Accounting For Partnership Firms

Accounting For Partnership Firms
Fundamentals
Prasanth venpakal
CONTENTS
• Meaning of Partnership
• Features of Partnership
• Partnership Deed
• Contents Of The Partnership Deed.
• Rules Applicable in the Absence of
Partnership Deed.
• Partnership Accounts.
Meaning of Partnership
Partnership is an extension of the sole-proprietary concern.
A Partnership is a business carried on by two or more persons.
They join hands together on the basis of an agreements, pool
their resources and run a lawful business. The main aim of
such a business is to earn profit to share it among themselves.
In India partnership business is governed by the Indian
Partnership Act 1932.
Features of Partnership
1. Number of Persons
As Per Companies Act 1956
A minimum of two persons are required to form a partnership. There is a limit
on maximum number of persons which constitute a partnership firm. The
maximum number is 10 in the case of a firm carrying on a banking business and
20 if it is engaged in any other business.
As Per Companies Act 2013
The new Companies Act 2013 has prescribed the maximum number of members
in case of a partnership firm should not be more than 50 in case of partnerships
Features of Partnership….
2. Agreement / Deed
A partnership is the result of an agreement between two or

more persons. The agreement may be written or oral. The
written agreement is known as partnership deed.
3. Business
The partners should carry some business and
should be some lawful business.
4. Sharing of Profits
The purpose of partnership must be to earn profit. The

profit should be shared by the partners in agreed ratio. If
there is no specific agreement in this regard, partners will
share the profits equally.
5. Utmost Good Faith
‘Good Faith’ is the essence of a partnership. Hence each
partner should be just and faithful to another.
6. Unlimited Liability
Liability of each partner is unlimited . It means that

partners are individually and collectively liable for all debts of
the firm.
7. No Separate Legal Existence
A partnership is not a legal entity . It has no separate legal existence
apart from the partners.
Partnership Deed
Partnership is the result of an agreement between two or
more persons. The agreement may be oral or written.
When the agreement is in written form it is known as
partnership deed. It may be defined as “A document
containing the terms of partnership as agreed by the
partners is called ‘Partnership Deed’ or ‘Articles of
Contents of Partnership Deed
 Name of the firm  Division of profit or loss.
 Name and addresses of all partners.  Interest on capital / drawings.
 Nature and place of business.  Interest in partner’s loan.
 Date of commencement of partnership.  Salaries, commission , etc. if payable to any
partner.
 Duration of Partnership , if any
 Details of division of work among the
 Capital contribution by the partners. partners.
 The amount Which can be withdrawn by Ascertainment of goodwill on admission,
each partner. retirement & death of a partner.
 Rules regarding operation of bank Settlement of accounts on retirement or
accounts. death of a partner and on dissolution of a
firm.
Rules Applicable in the Absence of Partnership Deed
Normally a partnership deed includes all matters relating to the
mutual relationship amongst partners. But in certain cases there
will no such an express agreement . In such cases the partners
have to follow the following provisions in their business.
1.Profit Sharing : Partners are entitled to share equally the profits
and losses of the firm , irrespective of their capital contribution.
2. Interest on Capital : Partners are not entitled to interest on capital.
But if there is any agreement for providing interest on capital , such
interest is payable only out of the profit of the business. If there is loss
interest on capital need not be allowed.
Rules Applicable in the Absence of
Partnership Deed
3. Interest on Loan / Advances : If any partner has advanced some
money to the firm in addition to his capital then he will be entitled
to get an interest on the amount at the rate of 6 % per annum even
if there are losses.
4.Interest on Drawings : No interest will be charged on drawings
made by the partners.
5. Remuneration to Partners : Partners are not entitled to any
salary or other remuneration.
p r i a t i o n
s s A p p ro
a n d L o
P r o f i t c o u n t
A c
Profit and Loss Appropriation Account
'Profit and Loss Appropriation Account' is merely an extension
of the profit and loss account and is prepared to show how net profit
is to be distributed among the partners. The account should begin
with the profit or loss forwarded from the profit and loss account.
Further this account is credited with net profit and interest on
drawings, and debited with interest on capitals, salary or commission
to partners. After these adjustments have been made, the Profit and
Loss Appropriation Account will show the amount of profit or loss.
After transferring a particular sum to the reserve fund , balance
amount will be distributed among the partners in the agreed profit
sharing ratio . And this amount is transferred to their capital or
current accounts.
Journal Entries For Preparing The Profit And Loss Appropriation Account
1.For the transfer of Net profit

P&L account Dr
P&L Appropriation a/c
(Net profit transferred to p&l appropriation account)
P&L appropriation a/c Dr
P&L account
(Net loss transferred to p&l appropriation account)
2. For Interest on Capital
Interest on Capital a/c Dr.
Partners' Capital/Current a/c
(For Crediting Interest on Capital to Capital/Current Account )
Profit and Loss Appropriation a/c Dr.

Interest on Capital a/c
(For transferring Interest on Capital to Profit and Loss
Appropriation Account)
3. For Interest on Drawings
Partners Capital/Current a/c Dr.
Interest on Drawings a/c
(Interest on Drawings is a gain to the firm and is charged to
Partner's Capital/Current Account)
Interest on Drawings a/c Dr.
Profit and Loss Appropriation a/c
(For transferring Interest on Drawings to Profit and Loss
Appropriation Account, the following entry is to be recorded)
4. Partner's Salary
Salary to Partner a/c Dr.
Partner Capital/Current a/c
(Salary allowed to a partner is a gain of the individual partner and charge
against the profits of the firm as per partnership agreement. For this
following entry is recorded )
Salary to partner a/c
(For charging salary allowed to a partner)
5. Partner's Commission
Commission to partner a/c Dr.
Partner's capital/current a/c
(Commission due to the partner )
Commission to partners a/c
(Commission paid to a partner is charged to Profit and Loss
Appropriation account )
6. For Transfer to Reserve:

Reserve
(Amount transferred to Reserve)
7. Transfer of share of Profit or Loss to P&L Appropriation
If Profit:
Partner's Capital/Current a/c
If Loss:
Partner's Capital/Current a/c Dr.
Profit and Loss Appropriation a/c
Profit & Loss Appropriation Account
Dr Cr
Particulars Amount Particulars Amount
To Profit an loss Xxx By Profit & Loss Account Xxx
(In case of loss) (In case of profit)
To Interest on Capital By Interest on Drawings
A xxx A xxx
B xxx xxx B xxx Xxx
To Salaries Xxx By Loss transferred to
To Commission Xxx ( in the case of loss)
To Reserve Xxx A’s capital / current A/c xxx
To Profit Transferred to B’s Capital / Current A/c xxx xxx
(in the case of profit)
A’s capital / current A/c xxx
B’s Capital / Current A/c xxx xxxx
xxxx xxxx
Illustration -1
A and B are partners. A's Capital is ₹ 1,00,000 and B's Capital is ₹ 60,000.
Interest on capital is payable @ 6% p.a. B is entitled to a salary of ₹ 3,000
per month. Profit for the current year before interest and salary to B is ₹
80,000.
Prepare Profit and Loss Appropriation Account.

Solution -1

Dr. Cr.
Amount Amount
Particulars Rs Particulars Rs
Interest on Capital: Profit and Loss A/c (Net Profit) 80,000
A 6,000
B 3,600 9,600
Salary to B (Rs 3,000 × 12) 36,000
Profit transferred to:
A’s Capital A/c 17,200
B’s Capital A/c 17,200 34,400
80,000 80,000

Illustration -2
X, Y and Z are partners in a firm sharing profits in 2 : 2 : 1 ratio. The
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. The profit of the firm for the year ended 31st
March, 2018 after debiting Z's salary was ₹ 4,00,000.
Prepare Profit and Loss Appropriation Account.

Solution -2
Dr. Cr.
Rs Rs
Interest on Capital: Profit and Loss A/c 4,00,000
(Net Profit after Z’s salary)
X 50,000
Y 50,000
Z 25,000 1,25000

X’s Capital A/c 1,10,000
Y’s Capital A/c 1,10,000
Z’s Capital A/c 55,000 2,75,000
4,00,000 4,00,000
Salary to Z has not been debited to Profit and Loss Appropriation Account. This is because
Profit of Rs 4,00,000 is given after adjusting the Z’s salary.
Illustration -3
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 ₹ 2,500 per month
and Manoj was to ger a commission of ₹ 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 ₹ 1,250 and on Manoj's drawings was ₹ 425. Interest on
Capitals of the partners were ₹ 10,000 and ₹ 7,500 respectively. The firm earned a
profit of ₹ 90,575 for the year ended 31st March, 2018.
Prepare Profit and Loss Appropriation Account of the firm.

Solution -3

Dr. Cr.
Amou
Amount
Particulars Particulars nt
Rs
Rs
Salary to Prem (Rs 2,500 × 12) 30,000 Profit and Loss A/c (Net Profit) 90,575
Commission to Manoj 10,000 Interest on Drawings A/c:
Interest on Capital: Prem 1,250
Prem 10,000 Manoj 425 1,675
Manoj 7,500 17,500
Prem’s Current A/c 20,850
Manoj’s Current A/c 13,900 34,750
92,250 92,250

Illustration -4
Reema and Seema are partners sharing profits equally. The Partnership Deed
provides that both Reema and Seema will get monthly salary of Rs 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 Rs 5,00,000 each and drawings
during the year were Rs 60,000 each.
The firm incurred a loss of Rs 1,00,000 during the year ended 31st March, 2018.
Prepare Profit and Loss Appropriation Account for the year ended 31st March,
2018.
Solution -4

Dr. Cr.

Rs Rs
Profit and Loss A/c 1,00,000 Interest on Drawings A/c:
Reema 3,000
Seema 3,000 6,000
Loss transferred to
Reea 47,000
Seema 47,000 94,000
1,00,000 1,00,000
Illustration -5
On 1st April, 2013, Jay and Vijay entered into partnership for supplying laboratory
equipments to government schools situated in remote and backward areas. They
contributed capitals of ₹ 80,000 and ₹ 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 ₹
7,800. Showing your calculations clearly, prepare 'Profit and Loss Appropriation
Account' of Jay and Vijay for the year ended 31st March, 2014.
Solution -5
Note: Interest on capital is to be treated as an appropriation of profits and is to be

provided to the extent of available profits i.e. Rs 7,800.
Solution -5

Dr. Cr.
Amount Amount
Particulars Particulars
Rs Rs
Interest on Capital A/c: Profit and Loss A/c 7,800
Jay 4,800
Vijay 3,000 7,800

7,800 7,800

Illustration -6
Amar, Bhanu, and Charu are partners in a firm. Amar and Bhanu are to get
annual salary of ₹ 1,20,000 p.a. each as they are fully involved in the
business. Net profit for the year is ₹ 4,80,000. Determine the share of profit
to be credited to each partner.
Solution -6

Dr. Cr.
(₹) (₹)
Salary: Profit and Loss A/c 4,80,000
Amar 1,20,000
Bhanu 1,20,000 2,40,000
Amar’s Capital A/c 80,000
Bhanu’s Capital A/c 80,000
Charu’s Capital A/c 80,000 2,40,000

4,80,000 4,80,000

Illustration -7
A, B, C, and D are partners in a firm sharing profits as 4 : 3 : 2 : 1 respectively.

It earned a profit of ₹ 1,80,000 for the year ended 31st March, 2018. As per
the Partnership Deed, they are to charge a 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.
Solution -7
Dr. Cr.
Rs Rs
Partners’ Commission: Profit and Loss A/c (Net Profit) 1,80,000
A 6,000
B 9,000
C 6,000
D 9,000 30,000
A’s Capital A/c 60,000
B’s Capital A/c 45,000
C’s Capital A/c 30,000
D’s Capital A/c 15,000 1,50,000
1,80,000 1,80,000
Preparation of Capital Accounts of
Partners
Under Fixed & Fluctuating Capital
Methods
Capital Accounts of Partners
Capital accounts are personal in nature in which the transactions relating
to the partners of a firm are recorded. There will be minimum two
partners so separate capital accounts are to be prepared in order to
ascertain their individual share.
Capital Accounts of
Partners
Debit Side
• 1. Drawings [Cash / Kind]
• 2. Interest on Drawings
• 3. Share of loss [ As per profit and
loss A/c]
Credit Side
• 1. Opening of capital[ Capital introduced in the beginning ]
• 2. Additional capital introduced.
• 3. Assets brought in.
• 4. Interest on capital
• 5. Salary to the partner.
• 6. Commission to the partner.
• 7. Share of profit [ As per profit & loss a/c ]
Methods of Maintaining Capital Accounts
Mainly there is two methods of maintaining capital
accounts of partners.
• Fixed Capital Method
• Fluctuating Capital Method

Fixed Capital Method
This method is known as fixed capital method as the original capital
invested by any partner remains the same unless additional capital is
brought in or part of the capital is withdrawn as per agreement. Two
accounts viz, capital and current accounts are maintained. The
adjustments are made in current account.
Partners’ Capital Account
Dr Cr
Date Particular Amount Date Particular Amount
Rs. Rs
Cash/Bank (Amount Balance b/d Xxxx

withdrawn out of capital) Cash/Bank/ Assets
Balance c/d Xxxx (Additional Capital
Xxx introduced) Xxx
Balance b/d
XXXXX XXXXX
Partners’ Current Account
Dr Cr
Rs Rs.
Drawings xxx Balance b/d Xxx
Interest on drawings xxx Interest on Capital xxx
Profit & loss Appropriation a/c Salary xxx
(Share of loss in case of loss) Xxx Commission Xxx
Balance c/d P&l Appropriation a/c (Share
of profit in case of profit) xxx
Xxx
Balance b/d
xxxx xxxx
xxx
Fluctuating Capital Method
According to the fluctuating capital method, capital balance of partners
keeps on fluctuating from year to year. Under the fluctuating capital
method, only capital account is maintained. The yearly adjustments are
made directly in the capital account.
Partners’ Capital Account
Dr Cr
Rs. Rs
Drawings xxx Balance b/d Xxxx
Interest on drawings Xxx Assets xxx
Profit & loss Appropriation a/c Cash/Bank/ Xxx
(Share of loss in case of loss) Xxx (Additional Capital
Balance c/d introduced)
Interest on Capital xxx
xxx Salary xxx
Commission xxx
P&l Appropriation a/c (Share xxx
of profit in case of profit)

Balance b/d
xxxx xxxx
xxx
Illustration - 1
Ajith and Sajith were partners with capitals of Rs.1000000 and Rs.750000respectively.
They agree to share profits in the ratio of 3:2. Show how the following transactions will be
recorded in the capital accounts of the partners in both the cases when a) the capital are
fixed and b) the capitals are fluctuating. The books are closed on December 31 every year.
Particulars Ajith Sajith

Interest on Capital 5% 5%
Drawing (During 2010) 22500 15000
Interest on Drawings 1350 900
Salary 15000
Commission 7500 5250
Share in loss for the year 2010 45000 30000
Solution – Under Fixed Capital Method.
Partner’s Capital Account

Dr
Cr
Date Particulars Ajith Sajith Date Particulars Ajith Sajith
To Balance c/d 1000000 750000 By Balance b/d 1000000 750000

1000000 750000 1000000 750000

Partner’s Current Account
Dr Cr
To Drawings 22500 15000 By Interest on 50000 37500
To Interest on capital
Drawings 1350 900 By Salary 15000 -------
To Profit & loss By Commission 7500 5250
Appropriation (loss) 45000 30000 By Balance c/d 3150
To Balance c/d
3650 -------
72500 45900 72500 45900

Solution – Under Fluctuating Capital Method
Dr Cr
To Drawings 22500 15000 By Balance b/d 1000000 750000
To Interest on Drawings By Interest on capital 50000 37500
To Profit & loss 1350 900 By Salary
Appropriation (loss) By Commission 15000 -------
To Balance c/d 45000 30000 7500 5250

1003650 746850
1072500 792750 1072500 792750

Illustration - 2
Anandu and Ravi entered into a partnership contributing Rs. 50000 and Rs.30000
respectively and they agreed to share profit and losses in the ratio 2:1 . Anandu
was entitled to a salary of Rs. 5000 p.a. Interest on capital was to be provided
@6% p.a. The drawings of Anandu and Ravi for the year ending December 31, 2014
were Rs. 6000 & Rs.5000 respectively. Interest on drawings Anandu Rs. 300 and
Ravi Rs. 200 to be charged. The profit of the firm after providing Anandu’s salary
and interest on capital and taking into account interest on drawings were Rs.
15000. Prepare capital accounts of partners , when capitals are fixed an fluctuating.
When Capitals are Fixed

Dr Cr
Date Particulars Anandu Ravi Date Particulars Anandu Ravi

50000 30000 50000 30000

Dr Cr
To Drawings 6000 5000 By Interest on

To Interest on capital 3000 1800
Drawings 300 200 By Salary 5000
To Balance c/d 11700 1600 By P&L
Appropriation a/c 10000 5000
(Profit)

18000 6800 18000 6800

When Capital Fluctuating

Dr Cr
To Interest on By Interest on capital 3000 1800
Drawings 300 200 By Salary 5000
To Balance c/d 61700 31600 By P&L Appropriation a/c
(Profit) 10000 5000

68000 36800 68000 36800

Illustration – 3
From the following particulars prepare the capital accounts of partners of Sajeev and Rajeev
in both the cases when a) the capitals are fixed and b) the capitals are fluctuating . books are
closed on 31st December 2011.
Particulars Sajeev (Rs) Rajeev(Rs)
Capitals on 1st January 2011 150000 125000
Drawings 15000 12500
Partner’s Salaries 10000 12000
Partner’s Commission 9000 14000
Interest on Partner’s loan 2500 1000
Interest on Capital 16000 12000
Interest on Drawings 800 500
Share of profit 30000 24000
Current a/c balance 3500(Cr) 3500(Dr)
When Capitals are Fixed

Dr Cr
Date Particulars Sajeev Rajeev Date Particulars Sajeev Rajeev

150000 125000 150000 125000

Dr Cr
To Balance b/d 3500 By balance b/d 3500

To Drawings 15000 12500 By Interest on capital 16000 12000
To Interest on Drawings By Salary
To Balance c/d 800 500 By commission 10000 12000
55200 44900 By Interest on loan 9000 14000
By P&L Appropriation a/c
(Profit) 2500 1000

30000 24000
71000 63000 71000 63000


Dr Cr
To Interest on Drawings 800 500 By Interest on capital 16000 12000
To Balance c/d By Salary 10000 12000
199200 174000 By commission 9000 14000
By P&L Appropriation a/c 30000 24000
(Profit)

215000 187000 215000 187000

Illustration – 4
Show how the following will be recorded in the Capital Accounts of the Partners Sohan and
Mohan when their capitals are fluctuating:
Sohan Mohan

(₹) (₹)
Capital on 1st April, 2018 4,00,000 3,00,000
Drawings during the year ended 31st march, 2019 50,000 30,000
Interest on Capital 5% 5%
Interest on Drawings 1,250 750
Share of Profit for the year ended 31st march, 2019 60,000 50,000
Partner's Salary 36,000 .....
Commission 5,000 3,000
Dr Cr
Sohan Mohan Sohan Mohan
Particulars Particulars
(₹) (₹) (₹) (₹)
Drawings A/c 50,000 30,000 Balance b/d 4,00,000 3,00,000
Interest on 1,250 750 Interest on 20,000 15,000
Drawings A/c Capital A/c
P&L 60,000 50,000
Appropriation
A/c
Balance c/d 4,69,750 3,37,250 Partners’ Salary 36,000 –
Commission 5,000 3,000
5,21,000 3,68,000 5,21,000 3,68,000

Calculation Of Interest On Capital
& Interest On Drawings
Calculation Of Interest On Capital
Interest on capital is paid to the partners as a compensation for their capital
contribution to the firm. Interest on capital is an expenses for the firm and gain
for partners individually. Interest on capital is to be allowed to the partners only
if the partnership deed provides for it. The interest on capital is allowed
considering three important factors rate, amount and period. Following are the
different ways of calculating interest on capital;
Situation – 1
When There Is No Addition To Or Withdrawal From Capital
During The Year.
Sathish and Ram are partners sharing profit and losses equally. Their capitals
on 1st January 2013 were 25000and 30000. Calculate interest on capital at 6%
per annum for the year ending 31st December 2013.
Interest on capital of Sathish = 25000 ×6 /100 = 1500
Interest on capital of Ram = 30000 ×6 /100 = 1800

Situation – 2
When There Is Additional Capital Contribution During The
Accounting Year
Santhosh and Raju started partnership business on 1 st January 2010 by contributing

Rs.50000 And Rs. 40000 as initial capital. During the year 2010 Santhosh introduced
Rs. 15000 as additional capital on 1st June and Raju introduced Rs. 10000 on 1st
August. The interest on capital is allowed @6% p.a. accounts are closed on December
31st every year. Calculate interest on capital to be allowed to Santhosh and Raju for
the year 2010.
Solution
Interest on capital of Santhosh
6% on 50000n for one year = 50000 × 6/100 = 3000
6% 0f 15000 for 7 months = 15000 × 6/100 × 7/12 = 525
Total interest on Capital of Santhosh = 3000 + 525 = 3525
Interest on capital of Raju
6% on 40000n for one year = 40000 × 6/100 = 2400
6% 0f 10000 for 5 months = 10000 × 6/100 × 5/12 = 250
Total interest on Capital of Raju = 2400 + 250 = 2650
Situation - 3
If opening balance is not given
In this case we have to Calculate opening capital , for this we

should add items such as drawings, interest on drawings ,share of
loss ,if any with capital at the end of year and to subtract items
such as partner’s salary, commission , share of profit , additional
capital ,etc.
Illustration - 5
Rahul, Rohit and Karan started partnership business on April 1, 2016 with capitals of
Rs 20,00,000, Rs 18,00,000 and Rs 16,00,000, respectively. The profit for the year
ended March 2017 amounted to Rs 1,35,000 and the partner’s drawings had been
Rahul Rs 50,000, Rohit Rs 50,000 and Karan Rs 40,000. The profits are distributed
among partner’s in the ratio of 3:2:1. Calculate the interest on capital @ 5% p.a.
Solution - 5
Interest on Capital
Rahul = 20,00,000 × = Rs 1,00,000
Rohit = 18,00,000 × = Rs 90,000
Karan = 16,00,000 × = Rs 80,000

Illustration - 6
Sunflower and Pink Rose started partnership business on April 01, 2016 with capitals
of Rs 2,50,000 and Rs 1,50,000, respectively. On October 01, 2016, they decided that
their capitals should be Rs 2,00,000 each. The necessary adjustments in the capitals
are made by introducing or withdrawing cash. Interest on capital is to be allowed @
10% p.a. Calculate interest on capital as on March 31, 2017.
Solution - 6
10 6

April 01, 2016 to September 30,
2,50,000 × × = Rs 12,500
2016 100 12

10 6
October 01, 2016 to March 31, 2,00,000 × × = Rs 10,000
2017 100 12

Interest on Sunflower’s Rs 22,500
Capital
Solution - 6
10 6

April 01, 2016 to September 30,
1,50,000 × × = Rs 7,500
2016 100 12
10 6
October 01, 2016 to March 31, 2,00,000 × × = Rs 10,000
2017 100 12
Interest on Pink Rose’s Capital Rs 17,500
Illustration - 7
Asha and Deepa are partners in a textile business. There capital at the end of the
year were Rs. 45000 and Rs.30000 respectively. During the year 2012 Asha’s drawings
and Deepa’s drawings were Rs.6000 and Rs.7000 respectively. Interest on drawings
charged were Rs.300 and Rs.200. Asha had been credited with a salary of Rs.2500
and Deepa with a commission of Rs. 4000. Profit during the year after making the
above mentioned adjustments were Rs. 20000. Calculate interest on capital @6% for
the year ending 31st December 2012.
Illustration - 8
On March 31, 2017 after the close of accounts, the capitals of Mountain, Hill and
Rock stood in the books of the firm at Rs 4,00,000, Rs 3,00,000 and Rs 2,00,000,
respectively. Subsequently, it was discovered that the interest on capital @ 10% p.a.
had been omitted. The profit for the year amounted to Rs 1,50,000 and the partner’s
drawings had been Mountain: Rs 20,000, Hill Rs 15,000 and Rock Rs 10,000. Calculate
interest on capital.
Mountain Hill Rock
Closing Capital 4,00,000 3,00,000 2,00,000
Add: Drawings 20,000 15,000 10,000
Less: Profit (1:1:1) (50,000) (50,000) (50,000)
Opening Capital 3,70,000 2,65,000 1,60,00
Mountain 3,70,000 × = Rs 37,000
2,65,000 × = Rs 26,500
Hill
1,60,000 × = Rs 16,000
Rock
Calculation Of Interest
On Drawings
PRASANTH VENPAKAL
Calculation Of Interest On Drawings
Interest is to be charged on the withdrawals made by the
partners , if it has been specifically mentioned in the
partnership deed . Interest on drawings is an income for the
firm and an expense to each partner.
1. Amount of withdrawal , rate of interest and date of
withdrawal given
Year end of a firm is 31st December , Rahul a partner

withdraws Rs.5000 on 1st July. Calculate the interest on
drawings at 8% per annum.
Interest on Drawings = 5000×8×6 = 525

100×12
2.Date of withdrawal not given , amount and rate of
interest given.
If the date of drawings is not given , it may assumed that drawings were
made evenly throughout the year. In such a case interest should be for six
months on the whole amount.
Raghav a partner withdraws Rs.7000 in a year and interest is chargeable on the
drawings at 12% per annum. Calculate interest on drawing.
Interest on Drawings = 7000×12×6 = 420

100×12
3.When different amount withdrawn at different intervals
If the date of drawings and the different amounts withdrawn are
clearly stated , the interest may be calculated with the help of
Simple method or product method. Let us look at the two methods
with illustration
A) Simple Method
in this method interest on drawings is calculated on each amount of drawings ,
from the date of drawings up to the end of accounting year . After finding out the
interest for each drawings , find the total amount of interest on drawings
Interest on Drawings
= Amount of drawings ××
Illustration - 1
Rajan a partner in a firm, withdrew the following amounts during
the year 2019
Rs.
February 1 2000
May 1 5000
June 302000
October 31 6000
December 31 2000
The interest on drawings is to be charged @15% p.a. Assuming the
accounting year closes on December 31. Calculate interest on
drawings chargeable to the partner.
Solution
Date Amount Period Interest
February 1 2000 11 2000 × 15/𝟏𝟎𝟎× 11/𝟏𝟐 = 275
May 1 5000 8 5000 × 15/𝟏𝟎𝟎 × 8/𝟏𝟐 = 500

June 30 2000 6 2000 × 15/𝟏𝟎𝟎× 6𝟏𝟐 = 150
October 31 6000 2 6000 × 15/𝟏𝟎𝟎× 2/𝟏𝟐 = 150
December 31 2000 0 2000× 15/𝟏𝟎𝟎× 0/𝟏𝟐 = 0
Total Interest on Drawings 1075
b) Product Method
• Calculate the time period between the date of withdrawal and the
date of closing the accounts in each case of drawings.
• Multiply the period so calculated by the respective amount of
drawings. This is called the product.
• Add up the various products.
• Calculate interest for one month on the sum of products at the rate
of percentage.
Illustration- 2
Rajan a partner in a firm, withdrew the following amounts during the
year 2019
Rs.
February 1 2000
May 1 5000
June 302000
October 31 6000
December 31 2000
The interest on drawings is to be charged @15% p.a. Assuming the
accounting year closes on December 31. Calculate interest on drawings
chargeable to the partner.
Solution
Date Amount Period Product
February 1 2000 11 22000
May 1 5000 8 40000
June 30 2000 6 12000
October 31 6000 2 12000
December 31 2000 0 0
Total 86000
Interest on drawings = Sum of Products × Rate of Interest × 1

100 12
= 86000 × 15 × 1
100 12
= 1075
4. Fixed amount withdrawn every month
If a partner withdraws a fixed amount at regular intervals, the interest on

drawings can be calculated on the basis of average period. The calculation of
average period depends upon whether the fixed amount is withdrawn on the first
day of each month , middle of the month or at the end of each month.
Average period =
Time Left After First Drawings + Time Left After Last Drawings
2
a) Fixed amount withdrawn on the first day of the month.
If the fixed amount is withdrawn on the first day of each month, the
average period will be calculated as follows;
Average period = 12+ 1
2
= 6½
Thus interest on the whole amount of drawings is to be calculated for
6½ months at the agreed rate.
Illustration
Devan a partner in a firm withdraws Rs. 3000 p.m. regularly only the first
day of every month. Interest is paid at 12% per annum. Calculate interest on
drawings.
Total Drawings = 3000 × 12 = 36000
Interest on Drawings = 36000 × 12 × 6½
100 12
= 2340
b) Fixed amount withdrawn on the last day of the month.
If the fixed amount is withdrawn on the last day of each month,
the average period will be calculated as follows;
2
= 5½
Thus interest on the whole amount of drawings is to be calculated
for 5½ months at the agreed rate.
Illustration
Biju a partner in a firm withdraws Rs. 6000 p.m. regularly only the
last day of every month. Interest is paid at 12% per annum.
Calculate interest on drawings.
Total Drawings = 6000 × 12 = 72000

Interest on Drawings = 72000 × 12 × 5½
100 12
= 3960
c) Fixed amount withdrawn in the middle of the
month.
If the fixed amount is withdrawn in the middle of each month, the
average period will be calculated as follows;
Average period = 12
2
=6
6 months at the agreed rate.
Illustration
Rajan a partner in a firm withdraws Rs. 12000 p.m. regularly in
the middle of every month. Interest is paid at 12% per annum.
Calculate interest on drawings.
Total Drawings = 12000 × 12 = 144000
Interest on Drawings = 144000 × 12 × 6
100 12
= 8640

Illustration - 2
Menon and Thomas are partners in a firm. They share profits equally.
Their monthly drawings are Rs 2,000 each. Interest on drawings is to be
charged @ 10% p.a. Calculate interest on Menon’s drawings for the
year 2006, assuming that money is withdrawn:
(i) in the beginning of every month,
(ii) in the middle of every month, and
(iii) at the end of every month.

Solution - 2
Solution -2
Solution - 2
D) When Drawings of Equal Amount are
made in the beginning of Each Quarter
When Drawings of Equal Amount are made in the beginning of
Each Quarter , the average period will be calculated as follows;
2
=7
Thus interest on the whole amount of drawings is to be calculated
for 7 months at the agreed rate.
Illustration
Calculate interest on drawing of Vimal @ 10 % p.a. if the

withdrew Rs. 10000 in the beginning of each Quarter
Total Drawings = 10000 × 4 = 40000
100 × 12
= 2500

E) When Drawings of Equal Amount are made AT
THE END of Each Quarter
When Drawings of Equal Amount are made end of Each Quarter ,
the average period will be calculated as follows;
2
=4
4 months at the agreed rate.
Illustration
Calculate interest on drawing of Vimal @ 10 % p.a. if
the withdrew Rs. 10000 end of each Quarter
Total Drawings = 10000 × 4 = 40000
100 × 12
= 1500

F) When Drawings of Equal Amount are made DURING
MIDDLE of Each Quarter
When Drawings of Equal Amount are made during the
middle of Each Quarter , the average period will be calculated
as follows;
Average period = 10.5+ 1.5
2
=6
Thus interest on the whole amount of drawings is to be
calculated for 6 months at the agreed rate.
Illustration
Calculate interest on drawing of Vimal @ 10 % p.a. if
the withdrew Rs. 10000 during the middle of each
Quarter
Total Drawings = 10000 × 4 = 40000
100 × 12
= 2000

Illustration
Calculate interest on drawings of Ashok @ 10% p.a. for the year ended
31st March, 2019, in each of the following alternative cases:
Case 1. If he withdrew ₹ 7,500 in the beginning of each quarter.
Case 2. If he withdrew ₹ 7,500 at the end of each quarter.
Case 3. If he withdrew ₹ 7,500 during the middle of each quarter.
Solution
Total Drawings = 7,500 × 4 = Rs 30,000
Interest Rate = 10% p.a.
Case (a)
When equal amount is withdrawn in the beginning of each quarter,
the interest on drawings is calculated for an average period of 7.5
months
Solution
Case (b)
When equal amount is withdrawn at the end of each quarter, the interest on
drawings is calculated for an average period of 4.5 months
Solution
Case (c)
When equal amount is withdrawn in the middle of each quarter, the interest
on drawings is calculated for an average period of 6 months
G) When Drawings of Equal Amount are only
DURING a period of 6 month ending 31st March
a) In the Beginning of each month

Average period = = 3
b) In the End of each month
c) In the Middle of each month
Illustration - 3
Calculate interest on drawing of Vimal @ 10 % p.a. For

monthly drawings for 6 months (Last 6 months) Rs. 10000
Solution
Total Drawings = 10000 × 6 = 60000
Interest on Drawings= = 1750
Interest on Drawings = = 1250
H) When Drawings of Equal Amount are only
DURING a period of 9 month ending 31st March

Average period = = 4.5
Illustration - 4
Calculate interest on drawing of Amal @ 10 % p.a. For
monthly drawings for 9 months (Last 9 months) Rs. 5000
Solution
Total Drawings = 5000 × 9= 45000

Interest on Drawings= = 1875
H) When the rate of interest is given with the word Per
annum (P.A.) & without Per annum
 When the rate of interest is given without the word Per

annum (P.A.), interest on drawings will be calculated with out
considering the time and date of drawing.
 When the rate of interest is given with the word Per annum
(P.A.) but the time and date of drawing is not given, interest
on drawings will be calculated by taking 6 months as average
period
Illustration- 6
Calculate interest on drawings for the following cases
a) If Remya has withdrawn Rs.25000 during the year and interest
charged @10% p.a.
b) If Divya has withdrawn Rs.25000 during the year and interest
charged @10%
Solution
a) Interest on Drawings of Remya

= = 1250
b) Interest on Drawings of Divya

= = 2500
Illustration – 7
Kanika and Gautam are partners doing a dry cleaning business in Lucknow, sharing
profits in the ratio 2 : 1 with capitals ₹ 5,00,000 and ₹ 4,00,000 respectively. Kanika
withdrew the following amounts during the year to pay the hostel expenses of her
son:
1st April ₹ 10,000
1st June ₹ 9,000
1st November ₹ 14,000
1st December ₹ 5,000
Gautam withdrew ₹ 15,000 on the first day of April, July, October and January to pay
rent for the accommodation of his family. He also paid ₹ 20,000 per month as rent
for the office of partnership which was in a nearby shopping complex.
Calculate interest on drawings @ 6% p.a.
Solution
Solution
Manager’s Commission on Net Profits
Some times the manager is to be allowed a certain percentage
of net profits as his commission . The amount is to be calculated
on two ways ;
• On profits before charging such commission
• On Profits after charging such commission
On profits before charging such commission
For example , if the profit before charging his commission is Rs.44000 and
the manager is to be allowed a commission of 10% on profit before
charging such commission and the amount will be ;
= 4400
On Profits after charging such commission
For example , if the profit before charging his

commission is Rs.44000 and the manager is to be
allowed a commission of 10% on profit after charging
such commission and the amount will be ;
= 4000
Adjustments Related to interest on partners loan
It is a charge against profits. It is provided irrespective of profits or loss. It will
also be provided in the absence of Partnership Deed @ 6% per annum. The
following entries are passed to record the interest on partner’s loan:
For allowing Interest on loan:
Interest on Partner’s Loan A/c Dr.
To Partner’s Loan A/c
(Being interest on loan allowed @___% p.a.)
For transferring Interest on Loan to Profit and Loss A/c:
Profit and Loss A/c Dr.
To Interest on Loan A/c
(Being interest on loan transferred to P & L A/c)
Adjustments Related to rent to a partner
It is a charge against profits. It is not debited in Profit and loss

appropriation account, instead of that it is debited to Profit & Loss
account
For transferring Partner’s Rent to Profit and Loss A/c:
Profit and Loss A/c Dr.
To Partner’s Rent A/c
(Being Partner’s Rent transferred to P & L A/c)
Guarantee Of Profit
To A Partner
PRASANTH VENPAKAL
Guarantee Of Profit To A Partner
Sometimes on admission of a new partner , the existing partners may give an assurance
to the incoming partner that he shall be given a minimum amount of profit irrespective of
the firm’s actual profit. Even if there is no profit or profit falls short of guaranteed
minimum amount, the newly admitted partner enjoys the privilege of getting the
guaranteed amount. If it is so, then the deficiency is borne by any one or by all other
partners in their profit sharing ratio.
a) Guarantee Given By the Firm

 Share the Amount of total Profit as per their profit sharing ratio.
 Find out the excess amount that will be shared by the firm.
 Find out share of other partners to compensate the excess amount and share as
per their old ratio.
 Deduct the amount shared by partners from their Profit in P&L Appropriation
A/c.
Illustration - 1 a) Guarantee Given By the Firm
Anil and Binil share profits and losses in the ratio of 2:1. They admit Rinil as
partner with 1/4 share in profits with a guarantee that his share of profit shall
be at least Rs. 100,000. The net profit of the firm for the year ending March
31, 2019 was Rs. 3,20,000. The new profit sharing ratio is 2 : 1 :1. Prepare
Profit and Loss Appropriation Account.
Solution a) Guarantee Given By the Firm
Working Notes :
Anil’s Share of Profit = 3,20,000 × = 160000
Binil’s Share of Profit = 3,20,000 × = 80000
Rinil’s Share of Profit = 3,20,000 × = 80000
Deficiency in Rinil’s Share = 100000 – 80000=20000
Anil’s Share in Deficiency = 20000 × = 13333
Binil’s Share in Deficiency = 20000 × = 6667
Solution a) Guarantee Given By the Firm
Profit & Loss Appropriation A/C
Particular Amount Particular Amount
Anil’s Share 160000 By Profit and loss (Net profit) 320000
Less: Share in
Deficiency 13333 146667
Binil’s Share 80000
Less: Share in
Deficiency 6667 73333
Rinil’s Share 80000
Add: Deficiency
Received from
Anil 13333
Binil 100000
6667
320000 320000
b) Guarantee Given By The firm to a Partner in specified ratio
 Share the Amount of total Profit as per their profit sharing ratio.
 Find out the excess amount that will be shared by the firm.
 Find out share of other partners to compensate the excess amount and share as
per the specified ratio.
 Deduct the amount shared by partners from their Profit in P&L Appropriation
A/c.
Illustration -2 b) Guarantee Given By The firm to a Partner in specified ratio
Arun, Varun and Tarun were partners of a law firm sharing profits in the ratio of 5:3:2.
Their partnership deed provided the following:
• Interest on partners' capital @ 5% p.a.
• Tarun was guaranteed a profit of Rs. 2,50,000 (excluding interest on capital) and any
deficiency on account of this was to be borne by Arun and Varun in the ratio of 2:3.
• During the year net profits earned by the firm were Rs. 8,60,000. Partner's capital on
April 01, 2018 were Arun - Rs. 3,00,000; Varun - Rs. 3,00,000 and Tarun- Rs.
2,00,000.
Prepare Profit and Loss Appropriation account and show your workings clearly.
Illustration -2 b) Guarantee Given By The firm to a Partner in specified ratio
Calculation of Interest on Capital

Arun’s Share of Profit = 300,000 × = 15000
Varun’s Share of Profit = 300,000 × = 15000
Tarun’s Share of Profit = 200,000 × = 10000
Total Interest on Capital = 40000

Solution
Working Notes :
Profit distributed among Partners = 860000 – 40000
= 820000
Arun’s Share of Profit = 8,20,000 × = 410000
Varun’s Share of Profit = 8,20,000 × = 246000
Tarun’s Share of Profit = 8,20,000 × = 164000
Deficiency in Tarun’s Share = 250000 – 164000= 86000
Arun’s Share in Deficiency = 86000× = 34400
Varun’s Share in Deficiency = 86000 × = 51600
Solution Profit & Loss Appropriation A/C
Interest on Capital Profit & Loss 8,60,000
Arun - 15,000 (Net Profit)

Varun - 15,000
Tarun - 10,000 40,000

Arun 410000
(-) Share in deficiency

34400 375600
Varun 246000
(-) Share in deficiency

51600 194400
Tarun 164000
+ deficiency received from

Arun 34400 2,50,000
Varun 51600 860000 860000

c) Guarantee of Profit by one Partner

 Share the Amount of total profit as per their profit sharing ratio.
 Find out the excess amount that will be given by the partner.
 Allot the excess amount from the guaranteed partner’s capital.
 Deduct the amount shared by partner from his profit in P&L Appropriation
A/c.
Illustration -3 c) Guarantee of Profit by one Partner
Arun, Boby and Chintu are partners in a firm sharing profit in the ratio or 2:2:1.
According to the terms of the partnership agreement, Chintu has to get a minimum of
Rs. 60,000, irrespective of the profits of the firm. Any Deficiency to Chintu on
Account of such guarantee shall be borne by Arun. Prepare the Profit and loss
Appropriation Account showing distribution of profits among the partners in case the
profits for year 2015 is Rs. 2,50,000
Solution
Working Notes :
Arun’s Share of Profit = 250000 × = 100000
Boby’s Share of Profit = 250,000 × = 100000
Chintu’s Share of Profit = 250,000 × = 50000
Deficiency in Chintu’s Share = 60000 – 50000= 10000
Defiency amount Rs.10000/- will give to Chintu by Arun
Solution Profit & Loss Appropriation A/C
Arun 100000 Profit & Loss 250000
(-) Share in deficiency (Net Profit)
10000 90000

Boby’s Share
100000
Chintu’s 50000
+ deficiency received from
Arun 10000 60000
250000 250000

Illustration -3
D) Accounting treatment of Guarantee of Minimum Profit, if the Firm have loss
Arun, Boby and Chintu are partners in a firm sharing profit in the ratio or 2:2:1.
According to the terms of the partnership agreement, Chintu has to get a minimum
of Rs. 60,000, irrespective of the profits of the firm. Any Deficiency to Chintu on
Account of such guarantee shall be borne by Arun And Boby Equally. Pass the
journal entry showing distribution of profits among the partners in case the loss for
year 2019 is Rs. 1,00,000
Solution
Working Notes :
Arun’s Share of Loss = 100000 × = 40000
Boby’s Share of Loss = 100,000 × = 40000
Chintu’s Share of Loss = 100,000 × = 20000
Deficiency in Chintu’s Share
= 60000 – (-20000)= 80000
Arun’s Share in Deficiency = 80000× = 40000
Varun’s Share in Deficiency = 80000 × = 40000
Solution Journal Entry
Date Particular l/f Debit Credit
Arun’s Capital a/c Dr 40000
Boby’s Capital a/c Dr 40000
Chintu’s Capital a/c Dr 20000
To Profit & Loss a/c 100000
( Amount loss shared among all partners)
Arun’s Capital a/c Dr 40000

Boby’s Capital a/c Dr 40000
To Chintu’s Capital a/c 80000
(Deficiency of Chintu met by others
equally)
ADJUSTMENTS IN
CLOSED ACCOUNTS
PRASANTH VENPAKAL
INTRODUCTION
Sometimes, after the final accounts have been prepared and the partners' capital
account are closed, it is found that certain items have been omitted by mistake or
have been wrongly treated. Such omissions and commissions usually relate to the
interest on capital, interest on drawings, salary to partners, etc. In such a situation,
instead of altering closed accounts and signed balance sheet, rectification or
adjustment is made at the beginning of next year.
INTRODUCTION
WAYS TO RECTIFY THE OISSION
These errors or omissions may be rectified in two ways:
 By passing a single adjusting entry with the net effect of the errors and
omissions
 by passing separate adjusting entries for each errors and omission

Illustration - 1
Arun, Binu & Chandran are started partnership on 1st April, 2019 with
capitals of 100000,60000 & 50000. After closing accounts at the end of
financial year , it was found that interest on capital @10% as per
agreement was not provided before sharing profit . Partners to make an
adjusting entry at the beginning of next year for rectifying the error.
Pass the adjusting entry assuming that capitals are Fixed.
Illustration
Interest on capital of ;
Arun = 100000 × = 10000
Binu = 60000 × = 6000
Chandran = 50000 × = 5000
Analysis Table
Particulars Arun Binu Chandran Total
Interest on capital (Cr) 10000 6000 5000 21000
Division of total interest on

capital in profit sharing ratio 7000 7000 7000 21000
(equally) (Dr)
Total 3000(Cr) 1000(Dr) 2000 (Dr) ……..

Adjustment Journal Entry
Date
Particular l/f Debit (Rs) Credit (Rs)
Ist April Binu's Capital a/c Dr 1000

2020
Chandran’s Capital a/c Dr 2000
To Arun's Capital a/c 3000
(Adjusting in respect of omission of Interest on
capital in the previous year )
Illustration - 2
Biju , Anil & Ravi are partners sharing profit and losses in 3:2:1. The profit
at the end of the year 31st March 2019 before providing the following
adjustment was Rs. 120000
 Biju & Ravi were entitled to get a salary of Rs.1000 each p.m.
 Anil was eligible to get a salary of Rs.6000 p.a.
Pass the adjusting journal entry in the books of the firm
Analysis Table
Particulars Biju Anil Ravi Total
Salary of Partners (Cr) 12000 6000 12000 30000
Division of total salary in profit

15000 10000 5000 30000
sharing ratio (3:2:1) (Dr)
7000
Total 3000(Dr) 4000(Dr)
(Cr)
……..
Date Particular l/f Debit (Rs) Credit
(Rs)
Ist Biju's Capital a/c Dr 3000
April
Anil’s Capital a/c Dr 4000
2020
To Ravi 's Capital a/c 7000
(Adjusting in respect of omission
of Salary in the previous year )
Illustration - 3
Biju , Anil & Ravi are partners sharing profit and losses in 3:2:1. After the
preparation of final accounts at the end of the year 31st march 2019, it
was found that Interest on drawings had not been taken into account.
The interest on drawings were Biju Rs.2400, Anil Rs. 2000 and Ravi
Rs.1600.
Pass the adjusting journal entry in the books of the firm

Analysis Table
Particulars Biju Anil Ravi Total
Interest on Drawings (Dr) 2400 2000 1600 6000
Division of total Interest on

Drawings in profit sharing 3000 2000 1000 6000
ratio (3:2:1) (Cr)
Total 600(Cr) …… 600 (Dr) ……..

(Rs)
Ist April Ravi's Capital a/c Dr 600
2020
To Biju 's Capital a/c 600
(Adjusting in respect of omission
of Interest on Drawings in the
previous year )
Illustration - 4
Ajith & Chandhu are partners sharing profit and losses in 2:1. Their capitals on 1st
April 2018 were Rs.80000 & Rs.40000. Their drawing during the year were
Rs.20000& Rs. 10000. Interest on Capital and drawings were taken @ 10% p.a. Ajith
will get a salary of Rs.1000 p.m & Chandhu is eligible to get Rs.9000 as Commission.
After the preparation of final accounts at the end of the year 31 st march 2019, it was
found that Interest on Capital & drawings, Ajith’s Salary and Chandhu’s Commission
had not been taken into account. Pass the adjusting journal entry in the books of the
firm
Analysis Table
Particulars Ajith Chandhu Total
Interest on Capital (Cr) 8000 4000 12000
12000 ……. 12000
Salry (Cr) ….. 9000 9000
Commission (Cr)
Less: Interest on Drawings (Dr) 2000 1000 3000
18000 (Cr) 12000(Cr) 30000

Less: Division of firm’s loss in
(Rs.30000) profit sharing ratio (2:1) 20000(Dr) 10000(Dr)
(Dr)
Total 2000(Dr) 2000(Cr) ……..
(Rs)
Ist April Ajith's Capital a/c Dr 2000
2020
To Chandhu 's Capital a/c 2000
(Adjusting in respect of omission of
Interest on Capital & Drawings,
Salary and Commission in the
previous year )
Illustration - 5
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 31-3-2016.
The profits ` 30,000 for the year ended 31-3-2016 were divided between the partners
without allowing interest on capital @ 12% p.a. and salary to Piya @ ` 1,000 per month.
During the year Piya withdrew ` 8,000 and Bina withdrew ` 4,000. Showing your working
notes clearly, pass the necessary rectifying entry.
16
2
Illustration – 5 [ Solution ]
16
3
16
4
16
5
Illustration - 6
Puneet and Akshara were partners in a firm sharing profits and losses in the ratio of 2:3.
The following was the balance sheet of the firm as on 31st March, 2019.
16
6
Illustration - 6
The profits ` 40,000 for the year ended 31st March, 2019 were divided between the
partners without allowing interest on capital @ 5% p.a. and commission to Akshara @ `
1,000 per quarter.
The drawings of the partners during the year were :
Puneet ` 2,500 per month.
Akshara ` 10,000 per quarter.
Showing your workings clearly, pass necessary adjustment entry in the books of the firm.
16
7
16
8
16
9
17
0
When Separate Adjustment
Entries for Each Error and
Omission is Passed
171
Omission of Items like Interest on Capital
Salary, commission , etc.
Work out the amounts of omitted items that are to be credited to partners'
capital accounts such as interest on capital, salaries to partners, etc. The
following journal entry for the adjustment is recorded :
Profit and Loss Adjustment a/c Dr.
To Partners' Capital a/c (individually)

Omission of interest on Drawings
Work out the amounts of omitted items which are to be debited to

Partners' Capital Accounts such as interest on drawings and record the
following adjustment entry are recorded :
Partners' Capital (individually) a/c Dr.
To Profit and Loss Adjustment a/c

The balance of the Profit and Loss Adjustment Account as worked out in
point 4 above be transferred to the partners' capital accounts in their profit
sharing ratio. Thus, the Profit and Loss Adjustment Account will stand closed. It
will involve the following journal entry :
If it is a credit balance (profit)
Profit and Loss Adjustment a/c Dr.
Partners' Capital (individually) a/c
If it is a debit balance (loss)
Partners' Capital (individually) a/c Dr.
Profit and Loss Adjustment a/c
Illustration - 7
Asha and Bony are partners in a firm sharing profits equally. Their capital accounts as
on December 31, 2000 showed balances of Rs. 60,000 and Rs. 50,000 respectively. After
taking into account the profits of the year 2000, which amounted to Rs 20,000, it was
subsequently found that the following items have been left out while preparing the final
account of the year ended 2000.
(i) The partners were entitled to interest on capitals @ 6% p.a.
(ii) The drawings of Asha and Bony for the year 2000 were Rs.8,000 and
Rs.6,000 respectively. The interest on drawings was also to be charged @ 5% p.a.
(iii) Asha was entitled to salary of Rs.5,000 and Bony, a commission of Rs.2,000 for the
whole year.
It was decided to make the necessary adjustments to record the above omissions. Give
the necessary journal entries and prepare the profit and loss adjustment account and
Partners' capital accounts.
Journal
Date Particulars l/f Debit Credit
Rs. Rs.
Profit and Loss Adjustment Account a/c Dr 6,240

To Asha's capital 3480
2,760
To Bony's capital
( Interest on capital Transferred to Profit &
Loss Adjustment a/c)
Profit and Loss Adjustment Account a/c Dr 7000

5000
To Asha's capital (Salary)
2000
To Bony's capital (Commission )
( Salary & Commission for Partners
transferred to P&L Adjustment a/c)

Journal
Date Particulars l/f Debit Credit
Rs. Rs.
Asha's capital a/c Dr 200

Bony's capital a/c Dr 150
350
To Profit and Loss Adjustment Account
( Interest on drawingsTransferred to Profit &
Loss Adjustment a/c)
Asha's capital a/c Dr 6445

Bony's capital a/c Dr 6445
To Profit and Loss Adjustment Account 12,890
( Loss on Profit & Loss Adjustment a/c
transferred to capital a/c)
Profit and Loss Adjustment Account
for the year ended December 31, 2000
Dr. Cr.
Capital (Interest on capital) Capital ( Interest on Drawings )
Asha 3,480 Asha 200
Bony 2,760 6,240 Bony 150 350
Asha's capital (Salary) 5,000 Capital (Loss on adjustments )
Bony's capital (Commission ) 2,000
Asha 6,445 12,890
Bony 6,445

13,240 13,240
Dr. Cr.
Particulars Asha Boney Particulars Asha Boney

To Profit and Loss By Balance b/d 60000 50000
Adjustment: (interest By Profit and Loss
on Adjustment: 200 150 (Interest on Profit and
drawings) Loss capital) 3480 2760
To Profit and Loss By Profit and Loss
Adjustment: (loss on (Loss on Adjustment
Adjustment) 6445 6445 Adjustment) (Salary) 5000
To balance c/d By Profit and Loss
61,835 48,165 (Loss on Adjustment
Adjustment)(Commission) 2000
68480 54760 68480 54760

Analysis Table
Particulars Asha Bony
Amount credited 8,480 4,760
(Interest on capital, salary and
commission)
Amount debited 6,645 6,595

(Interest on drawings and share of loss)
Total Cr. 1,835 Dr. 1,835
Direct Adjustment Journal Entry

Bony's Capital a/c Dr. 1,835
To Asha's Capital a/c 1,835
After recording the adjustment entry , the Partners’
Capital Account will be like this;
Dr. Cr.
Particulars Asha Boney Particulars Asha Boney
To Asha’s Capital 1835 By Balance b/d 60000 50000
To Balance b/d 61835 48165 By Bony’s Capital 1835

61835 50000 61835 50000

Accounting For Partnership Firms - Fundamentals 2021

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Accounting For Partnership Firms - Fundamentals 2021

Uploaded by

Copyright:

Available Formats

A partnership is the result of an agreement between two or

The purpose of partnership must be to earn profit. The

Liability of each partner is unlimited . It means that

1.For the transfer of Net profit

Profit and Loss Appropriation a/c Dr.

6. For Transfer to Reserve:

Prepare Profit and Loss Appropriation Account.

Profit and Loss Appropriation Account

Prepare Profit and Loss Appropriation Account.

Profit transferred to:

Prepare Profit and Loss Appropriation Account of the firm.

Profit and Loss Appropriation Account

Profit and Loss Appropriation Account

Particulars Amount Particulars Amount

Note: Interest on capital is to be treated as an appropriation of profits and is to be

Profit and Loss Appropriation Account

Vijay 3,000 7,800

Profit and Loss Appropriation Account

Bhanu 1,20,000 2,40,000

Profit transferred to:

Amar’s Capital A/c 80,000

Bhanu’s Capital A/c 80,000

Charu’s Capital A/c 80,000 2,40,000

A, B, C, and D are partners in a firm sharing profits as 4 : 3 : 2 : 1 respectively.

• Fixed Capital Method

• Fluctuating Capital Method

Cash/Bank (Amount Balance b/d Xxxx

Particulars Ajith Sajith

Partner’s Capital Account

To Balance c/d 1000000 750000 By Balance b/d 1000000 750000

1000000 750000 1000000 750000

72500 45900 72500 45900

1072500 792750 1072500 792750

Partner’s Capital Account

To Balance c/d 50000 30000 By Balance b/d 50000 30000

50000 30000 50000 30000

To Drawings 6000 5000 By Interest on

18000 6800 18000 6800

Partner’s Capital Account

68000 36800 68000 36800

Partner’s Capital Account

To Balance c/d 150000 125000 By Balance b/d 150000 125000

150000 125000 150000 125000

To Balance b/d 3500 By balance b/d 3500

71000 63000 71000 63000

Partner’s Capital Account

215000 187000 215000 187000

Interest on capital of Sathish = 25000 ×6 /100 = 1500

Interest on capital of Ram = 30000 ×6 /100 = 1800

Santhosh and Raju started partnership business on 1 st January 2010 by contributing

In this case we have to Calculate opening capital , for this we

Rahul = 20,00,000 × = Rs 1,00,000

Rohit = 18,00,000 × = Rs 90,000

Karan = 16,00,000 × = Rs 80,000

Mountain 3,70,000 × = Rs 37,000

Year end of a firm is 31st December , Rahul a partner

Interest on Drawings = 5000×8×6 = 525

Interest on Drawings = 7000×12×6 = 420

May 1 5000 8 5000 × 15/𝟏𝟎𝟎 × 8/𝟏𝟐 = 500

Interest on drawings = Sum of Products × Rate of Interest × 1

If a partner withdraws a fixed amount at regular intervals, the interest on

Total Drawings = 6000 × 12 = 72000