs. 19,280 before adjustment of
interest on Capital and drawings. The Partners withdrew during the year Rs. 3,000 each at the
end of every quarter commencing from 31.3.2008.

You are required to prepare a Profit Loss Appropriation A/c and show the entries therein for
distribution of Profit.
Show also the Capital A/cs of the partners for the year.

Points to be noted :
Each Partner drew Rs. 3,000 at the end of each quarter or Rs. 12,000 during the year. But inter-
est on drawings for each of them should be :
(a) On 3,000 draw at the end of 1st Quarter – Interest for 9 months = 3,000 x 8/100 x 9/12 = Rs.
180

(b) On 3,000 draw at the end of 2nd Quarter – Interest for 6 months = 3,000 x 8/100 x 6/12 = Rs.
120

(c) On 3,000 draw at the end of 3rd Quarter – Interest for 3 months = 3,000 x 8/100 x 3/12 =
Rs. 60
(d) On 3,000 draw at the end of 4th Quarter – No interest

* Total Interest on Drawings for each partner = Rs. 180 + Rs. 120 + Rs. 60 = Rs. 360

Financial Accounting 179

 PARTNERSHIP ACCOUNTING

Solution :
Dr. Profit & Loss Appropriation Account for the year ended 31.12.1995 Cr.

Particulars Amount Amount Particulars Amount Amount

Rs. Rs. Rs. Rs.

To Interest on Capital : By Profit & Loss (Net Profit) 19,280

(at 6% p.a) Interest on Drawings :
Amethyst 1,200
Enerald 1,800 Amethyst 360
“ Share of Profit 3,000 Emerald 360 720
“ Amethyst [2/5] 6,800
Emerald [3/5] 10,200 17,000
20,000 20,000

Capital Accounts
Dr. Cr.

Date Particulars Amrthyst Emerald Date Particulars Amrthyst Emerald

Rs. Rs. Rs. Rs.

31.12.08 To Drawings 12,000 12,000 1.1.08 By Bank 20,000 30,000

31.12.08 “ Drawings 360 360 “ (Capital Introduced)
“ “ Balance c/d 15,640 29,640 31.12.08 “ Interest on Capital 1,200 1,800
“ Share of Profit 6,800 10,200
28,000 42,000 28,000 42,000

llustration 9 :
Azu and Biju are partners firm contributing Rs. 25,000 and Rs. 20,000 respectively as capitals
and sharing profit as Azu 3/5 th and Biju 2/5 th. Interest on Capitals is to be allowed at 10 %
per annum. The net profit for year ended 31st March, 1996 amounts to Rs. 3,600 before making
any allowance for interest. Show the appropriation of profit.

Solution :
Azu (Rs.) Biju (Rs.) Total (Rs.)
Interest on Capital @ 10 % p.a. 2,500 2,000 4,500
The profit are Rs. 3,500.
Unless specifically agreed upon, interest on capitals should be allowed only up to Rs. 3,600
should be shared in Capital Ratio [25,000 : 20,000 or 5 : 4]

180 Financial Accounting

Azu’s share = 5/9 x Rs. 3,600 = Rs. 20,000 ; Biju’s share = 4/9 x Rs. 3,600 = Rs. 1,600
If the partners have agreed upon provision for interest on capital irrespective of profits, the
distribution should be –

Dr. Profit & Loss Appropriation Account for the year ended 31.12.2008 Cr.

Particulars Amt Amt Particulars Amt Amt

Rs. Rs. Rs. Rs.

To Interest on Capital : By profit & Loss (Net Profit) 3,600

Azu 2,500 “ Share of Loss :
Biju 2,000 4,500 Azu [3/5] 540
Biju [2/5] 360 900
4,500 4,500

Illustration 10 :

Sharing of profit on Effective Capital Ratio.

Sachin, Sanat and Sohali Started a partnership firm on 1.1.2008. Sachin introduced Rs. 10,000
on 1.1.2008 and further introduced Rs. 5,000 on 1.7.08 Sanat introduced Rs. 20,000 at first on
1.1.08 but withdrew Rs. 8,000 from the business on 31.7.08. Sohali introduced Rs. 12,000 at the
beginning on 1.1.08, increased it by Rs. 4,000 on 1.6.08 and reduced it to Rs. 10,000 0n 1.11.08.
During the year 2008 they made a net profit of Rs. 56,100. The partners decided to provie
interest on their capitals at 12 % p.a. and to divide the balance of profit in their effective capital
contribution ratio.
Prepare the Profit & Loss Appropriation Account for the year ended 31.12.08.
Solution
(a) Calculation of effective capital contribution :
Product(R)

Sachin : Rs. 10,000 for 6 months (1.1.to 1.7) 60,000

Rs. 15,000 for 6 months (1.7.to 31.12) 90,000
1,50,000

Sanat : Rs. 20,000 for 7 months (1.1.to 31.7) 1,40,000

Rs. (20,000 – 8,000) for 5 months (1.8.to 31.12) 60,000
2,00,000

Sohali : Rs. 12,000 for 5 months (1.1.to 1.6) 60,000

Rs. (12,000 + 4,000) for 5 months (1.6.to 1.11) 80,000
Rs. 10,000 for 2 months (1.11.to 31.12) 20,000
1,60,000

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 PARTNERSHIP ACCOUNTING

™ Profit Sharing Ratio = Effective Capital Ratio = 15 : 20 : 16

(b) Interest on Capitals = Product x Interest on Capital x 1/12
Sachin =1,50,000 x 12/100 x 1/12 = 1,500; Sanat = 2,00,000 x 12/100 x 1/12 = 2,000; Sohali =
1,60,000 x 12/100 x 1/12 = 1,600
Dr. Profit & Loss Appropriation Account for the year ended 31.12.1996 Cr.

Particulars Amount Amount Particulars Amount Amount

Rs. Rs. Rs. Rs.

To To Interest on Capital : By Profit & Loss 56,100

(Net Profit)
“ Sachin 1,500
“ Sanat 2,000
“ Sohali 1,600 5,100
“ Share of Profit :
“ Sachin [15/51] 15,000
“ Sanat [20/51] 20,000
“ Sohali [16/51] 16,000
51,000
56,100 56,100
Interest on Capitals omitted to be charged.
Illustration 11 :

A, B, C and D are partners sharing profit and losses in the rato of 4 : 3 : 3 : 2 Their
respective capitals on 31st March, 2008 were Rs.3,000 Rs. 4,500 Rs. 6,000 and Rs. 4,500. After
closing and finalizing the accounts it was found that interest on capital @ 6 % per annum was
omitted. Interest to altering the signed accounts it was decided to pass a single adjusting entry
on 1st April, 2008 crediting or debiting the respective partners’ accounts. Show the Journal
Entry.
Statement showing Rectification of Profits
Partner Interest on Capital Amount Wrougly (Excess)/Deficit Adjust
@ 6%p.a. not provided distributed in PSR
Rs. Rs. Rs. Rs.
A 180 360 (180) Debit
B 270 270 - -
C 360 270 90 Credit
D 270 180 90 Credit
1,080 1,080 -

182 Financial Accounting

 Dr. Cr.
Date Particulars L.F Amount Amount
Rs. Rs.
1.4.08 A’s Current A/c …………………..…Dr. 180
To C’s Current Account 90
To D’s Current Account 90
[Interest on Capital not provided
@ 6% p.a. now rectified]

The Capital Accounts of Adhar and Bhudhar Stood at Rs. 40,000 and Rs. 30,000 Respectively
after the necessary adjustment in respect of the drawings and the net profit for the year ended
31st December, 1995. It was subsequently ascertained that 5% p.a. interest on Capitals and draw-
ings was not taken into account in arriving at the net profit. The drawings of the partners had
been : Adhar Rs. 1,200 at the end of each quarter and Bhudhar Rs. 1,800 at the end of each half
year.
The profit for the year as adjusted amounted to Rs. 20,000. The partners share profit in the
proportion of Adhar 3/5 and Bhudhar 2/5
You are required to pass journal entries and show the adjusted capital accounts of the partners.
Working Notes :
(i) Interest Drawings

Adhar Bhudhar
Rs. Rs.

On 1,200 drawn at the end of 1st quarter [1,200 x 5/100 x 9/12] 45

nd
On 1,200 drawn at the end of 2 quarter [1,200 x 5/100 x 6/12] 30
rd
On 1,200 drawn at the end of 3 quarter [1,200 x 5/100 x 3/12] 15
On 1,200 drawn at the end of last quarter Nil
90
On 1,800 drawn at the end of 1st half year [1,200 x 5/100 x 6/12] 45
nd
On 1,800 drawn at the end of 2 half year Nil
45

Financial Accounting 183

 PARTNERSHIP ACCOUNTING

(ii) Statement showing Rectification of Profits

Adhar Bhudhar
Rs. Rs.
(A) Capital as on 31.12.08 40,000 30,000
Add : Drawings 4,800 3,600
Less : Share of Profits already Credited 12,000 8,000
Capital as on 1.1.08 32,800 25,600
Add : Interest on Capital @ 5% 1,640 1,280
Less : Interest on Drawings 90 45
Add : Share of Profits = 17,215
[20,000 - 1,640 - 1,280 + 90 + 45] 10,329 6,886
Less : Drawings 4,800 3,600
(B) Adjusted Capital as on 31.12.08 39,879 30,121
Difference of Capital [A-B} 121 121
(Excess) (Deficit)

Solution :
Adjustment Entry :
Journal Dr. Cr.
Date Particulars L.F. Amount Amount
Rs. Rs.
1.1.2009 Adhar’s Capital Account ………………….…Dr. 121
To Bhudhar’s Capitals Account
[Adjustment made for Interests on Capital 121
and on Drawings
not provided and the net amount wrongly
shared as Profits]

Capital Accounts
Dr. Cr.

Date Particulars Adhar Bhudhar Date Particulars Adhar Bhudhar

Rs. Rs. Rs. Rs.

1.1.09 To Bhudhar’s 121 1.1.09 By balance b/f 40,000 30,000

Capitals
’’ Balance c/f 39,879 30,121 ’’ Ashar’s Capital 121
40,000 30,121 40,000 30,121

184 Financial Accounting

Adjustment for wrong distribution of Profits.

Illustration 12 :
Dr. Profit & Loss Appropriation Account for the year ended 31st March 2008 Cr.

Particulars Amt Rs. Particulars Amt Rs.

To Interest on Capital : By Net Profit 40,000
Dhruva 8% of Rs. 40,000 3,200 ’’ Interest on Drawings (calculated
Rohini 8% of Rs. 30,000 2,400 on average of 6 months)
’’ Salary – Dhruva 4,800 Dhruva 6% of Rs. 8,000 240
’’ Share of Profit : Dhruva [1/2] 15,010 Rohini 6% of Rs. 6,000 180
Rohini [1/2] 15,010
40,420 40,420

The entries were duly passed in the books but the following discrepancies were subsequently
discovered :
(i) Interest on capital should have been allowed at 6% p.a. and that on drawings should have
been charged at 8% p.a.
(ii) Dhruva was not entitled to get any salary but Rohini was to get a monthly salary of Rs.
250.
(iii) Profits should have been shared in opening capital ratio.
You are required to redistribute the profits correctly.
Solution :
Calculation of Net Amounts already Credited to each Partner’s Capital

Dhruva Rohini
Rs. Rs.

Amounts Credited : Interest on Capital 3,200 2,400

Salary 4,800 —
Share of Profit 15,010 15,010
23,010 17,410
Less : Amount debited – Interest on drawings 240 180
22,770 17,230

Financial Accounting 185

 PARTNERSHIP ACCOUNTING

Dr. Profit & Loss Appropriation Account for the year ended 31.12.2008 Cr.
Particulars Amount Amoun Particulars Amount Amount
Rs. Rs. Rs. Rs.
To Interest on Capital : By Dhruva’a Capital 22,770
Dhruva [6% of 40,000] 2,400 (Amount written back)
Rohini [6% 0f 30,000] 1,800 4,200 ’’Rohini’s Capitals
’’Salary – Rohini 3,000 (Amount written back) 17,230
[250 x 12]
’’Interest on Drawings :
[@ 8% p.a. on average
6 months]
Dhruva 320
’’Share of Profit : Rohini 240 560
Dhruva [4/7] 19,063
Rohini [3/7] 14,297 33,360
40,560 40,560
Illustration 13 :
Cross Guarantee
Susmita and Aishwarya were partners of a Beauty Parlour sharing profit and Losses as 3 : 2
Manpereet who had been running a similar business as a beauty consultant requested Susmita
and Aishwarya to form a new partnership to which all of them agreed on the conditions that :
1. They would share the profits and losses 3 : 2 : 1.
2. Susmita and Aisharwya guranteed to the effect that Manpreet’s share of profit would not
be lower than Rs. 22,500 per annum.
3. Manpreet guaranteed that gross fees earned by her for partnership business shall be at
least equal to her average gross fees of the preceeding three years when she was doing
business on her own. Her average gross fees were Rs. 37,500.
The profit of the new partnership for the first accounting year ended on 31st March, 2008 was
Rs. 1,12,500 and the gross fees earned by Manpreet for the firm were Rs. 24,000.
Show the distribution of the above profit in a Profit & Loss Appropriation Account for the year
ended 31st March, 2008.
Solution : Susmita , Aisharwya & Manpreet
Dr. Profit & Loss Appropriation Account for the year ended 31.3.08 Cr.
Particulars Amount Amount Particulars Amount Amount
Rs. Rs. Rs. Rs.
To Partnerships’ By Profit + Less A/c 1,12,500
Capital A/cs : (Net Profit)
(Share of Profit) [Note 2 ] ’’Manpreet’s Capital A/c 13,500
Susmita 62,100 [Note 2]
Aisharwya 41,400
Manpreet 22,500 1,26,000
1,26,000 1,26,000

186 Financial Accounting

 Note :
1. Manpreet’s shortfall in gross fees earned by her for the partnership = Rs. 37500 –Rs.
24,000 = Rs. 13,500. This amount is to be paid by her out of her Capital Account.
Manprcet’s Capital A/c Dr. 13,500
To Profit Loss Approprition A/c 13,500
2. Manpreet’s share of actual profit =1/6 of Rs. 1,26,000 = Rs. 21,000. As amount guaran-
teed to her is Rs. 22,500.
● Deficit = Rs. 1,500 to be shared by Susmita and Aishwarya as 3 : 2.

● Final Distribution of Profit should be :

Susmita = 3/6 of 1,26,000 – 3/5 of 1,500
= 63,000 – 900
= Rs. 62, 100;
Susmita’s Capiital A/c Dr. 900 Aishwarya = 2/6 of 1,26,000 – 2/5 of 1,500
Aishwarya’s Capital A/c Dr.600 = 42,000 – 600 = Rs. 41,400;
To Manpreet’s Capital A/c 1,500 Manpreet = 1/6 of 1,26,000 + 1,500
= 21,000 + 1,500
= Rs. 22,500.
Illustration 14 :
Guarantee with Retrospective effect
Kalyani and Ranu commenced business on 1st July, 2005 as partners with capitals of Rs. 1,80,000
and Rs. 1,20,000 respectively. The capitals would remain fixed and carry interest at 10% p.a.
profit and losses were to be shared in proportion to their capitals.
They appointed Anita as their Manager on 1st July, 2005 at a salary of Rs. 9,600 per annum plus
a bonus of 5% of the net profits after charging such bonus and interest as a partner from the
commencement of the business. She had to deposit Rs. 80,000 as security, carrying an interest
@ 12%p.a. It was agreed that she would be entitled to one-fifth share of the profits and her
security deposit would be treated as her capital carrying interest @ 10% p.a. It was further
agreed that this new arrangement should not result in Anita’s share for any of these years
being less than what she had already received under the original agreement and terms of her
appointment.
The profits before charging Anita’s bonus and interest on Capital of the partners or giving
effect to the new arrangement were – (a) for the year 2005-06 - Rs. 60,000; (b) for the year 2006
– 07 – Rs. 1,20,000; (c) for the year 2007-08 – Rs. 1,60,000
Show by a single journal entry to give effect to the new arrangement with explanatory compu-
tation.
Points to be noted :
1. As a Manager, Anita received (a) bonus @ 5% on Net Profits after charging such bonus
and interest on capital at 10% p.a. to Kalyani and Ranu (b) Salary Rs. 9,600 p.a. (c) Interest
on security deposit at 12% p.a.

Financial Accounting 187

 PARTNERSHIP ACCOUNTING

2. As a Partner Anita is entitled to (a) Interest on Capital at 10% p.a. (b) 1/5th of profit after
providing interest on capital at 10% p.a. to all partners including herself.

3. If total dues of Anita under (2) above is more than that under (1) above, she should get the
difference. But if such dues under (1) above is more, she would not refund the excess
already received.
(1) Solution :
Workings – Calculation of Anita’s Dues as Manager

2005-06 2006-07 2007-08

Rs. Rs. Rs.

Salary 9,600 9,600 9,600

Interest on Security Deposit : 12% of 80,000 9,600 9,600 9,600
Bonus 5/105 of profit after charging interest on capitals
of Kalyani and Ranu
2005-06 = 5/105 of (60,000 - 10% of 3,00,000) 1,429
2006-07 = 5/105 of 1,20,000 – 10% of 3,00,000) 4,286
2007-08 = 5/105 of 1,60,000 – 10% of 3,00,000) 6,190
20,629 23,486 25,390

(2) Calculation of Distributable profit under the new arrangement

2005-06 2006-07 2007-08

Rs. Rs. Rs.

Net profits given (after charging interest on security deposit

and Anita’s salary but before charging interest on capitals) 60,000 1,20,000 1,60,000
Add : Anita’s Salary and Interest on Deposit no more
payable [9,600 +9,600] 19,200 19,200 19,200
79,200 1,39,200 1,79,200
Less : Interest on Capitals to all partners @ 10% of 38,000 38,000 38,000
[1,80,000 + 1,20,000 + 80,000]
Distributable Profits 41,200 1,01,200 1,41,200
Anita’s Share of Profit = 1/5th of Distributable Profit 8,240 20,240 28,240

188 Financial Accounting

(3) – Difference in Payments to Anita

2005-06 2006-07 2007-08

Rs. Rs. Rs.

A. Anita’s Dues as Partner :

Interest on Capital @ 10% of 80,000 8,000 8,000 8,000
Share of Profit [as perworkings 2] 8,240 20,240 28,240
16,240 28,240 36,240
B. Anita’s Dues as manager [as perworkings 1] 20,629 23,486 25,390
Difference Payable to Anita - 4,754 10,850
Total 15,604

Journal

Dr. Cr.

Date Particulars L.F Amount Amount

Rs. Rs.

Kalyani’s Current A/c [3/5 of 15,604]………………Dr. 9,362

Ranu’s Current A/c [2/5 of 15,604]…………………Dr. 6,242
To Anita’s Current A/c
[Adjustments made through Partners’ Current 15,604
A/cs to the to new arrangement regarding profits]

As capitals remained fixed and interest was calculated every year on these fixed capitals,the
necessary adjustment has been made through current accounts.

Illustration 15 :

Adjusments without alteration of book values

R,S and T are partners of a firm, sharing profits and losses as 5 : 3 : 2. Their Balance Sheet as
on 31st March, 2007 stood as follows :

Financial Accounting 189

 PARTNERSHIP ACCOUNTING

Liabilities Rs. Assets Rs.

Sundry Creditors 25,000 Cash at bank 10,000
General Reserve 20,000 Sundry Debtors 22,000
S Loan Account 15,000 Less: Reserve for Bad Debts 2,000 20,000
Capital Account : Furniture 10,000
R 25,000 Machinery 35,000
S 10,000 Stock 25,000
T 5,000
1,00,000 100,000

From 1st April, 2007 the partners decided to change their profit sharing ratio as 2 : 1 : 2 in place
of their previous ratio 5 : 3 : 2 and the following adjustments were agreed upon :

(1) The Reserve for Bad Debts was to be raised to 10%; (2) Furniture was to be appreciated by
Rs. 5,200.

They did not want to alter the book values of the assets and reserve but recorded the change by
passing one single journal entry.

The profit for the year ended 31st March, 2008 showed a net profit of Rs. 22,900.

You are required :-

1. To show the single journal entry adjusting the partners’ capital on 1st April, 2007, and

2. To prepare the Profits and Loss Account for the year ended 31st March, 2008 after taking
into account the following : (i) Interest on Capital at 5% p.a.; (ii) Interest on S’s loan and
(iii) Transfer 25% of the divisible profit to Reserve Fund after changing such transfer.
Working Notes :

1. Calculation of Net Effect of the adjustments

Rs.
Profit due to increase of Value of Furniture 5,200
General Reserve 20,000
Less : Additional Reserve for Bad Debts (Provision) 25,200
[10% of (Rs.22,000-Rs.2000)] 200

Profit 25,000

190 Financial Accounting

2. Adjustment of Capital as on 01.04.07

Rs. Rs. Rs.

Profit Rs. 25,000 shared in old ration 5 : 3 : 2 12,500 7,500 5,000

Loss Rs. 25,000 shared in new ratio 2 : 1 : 2 (10,000) (5,000) (10,000)
Net Effect 2,500 2,500 (5,000)
Capitals as on 31.03.07 25,000 10,000 5,000
Adjusted Capital on 1.4.07 27,500 12,500 —

Solution :

Books of R, S & T
Journal Entry

Date Particulars L.F. Amount Amount

1.4.07 T’s Capital A/c …………………………………...Dr. 5,000

To, R’s Capital 2,500
S’s Capital 2,500
(Adjustment made due to change in profit sharing ratio)

Dr. Profit & Loss Account for the year ended 31st March, 2008 Cr.

Particulars Amount Amount Particulars Amount Amount

Rs. Rs. Rs. Rs.

To Interest on Capital : By, Profit & Loss 22,900

R - [5% of 27,500] 1,375 A/c Net Profit
S - [5% of 12,500] 625 2,000
‘’ Interest on S’s loan 900
[6% of 15,000]
‘’ Reserve Fund 4,000
[25/125 x (22,900 – 2,900)]
‘’ Shares of Profit :
R [ 2/5 ] 6,400
S [ 1/5 ] 3,200
T [ 2/5 ] 6,400 16,000
22,900 22,900

Financial Accounting 191

 PARTNERSHIP ACCOUNTING

Illustration 16 :
Adjustment of Profits – A typical problem
Agni and Bani started a partnership on April 1, 2005 with respective capital contributions of
Rs. 60,000 and Rs. 20,000. On 31.03.2007 they prepared the following Trial Balance for their
business :

Dr. (Rs.) Cr. (Rs.)

Stock 46,000 -
Machinery 46,500 -
Debtors and Creditors 58,000 12,000
Provision for Depreciation 9,500
Cash and Bank 21,000 -
Capitals : Agni - 1,04,750
Bahni - 45,250
1,71,500 1,71,500

The transactions recorded in the Capital Accounts during these two years were interest on
capital at 10% p.a. on initial investments and allocation of incomes. On 31.03.07 it was further
discovered that total drawings of Rs. 21,000 by Agni and Rs. 15,000. By Bahni had been wrongly
treated as business expenses. The Partnership Accounts were to be correctly adjusted.
On 1.4.2007 Agni and Bahni offered partnership to Clara and Dela on the following terms :
1. The new partners should introduce capitals as Clara Rs. 50,000 and Dela Rs. 40,000.
2. All partners would be entitled to interest on opening balance of the new partnership @
10% p.a.
3. Agni and Bahni are to receive salaries for their special services @ Rs. 10,000 p.a. and Rs.
6,000 p.a.
4. The minimum dues of Clara and Dela would be Rs. 10,000 p.a. and 12,000 p.a. respec-
tively (inclusive of their interest on capital)
5. Profits after charging Partners’ salaries and interests on capitals would be shared as 3 : 3
: 2 : 2 among Agni, Bahni, Clara and Dela.
You are required to show : (1) Correct Capital balance of Agni and Bahni on31.03.07 (2) the net
income that must be earned by the new firm during the year ended 31st March 2008 so that
Agnni and Bahni receive equal shares of Profit and Agni receives an aggregate of Rs. 30,000
inclusive of interest on Capital Salary and Share of Profit.

192 Financial Accounting

Solution :
Notes :

1. Profits already credited

Agni Bahni
Rs. Rs.

Opening Capitals 60,000 20,000

+ Interest on Capital for 2 years @ 10% p.a. on original capitals 12,000 4,000
+ Profits Credited (Balance) 32,750 21,250
Closing Balance 1,04,750 45,250
Therefore Total Profit Credited = 32,750 + 21,250 = Rs.54,000

Therfore rectified Profit = Profits Credited + drawings treated as an expense

= 54,000 + 21,000 + 12,000 + 15,000 = 90,000/-

2. Sharing Profits

Agni Bahni
Rs. Rs.

Correct Profit equally divided [ 90,000 as 1 : 1 ] 45,000 45,000

Profits wrongly credited 32,750 21,250
Adjustment Required 12,250 23,750

Statement showing correction of Capitals of Agni and Bahni on 31.03.08

And correction of Profits upto that date

Correction of Capital Balance Agni Bahni

Rs. Rs.

Balance as per Trial Balance on 31.3.07 1,04,750 45,250

Less : Drawing 21,000 15,000
83,750 30,250
Add : Adjustment for Profit [ Note 1 & Note 2 ] 12,250 23,750
Adjusted Capitals on 31.3.07 96,000 54,000

Financial Accounting 193

 PARTNERSHIP ACCOUNTING

Statement Showing Calculation of Minimum Income to be earned during the year

ended 31.3.08

Amt Amt
Rs. Rs.

Minimum Amount Payable to :

Agni : Interest on Capital [ 10% of 96,000 ] 9,600
Salary 10,000
Share of Profit [ Balancing amount to make total dues Rs. 30,000 ] 10,400 30,000
Bahni : Interest on Capital [ 10% of 54,000 ] 5,400
Salary 6,000
Share of Profit [ Balancing Amount to make total dues Rs. 30,000 ] 10,400 21,800
Clara : Interest on Capital [ 10% of 50,000 ] 5,000
Share of Profit [ Balancing Amount to make total Rs. 10,000 ] 5,000 10,000
Dela : Interest on Capital [ 10% of 40,000 ] 4,000
Share of Profit [ Balancing Amount to make total Rs. 12,000 ] 8,000 12,000
Total Profits Required to be earned 73,800

194 Financial Accounting

 EXERCISE
1. In which set of business organization Profit and Loss appropriation Account is to be main-
tained?
2. What do you mean by guranteed Partnership?
3. In absence of partnership deed which item will be reflected in Profit and Loss appropria-
tion Account
Problem 1.
Guarantee with retrospective effect
A and B commenced business on 1st April, 2005 as partners with capitals of Rs. 1,20,000 and Rs.
80,000 respectively. The capitals remained fixed carrying interest @ 7% per annum. Profits
were shared in proportion to their capitals.
They appointed C as their manager on 1st April, 2005 at a salary of Rs. 4,800 per annum plus a
bonus of 5% of the profits after charging such bonus and interest on capital. C had to deposit
on 1.4.05 Rs. 40,000 as security deposit carrying interest at 8% per annum.
In March, 2008 it was settled that C should be treated as partner from 1st April, 2005. It was
agreed that he should be entitled to 1/6th of the profits and his security deposit would be
treated as his capital carrying interest at 7% instead of the 8% he had received. It was further
agreed that this new arrangement should not result in C’s share for any of these years being
less than what he had received under the original agreement and terms of his appointment.
The profits before charging C’s bonus and interest on capital or giving effect to the new ar-
rangement were : (a) for the year ended 31st March, 2006 – Rs. 30,000; (b) for the year ended 31st
March, 2007 – Rs. 58,000; (c) for the year ended 31st March, 2008 – Rs. 83,000.
Show the necessary Journal entries to give effect to the new arrangement with explanatory
computation.

[Ans : A’s Current A/c …………………… Dr. 2,872

B’s Current A/c …………………… Dr. 1,914
To C’s Current A/c 4,786]
Problem 2.
Conversion of method of accounting from Cash Basis to Mercantile Basis with retrospective
basis.
P, Q and R are partners of a firm of consultants since 1st January, 2005 sharing profits and losses
as 3 : 2 : 1. They maintain their accounts under cash basis after allowing salaries as P Rs. 1,500
per month, Q Rs. 1,200 per month and R Rs. 300 per month. Besides R’s share is guaranteed to
a fixed minimum of Rs. 6,000 (including his salary).

Financial Accounting 195

 PARTNERSHIP ACCOUNTING

In 2008 they decide to change the method of accounting to mercantile basis with retrospective
effect. Relevant pieces of information are :

Year Profit under cash basis before Outstanding Expenses on the Fees earned
charging partner’s salaries closing date of the year but not received
on the closing
date of the year
Rs. Rs. Rs.
2005 50,000 10,000 14,500
2006 61,000 9,000 16,500
2007 40,000 10,500 8,000

Pass a single Journal Entry adjusting the partners accounts to give effect to the above change.
[Ans : Adjustment Entry :
A’s Capital (Dr.) 2,210 Outstanding Expenses (Cr.) 10,500
B’s Capital (Dr.) 1,473 C’s Capital (Cr.) 1,183
Problem 3.
S, T and O were partners sharing profits as 3 : 2 : 1. Their capitals on 31st December, 1995 stood
as S Rs, 45,000, O Rs. 15,000 and T Rs. 15,500 after adjustments of net profit Rs. 18,000 for the
year ending that date and their drawings of Rs. 6,000 Rs. 4,000 and Rs. 2,000 respectively. It
was discovered however that while ascertaining the profit the accountant did not take into
consideration the following matters :
1. Interest @ 6% p.a. on Capital as on 1.1.2008
2. O was entitled to a salary of Rs. 2,000 per annum of which Rs. 490 was unpaid.
3. Till 31.12.2007 partners were sharing profits equally and that goodwill was valued at Rs.
12,000 on the date of re-ascertaining the profit the accountant did not take into consider-
ation the following matters :
4. A loan of Rs. 5,000 from T as brought forward from 2007 carrying interest at 8% p.a. was
merged into his capital on July 1, 2008. No interest on loan was, however, charged to
profit & loss account.
You are required to work out a Profit & Loss adjustment account and show the journal entries
necessary for re-adjustment of capital accounts and the revised capital accounts of partners
assuming that all their dues are to be adjusted in Capitals Accounts.
[Hints : See Appropriation of Profits – Wrong Distribution]
[Ans : Revised Profit 12,720; Capital Balances for charging interest S Rs. 46,000, T
Rs. 12,000; O Rs. 18,500;

196 Financial Accounting

 Revised Capitals : S Rs. 49,120, T Rs. 18,160, O Rs. 20,220

T A/c …………Dr 840 Goodwill A/c …………. Dr. 12,000

S A/c (Cr.) 120 S, T & O each (Cr.) 12,000
O A/c (Cr.) 720 (Rs. 4,000 each)

Problem 4.
Apportionment between Pre-admission and Post-admission Profits
A and B are partners in a firm sharing profit & losses in the ratio of 3 : 2, with capitals of Rs.
1,20,000 and Rs. 40,000 respectively. The interest on capital @ of 5% p.a. They admit C into
partnership with effect from 1st October, 2008 on the following conditions :
(i) That C is to bring in Rs 15,000 as premium for goodwill, which will be withdrawn by A &
B in their old profit-sharing ratio.
(ii) That C is to contribute Rs. 22,400 to the firm as his share of capital.
(iii) That the partner’s capitals will carry interest at 5% p.a.
(iv) That the profit earned during 2008 will be apportioned between the pre-admission and
post-admission period on the basis of turnover.
The profits for the year ending 31st December, 2008 before charging interest on partners Capi-
tals amounted to Rs. 66,500. The monthly average turnover during the first 9 months of the
calendar year was twice the corresponding figure for the remaining 3 months.
You are required to prepare : (1) Profits & Loss Account of the firm for the pre-admission
period and (2) Profit & Loss Account of the firm for the post-acquisition period.
[Hints : (1) Ratio of Turnover : 1.1.2008 to 30.9.08: 1.10.08 to 31.12.08 = 9 x 2 : 3 x 1 = 18 : 3 or 6 :
1 (2) Profit Sharing Ration between A & B = 3 : 2 and Profit Sharing Ratio between B & C = 3 :
2, So, Ratio between A, B and C = 9 : 6 : 4]
[Ans : (a) Pre-Admission Periods distributable profits = 51,000; (b) Post-Admission Periods
distributable profits = 7,220; (c) Interest on Capitals of Capitals for (a) = Rs. 6,000 and for (b) Rs.
2,280]

Financial Accounting 197