Ahmadhiyya International School

Subject: ACCOUNTING-Gr-11-Unit: Partnership accounts-Notes

Syllabus
 Statements of profit or loss (and other comprehensive income) and appropriation
accounts.
 Partners’ current accounts and capital accounts on a fixed or floating basis.
 Use of the Partnership Agreement in appropriation of profit/loss.
 Provisions of Section 24 of the Partnership Act 1890 in relation to partners’ salaries,
division of profit or loss, interest on loans, capital and drawings.
 Introduction (or retirement) of a partner, including the introduction of assets and
treatment of goodwill
Partnership-Meaning and definition
Partnership is the relation between two or more persons, who have agreed to share the
profits (or losses) arising from their business. Registration of a partnership is optional.
Compared to a sole proprietor ship, a partnership has the following advantages.
1. Sharing of risk
2. More financial resources
3. Joint and several liability of the partners
4. More managerial efficiency.

Partnership agreement
A partnership is formed on the basis of a deed between the partners. It may be written or
oral. It is also known as the articles of partnership. It contains the profit sharing ratio, partner’s
rights, duties, liabilities etc.
When the partnership is silent regarding a particular matter or if there is no such partnership
agreement, Section 24 of the Partnership Act 1890 (UK) should be applied. Section

Section 24 of the Partnership Act 1890 (UK)

Inter alia, this section states regarding the accounting treatment for the following as follows:
 Share the profits and losses equally
 No interest on capital or drawings should be allowed
 Salary, commission etc should not be paid
 5% interest on any loans and advances made by the partners to the firm

ACC-SRN Page 1
 Ahmadhiyya International School
Subject: ACCOUNTING-Gr-11-Unit: Partnership accounts-Notes
Books of accounts
The books of accounts of a partnership are maintained in the same way as that of a sole trader.
However two points require special attention, before preparing final accounts/financial
statements.
a) Sharing of profit
b) Capital accounts

Sharing of profit (P&L appropriation account)

Profit and loss appropriation account is the subsidiary of the statement of profit or loss and other
comprehensive income. It is used for the division of profit among the partners. The total net
profit is appropriated among the partners in their agreed ratio after considering the interest on
capital, salary, interest on drawings etc

c) Specimen: P&L appropriation account

Balance of profit b/d from last year(if any) xx

Add net profit for the year xx
Add interest on drawings: xx
Gross total xxx
Less appropriations:
salary, commission etc to partners xx
Interest on capitals xx (xx)
Net divisible profit (shared among partners) xxx

Capital accounts: capital accounts of partners may be maintained under any of the following
two methods viz, fixed capital and fluctuating capital

Fixed capital method: - under this method the original capital invested by the partners will be
kept unchanged. The increasing and decreasing items of capital (personal incomes and
personal expenses) such as drawings, interest on drawings, share of profit/loss etc will not be
entered to the capital, but they will be shown in a separate current account opened for each
partner. However, additional capital if any brought into by partners will be credited to the capital
account

ACC-SRN Page 2
 Ahmadhiyya International School
Subject: ACCOUNTING-Gr-11-Unit: Partnership accounts-Notes
Fluctuating capital method: Under this method the increasing and decreasing items of capital
(personal incomes and personal expenses) are directly entered in the capital accounts of
partners, so that their balances fluctuate every year.

Fixed and fluctuating capitals comparison

Fixed capital Fluctuating capital

 Capital remains fixed
 Increasing and decreasing items of
capitals shall show separately.
 A current account is opened
 Capital balance varies from year to
year.
 Increasing and decreasing items of
capital are entered directly to the
capital
 A current account is not opened

Practical efficacy: Fixed capital method has more practical utility than the fluctuating method,
as the current account shows the amount that the partners are eligible to withdraw. Any
drawings in excess of the credit from share of profit, interest on capital etc will lead to a debit
balance in the current account. It will be a caveat to the partners.

Current account: (Specimen--Horizontal form is preferred)

(Suppose two partners A and B)
A B A B
Drawings xx xx Balance b/d xx xx
interest on drawings xx xx Share of profit xx xx
Interest on capital xx xx
Share of loss, (if any) Salary, commission etc xx xx
Interest on loan, (if any)
Balance c/d xx xx
xxx xx xxx xxx

ACC-SRN Page 3
 Ahmadhiyya International School
Subject: ACCOUNTING-Gr-11-Unit: Partnership accounts-Notes
 Interest on capital, partners’ salary etc are business expenses, whereas they are

personal incomes for the partner. Similarly, interest on drawings is an income for the

partnership, whereas, it is an expense for the partner.

 Capital accounts as well as current accounts are personal accounts.

 Only items of personal incomes and expenses are shown in current account.

 All personal incomes are credited and personal expenses are debited to the current

account.

 Current account balances of partners’ are shown separately in the statement of financial

position.

 It will be under liabilities, followed by capital if there is a credit balance and it will be

shown as current assets if there is a debit balance(overdrawn)

Interest on Capital :( Why interest on capital is allowed?)

When the capital contributed by the partners is uneven, though they share the work equally, it is
fair to allow interest on capital. Moreover, had the partners invested their fund otherwise, they
would get interest. To compensate this, interest at certain rate is allowed on partners capitals.

Interest on drawings :( Why interest on drawings is allowed?)

Interest in drawings is allowed mainly to prevent the partners from making unnecessary
drawings, which may affect the fund position of the business.

Points to remember
 If the profit sharing ratio is not given, the profit shall be shared equally
 Interest on capital: – debit to appropriation a/c- credit to current a/c
 Salary to partners: - debit to appropriation a/c- credit to current a/c
 Interest on drawings: - credit to appropriation a/c – debit to current a/c

ACC-SRN Page 4