ACCOUNTING FOR PARTNERSHIP FIRMS - FUNDAMENTALS.pptx

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1. Accounting For Partnership Firms Fundamentals

2. CONTENTS Meaning of Partnership Features of Partnership Partnership Deed Contents Of The Partnership Deed. Rules Applicable in the Absence of Partnership Deed. Partnership Accounts.

3. 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.

4. Features of Partnership 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

5. 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.

6. Features of Partnership…. 3. Business The partners should carry some business and should be some lawful business.

7. Features of Partnership…. 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.

8. Features of Partnership…. 5. Utmost Good Faith ‘Good Faith’ is the essence of a partnership. Hence each partner should be just and faithful to another.

9. Features of Partnership…. 6. Unlimited Liability Liability of each partner is unlimited . It means that partners are individually and collectively liable for all debts of the firm.

10. Features of Partnership…. 7. No Separate Legal Existence A partnership is not a legal entity . It has no separate legal existence apart from the partners.

11. 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 Partnership’.

12. Contents of Partnership Deed Name of the firm Name and addresses of all partners. Nature and place of business. Date of commencement of partnership. Duration of Partnership , if any Capital contribution by the partners. The amount Which can be withdrawn by each partner. Rules regarding operation of bank accounts. Division of profit or loss. Interest on capital / drawings. Interest in partner’s loan. Salaries, commission , etc. if payable to any partner. Details of division of work among the partners. Ascertainment of goodwill on admission, retirement & death of a partner. Settlement of accounts on retirement or death of a partner and on dissolution of a firm.

13. 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.

14. 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.

15. Profit and Loss Appropriation Account

16. 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.

17. Journal Entries For Preparing The Profit And Loss Appropriation Account 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)

18. Journal Entries For Preparing The Profit And Loss 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)

19. Journal Entries For Preparing The 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)

20. Journal Entries For Preparing The Profit And Loss Appropriation Account 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 ) Profit and Loss Appropriation a/c Dr. Salary to partner a/c ( For charging salary allowed to a partner )

21. Journal Entries For Preparing The Profit And Loss Appropriation Account 5. Partner's Commission Commission to partner a/c Dr. Partner's capital/current a/c ( Commission due to the partner ) Profit and Loss Appropriation a/c Dr. Commission to partners a/c ( Commission paid to a partner is charged to Profit and Loss Appropriation account )

22. Journal Entries For Preparing The Profit And Loss Appropriation Account 6. For Transfer to Reserve: Profit and Loss Appropriation a/c Dr. Reserve (Amount transferred to Reserve)

23. Journal Entries For Preparing The Profit And Loss Appropriation Account 7. Transfer of share of Profit or Loss to P&L Appropriation If Profit: Profit and Loss Appropriation a/c Dr. Partner's Capital/Current a/c If Loss: Partner's Capital/Current a/c Dr. Profit and Loss Appropriation a/c

24. Profit & Loss Appropriation Account Dr Cr Particulars Amount Particulars Amount To Profit an loss (In case of loss) To Interest on Capital A xxx B xxx To Salaries To Commission To Reserve To Profit Transferred to (in the case of profit) A’s capital / current A/c xxx B’s Capital / Current A/c xxx Xxx xxx Xxx Xxx Xxx xxxx By Profit & Loss Account (In case of profit) By Interest on Drawings A xxx B xxx By Loss transferred to ( in the case of loss) A’s capital / current A/c xxx B’s Capital / Current A/c xxx Xxx Xxx xxx xxxx xxxx

25. 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.

26. Solution -1 Profit and Loss Appropriation Account Dr.     Cr. Particulars Amount Rs Particulars Amount 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        

27. 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.

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

29. 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.

30. Solution -3 Profit and Loss Appropriation Account Dr.     Cr. Particulars Amount Rs Particulars Amount 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     Profit transferred to:       Prem’s Current A/c 20,850       Manoj’s Current A/c 13,900 34,750       92,250   92,250        

31. 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.

32. Solution -4 Profit and Loss Appropriation Account Dr.     Cr. Particulars Amount Rs Particulars Amount 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

33. 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.

34. 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.

35. Solution -5 Profit and Loss Appropriation Account Dr.     Cr. Particulars Amount Rs Particulars Amount 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        

36. 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.

37. Solution -6 Profit and Loss Appropriation Account Dr.     Cr. Particulars Amount (₹) Particulars Amount (₹) Salary:   Profit and Loss A/c 4,80,000 Amar 1,20,000       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       4,80,000   4,80,000        

38. 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.

39. Solution -7 Profit and Loss Appropriation Account Dr.     Cr. Particulars Amount Rs Particulars Amount 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     Profit transferred to:                            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

40. Preparation of Capital Accounts of Partners Under Fixed & Fluctuating Capital Methods

41. 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.

42. Methods of Maintaining Capital Accounts Mainly there is two methods of maintaining capital accounts of partners. Fixed Capital Method Fluctuating Capital Method

43. 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.

44. Date Particular Amount Rs. Date Particular Amount Rs   Cash/Bank (Amount withdrawn out of capital) Balance c/d     Xxxx Xxx   Balance b/d Cash/Bank/ Assets ( Additional Capital introduced)   Balance b/d Xxxx     Xxx XXXXX XXXXX Partners’ Capital Account Dr Cr

45. Date Particular Amount Rs Date Particular Amount Rs.   Drawings Interest on drawings Profit & loss Appropriation a/c (Share of loss in case of loss) Balance c/d xxx xxx   Xxx     Xxx   Balance b/d Interest on Capital Salary Commission P&l Appropriation a/c (Share of profit in case of profit)   Balance b/d Xxx xxx xxx Xxx   xxx xxxx xxxx   xxx Partners’ Current Account Dr Cr

46. 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.

47. Date Particular Amount Rs. Date Particular Amount Rs   Drawings Interest on drawings Profit & loss Appropriation a/c (Share of loss in case of loss) Balance c/d xxx Xxx   Xxx     xxx   Balance b/d Assets Cash/Bank/ (Additional Capital introduced) Interest on Capital Salary Commission P&l Appropriation a/c (Share of profit in case of profit)   Balance b/d Xxxx xxx Xxx     xxx xxx xxx xxx     xxxx xxxx   xxx Partners’ Capital Account Dr Cr

48. Illustration - 1 Particulars Ajith Sajith Interest on Capital Drawing (During 2010) Interest on Drawings Salary Commission Share in loss for the year 2010 5% 22500 1350 15000 7500 45000 5% 15000 900   5250 30000 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.

49. Solution – Under Fixed Capital Method. 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 Capital Account Dr Cr

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

51. Solution – Under Fluctuating Capital Method Partner ’ s Capital Account Dr Cr Date Particulars Ajith Sajith Date Particulars Ajith Sajith   To Drawings To Interest on Drawings To Profit & loss Appropriation (loss) To Balance c/d 22500   1350   45000   1003650 15000   900   30000   746850   By Balance b/d By Interest on capital By Salary By Commission 1000000 50000   15000 7500 750000 37500   ------- 5250 1072500 792750 1072500 792750

52. 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.

53. When Capitals are Fixed Date Particulars Anandu Ravi Date Particulars Anandu Ravi   To Balance c/d 50000   30000   By Balance b/d 50000 30000 50000 30000 50000 30000         Partner ’ s Capital Account Dr Cr

54. Date Particulars Anandu Ravi Date Particulars Anandu Ravi   To Drawings To Interest on Drawings To Balance c/d 6000   300 11700     5000   200 1600       By Interest on capital By Salary By P&L Appropriation a/c (Profit)   3000 5000   10000 1800     5000   18000 6800 18000 6800         Partner ’ s Current Account Dr Cr

55. When Capital Fluctuating Date Particulars Anandu Ravi Date Particulars Anandu Ravi   To Drawings To Interest on Drawings To Balance c/d 6000   300 61700   5000   200 31600   By Balance b/d By Interest on capital By Salary By P&L Appropriation a/c (Profit)   50000 3000 5000   10000 30000 1800     5000   68000 36800 68000 36800         Partner ’ s Capital Account Dr Cr

56. Illustration – 3 Particulars Sajeev (Rs) Rajeev(Rs) Capitals on 1 st 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 ) 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 31 st December 2011.

57. When Capitals are Fixed Date Particulars Sajeev Rajeev Date Particulars Sajeev Rajeev   To Balance c/d 150000   125000   By Balance b/d 150000 125000 150000 125000 150000 125000         Partner ’ s Capital Account Dr Cr

58. Date Particulars Sajeev Rajeev Date Particulars Sajeev Rajeev   To Balance b/d To Drawings To Interest on Drawings To Balance c/d   15000   800 55200     3500 12500   500 44900       By balance b/d By Interest on capital By Salary By commission By Interest on loan By P&L Appropriation a/c (Profit)   3500 16000   10000 9000   2500   30000   12000   12000 14000   1000   24000 71000 63000 71000 63000     Partner ’ s Current Account Dr Cr

59. When Capital Fluctuating Date Particulars Sajeev Rajeev Date Particulars Sajeev Rajeev   To Drawings To Interest on Drawings To Balance c/d 15000  800  199200 12500  500 174000   By Balance b/d By Interest on capital By Salary By commission By P&L Appropriation a/c (Profit)   150000  16000 10000 9000  30000 125000  12000 12000 14000  24000 215000 187000 215000 187000         Partner ’ s Capital Account Dr Cr

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

61. When Capital Fluctuating Particulars Sohan (₹) Mohan (₹) Particulars Sohan (₹) Mohan (₹) Drawings A/c 50,000 30,000 Balance b/d 4,00,000 3,00,000 Interest on Drawings A/c 1,250 750 Interest on Capital A/c      20,000 15,000       P&L Appropriation A/c 60,000 50,000 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             Partner ’ s Capital Account Dr Cr

62. Calculation Of Interest On Capital & Interest On Drawings

63. 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;

64. 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 1 st January 2013 were 25000and 30000. Calculate interest on capital at 6% per annum for the year ending 31 st December 2013. Interest on capital of Sathish = 25000 ×6 /100 = 1500 Interest on capital of Ram = 30000 ×6 /100 = 1800

65. 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 1 st June and Raju introduced Rs . 10000 on 1 st August. The interest on capital is allowed @6% p.a. accounts are closed on December 31 st every year. Calculate interest on capital to be allowed to Santhosh and Raju for the year 2010.

66. 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

67. 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.

68. 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.

69. 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

70. 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.

71. Solution - 6 April 01, 2016 to September 30, 2016 2,50,000 × 10 × 6 =   Rs 12,500   100 12   October 01,  2016 to March 31, 2017 2,00,000 × 10 × 6 =   Rs 10,000   100 12   Interest on Sunflower’s Capital Rs 22,500

72. Solution - 6 April 01, 2016 to September 30, 2016 1,50,000 × 10 × 6 =   Rs   7,500   100 12   October 01,  2016 to March 31, 2017 2,00,000 × 10 × 6 =   Rs 10,000   100 12   Interest on Pink Rose’s Capital Rs 17,500

73. 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 31 st December 2012.

74. 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.

75.   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 Hill 2,65,000 ×  = Rs 26,500 Rock 1,60,000 ×  = Rs 16,000

76. Calculation Of Interest On Drawings

77. 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.

78. 1. Amount of withdrawal , rate of interest and date of withdrawal given Year end of a firm is 31 st December , Rahul a partner withdraws Rs.5000 on 1 st July. Calculate the interest on drawings at 8% per annum. Interest on Drawings = 5000×8×6 = 525 100×12

79. 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

80. 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

81. 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 × ×  

82. Rajan a partner in a firm, withdrew the following amounts during the year 2019 Rs . February 1 2000 May 1 5000 June 30 2000 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. Illustration - 1

83. 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 2000× 15/𝟏𝟎𝟎× 0/𝟏𝟐 = 0 Total Interest on Drawings 1075 Solution

84. 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.

85. Rajan a partner in a firm, withdrew the following amounts during the year 2019 Rs . February 1 2000 May 1 5000 June 30 2000 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. Illustration- 2

86. 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 Total 86000 Interest on drawings = Sum of Products × Rate of Interest × 1 100 12 = 86000 × 15 × 1 100 12 = 1075 Solution

87. 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

88. 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.

89. 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

90. 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; Average period = 11+ 0 2 = 5½ Thus interest on the whole amount of drawings is to be calculated for 5½ months at the agreed rate.

91. 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

92. 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 Thus interest on the whole amount of drawings is to be calculated for 6 months at the agreed rate.

93. 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  

94. 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.

95. Solution - 2

96. Solution - 2

97. Solution - 2

98. 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; Average period = 12+ 3 2 = 7 Thus interest on the whole amount of drawings is to be calculated for 7 months at the agreed rate.  

99. 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 Interest on Drawings = 40000 × 10 × 7 100 × 12 = 2500    

100. 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; Average period = 9+ 0 2 = 4 Thus interest on the whole amount of drawings is to be calculated for 4 months at the agreed rate.  

101. Illustration Calculate interest on drawing of Vimal @ 10 % p.a. if the withdrew Rs . 10000 end of each Quarter Total Drawings = 10000 × 4 = 40000 Interest on Drawings = 40000 × 10 × 4 100 × 12 = 1500    

102. 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.

103. 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 Interest on Drawings = 40000 × 10 × 6 100 × 12 = 2000  

104. 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.

105. 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

106. 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

107. 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

108. G) When Drawings of Equal Amount are only DURING a period of 6 month ending 31 st March a) In the Beginning of each month Average period = = 3 b) In the End of each month Average period = = 2 c) In the Middle of each month Average period = = 3  

109. Illustration - 3 Calculate interest on drawing of Vimal @ 10 % p.a. For monthly drawings for 6 months (Last 6 months) Rs . 10000  a) In the Beginning of each month b) In the End of each month c) In the Middle of each month

110. Solution Total Drawings = 10000 × 6 = 60000 a) In the Beginning of each month Interest on Drawings= = 1750 b) In the End of each month Interest on Drawings = = 1250 c) In the Middle of each month Interest on Drawings = = 1500  

111. H) When Drawings of Equal Amount are only DURING a period of 9 month ending 31 st March a) In the Beginning of each month Average period = = 5 b) In the End of each month Average period = = 4 c) In the Middle of each month Average period = = 4.5  

112. Illustration - 4 Calculate interest on drawing of Amal @ 10 % p.a. For monthly drawings for 9 months (Last 9 months) Rs . 5000  a) In the Beginning of each month b) In the End of each month c) In the Middle of each month

113. Solution Total Drawings = 5000 × 9= 45000 a) In the Beginning of each month Interest on Drawings= = 1875 b) In the End of each month Interest on Drawings = = 1500 c) In the Middle of each month Interest on Drawings = = 1688  

114. 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

115. Illustration- 6 Calculate interest on drawings for the following cases If Remya has withdrawn Rs.25000 during the year and interest charged @10% p.a. If Divya has withdrawn Rs.25000 during the year and interest charged @10%

116. Solution Interest on Drawings of Remya = = 1250 Interest on Drawings of Divya = = 2500  

117. 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.

118. Solution

119. Solution

120. 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

121. 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  

122. 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  

123. 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)

124. 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)

125. Guarantee Of Profit To A Partner

126. 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.

127. Guarantee Of Profit To A Partner 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.

128. 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. Illustration - 1

129. 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

130. Profit & Loss Appropriation A/C Particular Amount Particular Amount Anil’s Share 160000 Less: Share in Deficiency 13333 Binil’s Share 80000 Less: Share in Deficiency 6667 Rinil’s Share 80000 Add: Deficiency Received from Anil 13333 Binil 6667 146667 73333 100000 By Profit and loss (Net profit) 320000 320000 320000 a) Guarantee Given By the Firm Solution

131. Guarantee Of Profit To A Partner 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.

132. 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

133. 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   Illustration -2

134. 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

135. Solution Profit & Loss Appropriation A/C Particulars Amount Particulars Amount 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 Varun 51600 2,50,000     860000 860000    

136. Guarantee Of Profit To A Partner 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.

137. 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 Illustration -3

138. 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

139. Solution Profit & Loss Appropriation A/C Particulars Amount Particulars Amount Arun 100000 (-) Share in deficiency 10000     90000 Profit & Loss (Net Profit)     250000       Boby’s Share 100000     Chintu’s 50000 + deficiency received from Arun 10000 60000     250000 250000    

140. 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 Illustration -3

141. 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

142. Solution Journal Entry Date Particular l/f Debit Credit Arun’s Capital a/c Dr Boby’s Capital a/c Dr Chintu’s Capital a/c Dr To Profit & Loss a/c ( Amount loss shared among all partners) 40000 40000 20000 100000 Arun’s Capital a/c Dr Boby’s Capital a/c Dr To Chintu’s Capital a/c (Deficiency of Chintu met by others equally) 40000 40000 80000

143. ADJUSTMENTS IN CLOSED ACCOUNTS

144. 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.

145. 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

146. 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.

147. Illustration Interest on capital of ; Arun = 100000 × = 10000 Binu = 60000 × = 6000 Chandran = 50000 × = 5000  

148. 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 (equally) ( Dr ) 7000 7000 7000 21000 Total 3000(Cr) 1000( Dr ) 2000 ( Dr ) ……..

149. Adjustment Journal Entry Date Particular l/f Debit (Rs) Credit (Rs) Ist April 2020 Binu's Capital a/c Dr Chandran’s Capital a/c Dr To Arun's Capital a/c (Adjusting in respect of omission of Interest on capital in the previous year ) 1000 2000 3000

150. Illustration - 2 Biju , Anil & Ravi are partners sharing profit and losses in 3:2:1. The profit at the end of the year 31 st 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

151. Analysis Table Particulars Biju Anil Ravi Total Salary of Partners (Cr) 12000 6000 12000 30000 Division of total salary in profit sharing ratio (3:2:1) ( Dr ) 15000 10000 5000 30000 Total 3000( Dr ) 4000( Dr ) 7000 (Cr) ……..

152. Adjustment Journal Entry Date Particular l/f Debit (Rs) Credit (Rs) Ist April 2020 Biju's Capital a/c Dr Anil’s Capital a/c Dr To Ravi 's Capital a/c (Adjusting in respect of omission of Salary in the previous year ) 3000 4000 7000

153. 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 31 st 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

154. Analysis Table Particulars Biju Anil Ravi Total Interest on Drawings ( Dr ) 2400 2000 1600 6000 Division of total Interest on Drawings in profit sharing ratio (3:2:1) (Cr) 3000 2000 1000 6000 Total 600(Cr) …… 600 ( Dr ) ……..

155. Adjustment Journal Entry Date Particular l/f Debit (Rs) Credit (Rs) Ist April 2020 Ravi's Capital a/c Dr To Biju 's Capital a/c (Adjusting in respect of omission of Interest on Drawings in the previous year ) 600 600

156. Illustration - 4 Ajith & Chandhu are partners sharing profit and losses in 2:1. Their capitals on 1 st 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

157. Analysis Table Particulars Ajith Chandhu Total Interest on Capital (Cr) Salry (Cr) Commission (Cr) Less: Interest on Drawings ( Dr ) 8000 12000 ….. 2000 4000 ……. 9000 1000 12000 12000 9000 3000 Less: Division of firm’s loss in (Rs.30000) profit sharing ratio (2:1) ( Dr ) 18000 (Cr) 20000( Dr ) 12000(Cr) 10000( Dr ) 30000 Total 2000( Dr ) 2000(Cr) ……..

158. Adjustment Journal Entry Date Particular l/f Debit (Rs) Credit (Rs) Ist April 2020 Ajith's Capital a/c Dr To Chandhu 's Capital a/c (Adjusting in respect of omission of Interest on Capital & Drawings, Salary and Commission in the previous year ) 2000 2000

159. 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. 162 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.

160. Illustration – 5 [ Solution ] 163

161. Illustration – 5 [ Solution ] 164

162. Illustration – 5 [ Solution ] 165

163. 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. 166

164. Illustration - 6 167 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.

165. Illustration – 6 [ Solution ] 168

166. Illustration – 6 [ Solution ] 169

167. Illustration – 6 [ Solution ] 170

168. When Separate Adjustment Entries for Each Error and Omission is Passed 171

169. 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)

170. 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

171. 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

172. 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. Illustration - 7

173. Journal Date Particulars l/f Debit Rs . Credit Rs . Profit and Loss Adjustment Account a/c Dr To Asha's capital To Bony's capital ( Interest on capital Transferred to Profit & Loss Adjustment a/c)      6,240 3480 2,760    Profit and Loss Adjustment Account a/c Dr To Asha's capital (Salary) To Bony's capital (Commission ) ( Salary & Commission for Partners transferred to P&L Adjustment a/c)   7000  5000 2000 Illustration – 7 [ Solution ]

174. Journal Date Particulars l/f Debit Rs . Credit Rs . Asha's capital a/c Dr Bony's capital a/c Dr To Profit and Loss Adjustment Account ( Interest on drawingsTransferred to Profit & Loss Adjustment a/c)      200 150 350    Asha's capital a/c Dr Bony's capital a/c Dr To Profit and Loss Adjustment Account ( Loss on Profit & Loss Adjustment a/c transferred to capital a/c)  6445 6445 12,890 Illustration – 5 [ Solution ]

175. Profit and Loss Adjustment Account for the year ended December 31, 2000 Dr. Cr. Particulars Amount Particulars Amount Capital (Interest on capital) Asha 3,480 Bony 2,760 Asha's capital (Salary) Bony's capital (Commission )       6,240 5,000 2,000 Capital ( Interest on Drawings ) Asha 200 Bony 150 Capital (Loss on adjustments ) Asha 6,445 Bony 6,445       350     12,890   13,240   13,240 Illustration – 7 [ Solution ]

176. Partner ’ s Capital Account for the year ended December 31, 2000 Dr. Cr. Particulars Asha Boney Particulars Asha Boney To Profit and Loss Adjustment: (interest on Adjustment: drawings) To Profit and Loss Adjustment: (loss on Adjustment) To balance c/d     200       6445 61,835     150       6445 48,165 By Balance b/d By Profit and Loss (Interest on Profit and Loss capital) By Profit and Loss (Loss on Adjustment Adjustment) (Salary) By Profit and Loss (Loss on Adjustment Adjustment)(Commission)   60000     3480     5000 50000     2760           2000   68480 54760   68480 54760

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

178. After recording the adjustment entry , the Partners’ Capital Account will be like this; Particulars Asha Boney Particulars Asha Boney To Asha’s Capital To Balance b/d   61835 1835 48165 By Balance b/d By Bony’s Capital   60000 1835     50000         61835 50000   61835 50000 Partner ’ s Capital Account for the year ended December 31, 2000 Dr. Cr.

179. 183 N. Bala Murali Krishna