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Agreement Basic Concepts of Partnership Advantages

Written - Easy to wind up
- Easy to establish
Oral - Low cost of
formation
- Accepted form of
Business
Concepts Deed

Sharing of profit Absence of Deed Types of Partners

Number of Partner
Orally Contents
Maximum 50 - Name and Address of
As per deed partners
Minimum 2 - Name of the firm
- Nature of Business
- Capital of partners
- Interest on capital
- Interest on drawing
- Settlement of disputes
- Share Profits & Losses - Minor partner
equally - Nominal partner
- No Interest on capital
- No Interest on drawing
- Secret partner
- No Partner gets salary
- Silent partner
- Active partner
- Interest on partner’s
- loan to be paid @6%
p.a.
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Agreement Basic Concepts of Partnership Advantages

Written - Easy to wind up
- Easy to establish
Oral - Low cost of
formation
- Accepted form of
Business
Concepts Deed

Sharing of profit Absence of Deed Types of Partners

Number of Partner
Orally Contents
Maximum 50 - Name and Address of
As per deed partners
Minimum 2 - Name of the firm
- Nature of Business
- Capital of partners
- Interest on capital
- Interest on drawing
- Settlement of disputes
- Share Profits & Losses - Minor partner
equally - Nominal partner
- No Interest on capital
- No Interest on drawing
- Secret partner
- No Partner gets salary
- Silent partner
- Active partner
- Interest on partner’s
- loan to be paid @6%
p.a.
 Salary
Must be taken for P & l Appropriation A/c
the complete year
To Partners Salary
Interest on Drawing
Commission By P& l acc ( NP )
To Partners Comm By int on drawing
To Interest on capital
Regular
Before To Part. Cap/ current
Profit x Rate / 100
After
Profit x rate Irregular
100+Rate
Partners Capital account AT

Interest on cap Fixed capital Fluctuating Capital

- Capital Accounts
Remain fixed All are made
- All adjustments are adjustments in
made in Current Capital Accounts
Account

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 Past Adjustment

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 Guarantee of profit

By a partner
- Divide the profit in
profit sharing ratio
By all partner( - In case of deficiency
specific Ratio By all partner to guaranteed
partner, given
- Divide the profit in - Divide the profit in partner profit will be
profit sharing ratio profit sharing ratio decreased and that
- In case of deficiency - In case of deficiency will be transfer to
to guaranteed to guaranteed the latter
partner, deficiency partner, given
will be filled by all partner profit will be
partners in given decreased and that
ratio. will be transfer to
the latter

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- Purchased
- Self generated Goodwill – Nature and NATURE
valuation
- Intangible asset
- Can’t be depreciated
Simple average
Methods of Calculating
profit method
Goodwill = Capitalisation
Actual Average method:
Profit x Number Capitalisation of
of Years’ Weighted Average Super profit Average Profit =
Purchase method Method Average Profit x 100
Actual Profit – / Normal rate of
Actual average Goodwill =
Normal Profit return
profit = addition Weighted average x
Goodwill = Super Goodwill =Total
of normal profit Number of year
Profit x Number of Capitalised value of
of different years purchases
Years’ Purchased Business – Capital
/ Number of
Employed
years
Weighted average = Normal profit =
Capitalized value =
Profit x Weight Capital employed x
Normal profit = Actual profit x
/total of weights NRR/100
Profit – 100/NRR
Abnormal profit
+ Abnormal Loss
 Circumstances when
Reconstitution takes place
• Admission of a partner
• Retirement of an existing
partner
• Death of a partner
• Amalgamation of two
partnership firms
• Change in profit-sharing ratio
Change in PSR
Gaining Ratio Sac. Ratio
Gaining Ratio Sac. Ratio =
= New Ratio - Old Ratio -
Old Ratio New Ratio
Reconstitution of Partnership Firm Change in PSR
Revaluation of
Assets and Liabilities
• Debit the Revaluation
Account if liabilities
increase
• Credit the Revaluation
Account if liabilities
decrease
• Debit the Revaluation
Account if assets
decrease
Credit the Revaluation
Account if assets
increase
Reserves & Accumulated Profits & Losses
Transfer to Partners Capital
Transfer to Partner Capital Accounts or Current
Account in old profit-sharing ratio.
No Transfer to Partners Capital A/c
- Net effect of reserves, accumulated profits and
losses is calculated.
- Gaining/ Sacrificing ratio is calculated.
- The share of gaining partner and sacrificing
partner in net effects calculated.
- In case of positive Net Effects-
- Gaining Partner's Capital A/c
- Dr To Sacrificing Partner's Capital A/c
Reverse entry is made in case of negative Net Effects.
 Revaluation of
Assets and Liabilities Accounting
- Transfer the increasing or Treatment of
decreasing amount of assets and Goodwill
liabilities to Revaluation - The new partner is required to
Account. pay his share of the tangible
- Profits or losses arising from
Reconstitution of
assets
revaluation are distributed Partnership Firm : as well as the goodwill according
amongst the old partners in Admission of a Partner to the profit sharing ratio.
their old profit sharing ratio. - On the admission of partner,
goodwill must be revalued.
- However, not all businesses
keep a goodwill account in their
Accumulated Profits books.
and Reserves Goodwill adjustments can be
done:
Effect on Change in Profit sharing Ratio - Goodwill Account opened.
Reserves, losses and
profits should be - Goodwill Account not opened.
New PSR Sacrificing Ratio
transferred to Capital
New PSR = Old Sacrificing Ratio = / Current Accounts
Ratio - Sacrificing Old Ratio - New of old partners in old
Ratio Ratio profit sharing ratio.
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