Tag: Accounts

Interest on Partner’s Capital | Past Adjustment | Guarantee of Profit

Commerce

December 26, 2020
/ Leave a Comment on Interest on Partner’s Capital | Past Adjustment | Guarantee of Profit

5 min
3 years
897 words

Tagged Accounts, Class 12, Partnership Firm

Interest on Partner’s Capital | Past Adjustment | Guarantee of Profit

INTEREST ON PARTNER’S CAPITAL 1. When Capitals of partners are different but profit-sharing ratio is equal. If a partner invests more capital as compared to other partners and the profit-sharing ratio is equal. interest paid […]

1. When Capitals of partners are different but profit-sharing ratio is equal.

If a partner invests more capital as compared to other partners and the profit-sharing ratio is equal. interest paid on capital compensates him or her for more investment. In case interest on capital is not paid, share in profit of a partner investing more capital will be equal to share of profit of partners investing less capital.

2. When Capitals of partners are not same and profit-sharing ratio is also not equal.

Partners investing less capital may get more share of profit and partners investing more capital may get less share of profit.

3. Capital increases the earning capacity of the firm.

Capital is the most important component of business. Capital helps in efficient conduct of business activities and therefore earning more profits. It is because of this reason that interest on capital is allowed.

At the same time, where profit is shared by the partners in the proportion of their capitals, interest on capital should not be allowed because the partner investing more capital gets more share of profit.

PROVISION RELATED TO IOC

Cases:

When the partnership deed does not exist or partnership deed does not have a clause as to interest on capital.
- → interest on capital is not allowed

When the partnership deed provides for interest on capital as a charge.
- → interest on capital is allowed whether there is profit or loss

When the partnership deed provides for interest on capital but is silent as to the treatment of interest as a charge or appropriation.
- → interest on capital is considered to be appropriation of profit interest on capital is allowed only if there is profit there are three possible situations:

(i) In case of loss interest on capital is not allowed.

(ii)In case of profit before interest is equal to or more than the interest:- interest on capital is allowed at the agreed rate.

(iii) In case of profit before interest is less than the interest:- interest is allowed only to the extent of profit in the ratio of interest on capital of each partner.

Interest on capital when profit available for appropriation is inadequate:

The profit of the form may be less than the amount of total interest on capital allowable to the partners in such a situation, interest on Capitals of the partners is calculated and the profit is distributed among the partners in the ratio of interest on capital.

PAST ADJUSTMENT

1. When single adjustment entry is passed :

A single adjustment entry is passed for the net amount of all the past adjustments.

2. When adjustment entries are passed in place of a single journal entry :

Accounting Entries –

Following Journal entries shall be passed through Profit and Loss Adjustment Account:

(i) Adjustment entries for the items which are to be credited to the Partners Capital/Current Accounts:

Profit and Loss Adjustment A/c

To Partners’ Capital/Current A/cs

(Being the adjustment made for previously omitted, now recorded)

(ii) Adjustment entries for the items which are to be debited to the Partners Capital/Current Accounts:

Partners’ Capital/Current A/cs

To Profit and Loss Adjustment A/c

(Being the adjustment made for previously omitted, now recorded)

(iii) For Net Profit/Loss due to above adjustments:

(a) For Profit

Profit and Loss Adjustment A/C

To Partners Capital/Current A/cs

(Being the profit on adjustment credited to Partners’ Capital/Current Accounts)

(b) For Loss

Partners’ Capital/Current A/cs.

To Profit and Loss Adjustment A/c

(Being the loss on adjustment transferred to Partners’ Capital/Current Accounts)

Note: If capitals of the partners are fixed, adjustment entries are passed through Partners

GUARANTEE OF PROFIT

1. Guarantee of profit by all the remaining partners

When all the remaining partners guarantee that the guaranteed partner shall be given a minimum amount of profit.

ACCOUNTING ENTRY

On distributing the profit as if there is guarantee agreement

Profit and Loss appropriation a/c …Dr

To A’s partners capital a/c

On charging deficiency to guaranteed partner

Guarantee partner capital a/c. …Dr

To Guaranteed partner capital a/c

2. Guarantee of profit by one or more of the existing or old partners

When one or more than one of the existing or old partner’s guarantee a minimum profit to another partner, the adjustments are made through the partners capital account.

Distribute loss among the partners in their profit sharing ratio. then the capital account of the guaranteed partner is credited with guaranteed minimum profit plus the amount of loss this amount is debited to remaining partners in their proper sharing ratio or to the debit of the partner who has guaranteed minimum profit to the guaranteed partner.

Directly, give the guaranteed amount to the guaranteed partner and distribute the loss of the firm plus the amount given to the guaranteed partner among the rest of the partners or who has guaranteed minimum profit to the partner.

It’s the same as the guarantee of all the partners as guarantee of profit to a partner means that the partners other than the guaranteed partner shall share the balance profit after profit equal to guarantee that amount is credited to the guaranteed partners capital account or current account.

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ACCOUNTING FOR PARTNERSHIP FIRM – Fundamentals

Commerce

October 1, 2020
/ Leave a Comment on ACCOUNTING FOR PARTNERSHIP FIRM – Fundamentals

4 min
3 years
619 words
2

Tagged Accounts, Partnership Firm

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 […]

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

SIMPLE METHOD

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

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

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

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