ACCOUNTING FOR PARTNERSHIP FIRMS
PARTNERSHIP MEANING:
PARTNERS: The persons(two or more) who together do business and share all.
FIRM: The above collectively called as firm.
PARTNERSHIP DEED: The written document of a partnership agreement is Partnership Deed.
PROVISIONS AFFECTING ACCOUNTING TREATMENT IN THE ABSENCE OF PARTNERSHIP DEED:
The provisions are:
1. Profit and losses are to be shared equally among the partners.
2. No partner is entitled to a salary.
3. Partners are not entitled to receive interest on their capital.
4. Interest is not to be charged on partners' drawings.
5. When a partner advances loan to the firm, he is entitled to receive interest at six percent per annum.
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)
- It is always DEBITED to Profit and Loss A/c Rent paid to a partner is also a charge against profits and it will also be DEBITED to Profit and Loss A/c.
- Harris and Usama started business in partnership on 1st January, 2019 without any agreement. Mr. Harris introduced capital Rs. 60,000 and Mr. Usama Rs. 40,000. On March 1st, 2019 Mr. Usama advanced Rs. 20,000 by way of loan to the firm. The profit for the year ended 31st, December 2019, was amounted to Rs, 18,000.
Required: Prepare Profit and Loss Appropriation Account at the end of 2019.
SOLUTION:
These exceptions are referred to as special aspects of partnership accounts and are as follows:
- Maintenance of Partners Capital Accounts
- Distribution of Profit and Loss among the partners.
- Adjustment for Wrong Appropriation of Profit
- Reconstitution of the Partnership Firm
- Dissolution of the Partnership Firm
Maintenance of Partners Capital Accounts
In a partnership business, the capital accounts are maintained by two different methods which are (a) Fixed Capital Method and (b) Fluctuating Capital Method.
In fixed capital method, two accounts are maintained which is capital account and current account, while in the fluctuating capital method only capital account is maintained.
Distribution of Profit and Loss Among Partners:
The distribution of profit and loss needs to be done carefully as there are more than one individual involved in the partnership business. For this purpose, a Profit and Loss Appropriation Account is prepared.
Adjustment for Wrong Appropriation of Profit:
One of the special aspects of partnership is the adjustment of partnership accounts whenever there is any adjustment or correction that needs to be made for any events in the past. It may happen that profit was shared in the wrong ratio between partners in the past, in such case the firm makes adjustments to perform rectification of the error.
Reconstitution of the Partnership Firm:
Reconstitution is referred to as the changes that occur in terms of partnership or in the partnership deed which leads to creation of new terms of agreement between the partners.
Following situations lead to the reconstitution of partnership firm:
- Admission of a new partner
- Retirement of a partner/ Death of a partner
- Insolvency of a partner
Dissolution of Partnership Firm:
- Dissolution of Partnership firm refers to winding up of the partnership business which leads to termination of all relationships between the firm and its partners.
PARTNER'S CAPITAL ACCOUNT :
1. FIXED CAPITAL ACCOUNTS METHOD
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