Commerce

ACCOUNTING FOR PARTNERSHIP FIRM – Fundamentals

What do you mean by Partnership and Partnership firm ?

Partnership is a relationship between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

 The person who has entered into a partnership with one in another individual is called a partner and collectively known as a firm.

● ESSENTIAL FEATURES OF PARTNERSHIP

1. Two or more persons

2. Agreement

3. Lawful business

4. Profit sharing

5. Business can be carried on by all or any of the partners acting for all.

 ● INTEREST ON PARTNER’S LOAN

If any partner gives loan to the firm heabould receive interest at the agreed rate as specified in the Partnership Deed In the absence of an agreement or deed, the Indian Partnership Act, 19; will apply and the lending partner will get interest @6% p.a. on loan.

Nature of Interest on Partners Loan

Interest on partner’s loan is a charge against profit It means that a partner will get interest on loan Accounting Treatment Interest on partner’s loan being a charge against profit is debited to profit and Loss Account.

Accounting Treatment 

Interest on partner’s loan being a charge against profit is debited to profit and Loss Account on whether the firm has earned profit or incurs loss on the other hand, interest on a partner’s loan is again to the partner as a lender. Hence, it is credited to his Loan Account and not to his Capital Account. Journal entries passed are:

 ¡] To provide interest on partners loan:

        Interest on partners loan account       …Dr

                 To partners loan account      

 ¡¡] To close the internet interest on partners loan account :

        Profit and loss account         …Dr

                 To interest on partners loan account

● It is important to distinguish Loan Account and Capital Account of a partner because:

1. As per the Indian Partnership Act, 1932, partner’s loan is repayable on dissolution before repayment of capital to partners, and

2. In the absence of any agreement, partners get interest 6% pa on loan advanced whereas they are not entitled to interest on capital.

● DIFFERENCE BETWEEN P&L a/c And P&L Appropriation a/c.

• PARTNER’S CAPITAL ACCOUNT

It is of two types, namely, 

• Fixed Capital Account
• Fluctuating Capital Account

• FIXED CAPITAL ACCOUNT

It is further divided into 

• CAPITAL ACCOUNT
  • Credit with 
    • Further capital introduced
  • Debit with 
    • Drawings against capital

• CURRENT ACCOUNT
  • Credit with 
    • Remuneration
    • Interest on drawing
    • Share of profit
  • Debit with
    • Interest on drawing
    • Drawings
    • Share of loss

• FLUCTUATING CAPITAL ACCOUNT
  • Credit With
    • Further Capital introduced
    • Remuneration
      • Interest on capital 
      • Share of profit
  • Debit With
    • Drawing against Capital
    • Interest on drawings
    • Drawings
    • Share of loss

• REMUNERATION

 Commission under the two method is computed follows : 

[¡]  Percentage  of net profit 【before charging Commission】

  ◆ Net Profit before charging comm. × (Rate of commission/ 100)

           [¡¡]  Percentage of net profit 【after charging Commission】

     ◆Net profit (before Comm.) ×  (Rate of commission / 100 + Rate of commission)

→ ACCOUNTING TREATMENT

◇ On allowing REMUNERATION

      Partner’s Salaries a/c.                       …Dr

                To Partner’s current a/c.                       …Cr

                To Partner’s capital a/c.                

◇ On closure of REMUNERATION

      Profit & loss appropriation a/c.            …Dr

                To Partner’s Salaries a/c 

• CALCULATION OF INTEREST ON DRAWINGS

1. SIMPLE METHOD 

                    Total of product × (Rate of interest / 100) × (1 / 12)

2. AVERAGE PERIOD METHOD 

        Total drawings × (Rate of interest/100) × (Average profit/12)    

       ~ Average Profit = Months left after 1  drawing + (Months left after last drawing / 2)

•  DIFFERENT SITUATION FOR CALCULATING INTEREST ON DRAWINGS

1.  Beginning of every month : 6 and a half month
2.  End of every month :  5 and a half month 
3.  Middle of every month : 6 months 
4.  Beginning of each quarter :  7 and a half month 
5.  Middle of each quarter : 6 months 
6.  End of each quarter : 4 and a half month 
7.  If fixed amount is withdrew during : 6 months 
8.  Beginning of each month 3 and half months 
9.  Middle of each month : 3 months 
10.  End of each month : 2 and a half month

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