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Unit 5Partnership Accounts-I Q1) Explain P/L Appropriation account.A1) P/L Appropriation accountA partnership firm prepares a special component as part of its final accounts (after the preparation of Profit & Loss A/c) for the purpose of allocation and apportionment of its net profit or loss (along with Interest on Drawings, if any) among different heads, namely Partners’ remuneration (viz. Salary, Bonus, Commission etc.), Interest on Capital etc., and for making transfer to reserves. This component is referred to as the Profit & Loss Appropriation Account. It is that part of the final accounts that records the ‘appropriation items’, i.e., those items that occur only when the firm has sufficient profits. The different items that appear in the P/L Appropriation A/c are:

In the debit-side: Partners’ Remuneration (viz. Salary, Bonus, Commission, etc.), Interest on Capital, Transfer to Reserves and Distribution of profits amongst the partners.

In the credit-side: Net profit (as per P/L A/c ) and Interest on Drawings.

The journal entries for the preparation of Profit and LossAppropriation Account are given below:1. For transfer of the balance of Profit and Loss Account to Profit and LossAppropriation Account(a) In case of Net Profit :Profit and Loss A/c Dr.To Profit and Loss Appropriation A/c(Net Profit transferred to Profit and Loss Appropriation A/c)(b) In case of Net Loss :Profit and Loss Appropriation A/c Dr.To Profit and Loss A/c(Net Loss transferred to Profit and Loss Appropriation A/c)2. For Interest on CapitalFor transferring on Interest on Capital :Profit and Loss Appropriation A/c Dr.To Interest on Capital A/c(Interest on capital transferred to Profit & Loss Appropriation A/c)3. For Interest on DrawingsFor transferring Interest on Drawings :Interest on Drawings A/c Dr.To Profit and Loss Appropriation A/c(Interest on drawing transferred to Profit & Loss Appropriation A/c)4. For Partner’s SalaryFor transfer of partner’s SalaryProfit and Loss Appropriation A/c Dr.To Salary A/c(Salary transferred to profit & Loss Appropriation A/c)5. For Partner’s CommissionFor transferring commissionProfit and Loss Appropriation A/c Dr.To Commission A/c(Commission transferred to Profit and Loss Appropriation A/c)6. For Transfer of agreed amount to General ReserveProfit and Loss Appropriation A/c Dr.To General Reserve A/c(Transfer to General Reserve)7. For share of Profit or Loss appropriation(a) If ProfitProfit and Loss Appropriation A/c Dr.To Partner’s Capital/Current A/c(Profit transferred to capital/current A/c)(b) If LossPartner’s Capital/ Current A/c Dr.To Profit and Loss Appropriation A/c(Loss transferred to capital/current A/c)Format

Q2) Explain Capital & Current accountA2) Capital account is a personal account for each proprietor. In case of partnership firm there is a separate capital account for each partner. The capital contributed by each partner will be credited to the respective partner’s capital account. There are two methods of maintaining the capital accounts of the partners in the books of a firm. They are:

Fixed Capital Method

Fluctuating Capital Method

Fixed capital method

In this method, two accounts are maintained representing each partner viz. Capital Account and Current Account.

Partners’ Capital Account records transactions relating to the introduction of capital and permanent withdrawal of capital.

Other transactions between the partner and the firm viz. partner’s remuneration, interest on capital, interest on drawings share of profit or loss, etc. are recorded through Partners’ Current Account.

Since, the balance of the Capital Account remains unaltered from one accounting period to another (except for introduction of capital and withdrawal of capital), this method of maintaining the partners’ capital accounts is referred to as the Fixed Capital Method.

Capital accountCapital Account of each partner continues to show the same balance year after year and changes only if Additional Capital is introduced and withdrawal is made out of the capital.The Debit Side of this account shows:

Withdrawal Of Capital

Closing capital

The Credit Side of this account shows:

Opening Capital

Additional Capital

Current accountCurrent account is maintained to record transactions other than transactions relating to capital such as Drawings against Profit, Interest Allowed on Capital, Interest Charged on Drawings, Salary or Commission Payable to a Partner, Share of Profits/ Losses.Current Account of each partner is debited with:

Drawings by a partner against profit

Interest on Drawings

Share of Loss

Transfer of any amount to capital account permanently.

Similarly, Current Account of each partner is credited with:

Interest on Capital

Share of Reserves

Salary, Fees, Commission, Bonus

Share of Profit

Transfer of any amount from capital account permanently.

Dr. Partners’ Capital A/C Cr.

Particulars

To Bank A/C (Capital Withdraw)

To Balance c/f

By Balance b/f

By Bank A/C (Introduction of further capital)

Dr. Partners’ Current A/C Cr.

Particulars

To Drawings A/C

To Interest on drawings A/C

To P/L Appropriation A/C (Share of loss)

To Balance c/f

By Balance b/f

By interest on Capital A/C

By Partners’ Salary A/C

By Partners’ Commission A/c

By P/L Appropriation A/c (Share of Profit)

Fluctuating capital account

In this method, a single account is maintained representing each partner viz. Capital Account.

Partners’ Capital Account records all the transactions entered into between the partners and the firm during an accounting period.

Since, the balance of the Capital Account regularly changes or fluctuates, this method of maintaining the partners’ capital accounts is referred to as the Fluctuating Capital Method.

Particulars	X	Y	Particulars	X	Y
To Drawings A/C To Bank A/C (Capital withdrawn) To Interest on drawings A/C To P/L Appropriation A/C (Share of loss) To Balance c/f			By Balance b/f By Bank A/C (Introduction of further capital) By interest on Capital A/C By Partners’ Salary A/C By Partners’ Commission A/c By P/L Appropriation A/c (Share of Profit)

Journal Entries related to Partnership Capital AccountJournal entries are need before preparation of partnership capital accounts. (1) Transfer of Drawings Journal Entry

(2) Interest on Drawings Journal Entry

(3) Fresh Capital Introduce Journal Entry

(4) Excess Capital withdrawal Journal Entry

(5) Interest on Capital Journal Entry

(6) Salary / Commission Journal Entry Salary-Commission Journal Entry

Q3) Explain difference Capital & Current accountA3)

Difference	Capital account	Current account
Need	Capital account is maintained in all the cases, whether following Fixed Capital Account Method or Fluctuating Account Method.	Current Account is maintained when Fixed Capital Account is followed.
Balance of payment	Capital Account will always have a Credit Balance when the Fixed Capital Method is followed. In Fluctuating Capital Account Method, it may have either debit or credit balance.	Balance of Current Account may have a Debit or Credit balance.
Nature	In case of Fixed Capital, Capital account balance generally remains unchanged from year to year. It changes when further capital is introduced or capital is withdrawn by the partners.	The balance of Current Account changes every year as the all the adjustments are done in this account.
Capital contribution	The capital contributed by partners is shown in this account.	This account does not show the capital contribution.
Transactions	Capital Account records the transactions such as Opening capital, Additional capital and Withdrawal of capital.	Current account records the transactions such as Drawings, Interest on Capital, Interest on Drawings, Salary, Commission, Profit or Loss, etc.

Q4) Explain GuaranteeA4) Sometimes, a partner is admitted in the firm on guarantee in respect of his minimum share of profit from the business. Such a gurantee can be given even to an existing partner also. Such a guarantee to the incoming partner is given either by :(a) The firm i.e. by all the old partners in an agreed ratio, or(b) Some of the old partners or any one of the old partnersWhen all the partners guarantee that one of the partners shall be given a minimum amount of profit, we should calculate the following two amounts separately:i. Share of profit of the guaranteed partner as per profit sharing ratio, andii. Minimum guaranteed amount of profit of the guanteed partner.The higher of the above two is to be given to that partner. The balance of profit (total profit minus profit given to the guaranteed partner) is to be shared by the remaining partners in their respective profit -sharing ratio. When the new partner’s share of profit is more than the guaranteed amount, his actual share of profit is given to him instead of the guaranteed amount of profit.Different cases of guarantee

Guarantee by the Firm or by All the Partners of the Firm - In this case, firstly the firm enters the guaranteed amount to the partner in the Profit an Loss Appropriation Account. Then, it distributes the remaining profit among the remaining partners in their remaining ratio.

Guarantee by One Partner Only - Under this case, firstly the deficiency of profit is calculated for the partner who has received the guarantee. Then, this deficiency is deducted from the share of the partner who has given the guarantee.

3. Guarantee by Other Partners but Deficiency is Borne in a Specified Ratio - Under this case, the deficiency of profit is borne by other partners in a pre-determined ratio (not the remaining profit sharing ratio).

Q5) Durai and Velan entered into a partnership agreement on 1st April 2018, Durai contributing rs 25,000 and Velan rs 30,000 as capital. The agreement provided that: a) Profits and losses to be shared in the ratio 2:3 as between Durai and Velan.b) Partners to be entitled to interest on capital @ 5% p.a.c) Interest on drawings to be charged Durai: rs 300 Velan: rs 450d) Durai to receive a salary of rs 5,000 for the year, ande) Velan to receive a commission of rs 2,000During the year, the firm made a profit of rs 20,000 before adjustment of interest, salary and commission. Prepare the Profit and loss appropriation account.A5)

Q6) Arulappan and Nallasamy are partners in a firm sharing profits and losses in the ratio of 4:1. On 1st January 2018, their capitals were rs 20,000 and rs 10,000 respectively. The partnership deed specifies the following:a) Interest on capital is to be allowed at 5% per annum.b) Interest on drawings charged to Arulappan and Nallasamy are rs 200 and rs 300 respectively.c) The net profit of the firm before considering interest on capital and interest on drawings amounted to rs 18,000.Prepare Profit and loss appropriation account for the year ending 31st December 2018. Assume that the capitals are fluctuating.A6)

Q7) A and B are two partners sharing their profit in the ration of 4 : 3. The admitted C as a partner for 1/7 share in profit. Calculate the new profit sharing ratios of all the partners.A7) Let total Profit = 1New partner’s share = 1/7Remaining share = 1 – 1/7 = 6/7A’s new share = 4/7 of 6/7 = 24/49B’s new share = 3/7 of 6/7 = 18/49C’s Share = 1/7The new profit sharing ratio of A, B and C is:= 24/49 : 18/49 : 1/7= 24/49 : 18/49 : 7/49= 24 : 18 : 7
Q8) Rohit and Mohit are partners sharing profit in the ratio of 3 : 2. They admit Sumit as a new partner for 1/5 share in profit. Calculate the new profit sharing ratio and sacrificing ratio.A8) Calculation of new profit sharing ratio:Let total Profit = 1New partner’s share = 1/5Remaining share = 1 – 1/5 = 4/5Rohit’s new share = 3/5 of 4/5 = 12/25Mohit’s new share = 2/5 of 4/5 = 8/25Sumit’s Share = 1/5The new profit sharing ratio of Rohit, Mohit and Sumit is:= 12/25 : 8/25 : 1/5= 12/25 : 8/25 : 5/25= 12 : 8 : 5Calculation of Sacrificing RatiosRohit Sacrificed = 3/5 – 12/25 = 15 – 12/25 = 3/25Mohit Sacrificed = 2/5 – 8/25 = 10 – 8/25 = 2/25Sacrificing Ratio = 3 : 2 Q9) Explain Adjustment Regarding Revaluation of Assets and Liabilities at the time of admissionA9) At the time of admission of a new partner, it is always desirable to ascertain whether the assets of the firm are shown in books at their current values. In case the assets are overstated or understated, these are revalued. Similarly, a reassessment of the liabilities is also done so that these are brought in the books at their correct values. At times there may be some unrecorded assets with the business, these are also recorded and similarly if there is any unrecorded liability which the firm has to pay, the same is also recorded. For revaluation of assets and recording of unrecorded assets and for the reassessment of liabilities and recording of unrecorded liabilities the firm prepares an account in its book called Revaluation Account. Any gain or loss on revaluation of assets and reassessment of liabilities is transferred to the capital accounts of the old partners in their old profit sharing ratio. The revaluation account is credited with increase in the value of assets and decrease in the value of liabilities because it is a gain. Similarly, decrease of assets and increase in the value of liabilities is debited to revaluation account because it is a loss. Unrecorded assets are credited and unrecorded liabilities are debited in the revaluation account. If the revaluation account shows a credit balance then it indicates gain and if there is a debit balance then it indicates loss. Gain on revaluation or loss on revaluation will be transferred to the capital accounts of the old partners in old ratio.The following journal entries are recorded on revaluation of assets and reassessment of liabilities.(i) For increase in the value of AssetsAsset A/c Dr.To Revaluation A/c(Increase in the value of Assets)(ii) For decrease in the value of AssetRevaluation A/c Dr.To Asset A/c(Decrease in the value of Assets)(iii) For increase in the value of LiabilitiesRevaluation A/c Dr.To Liabilities A/c(Increase in the value of Liabilities) (iv) For decrease in the value of Liabilities Liabilities A/c Dr.To Revaluation A/c(Decrease in the value of Liabilities)(v) For unrecorded AssetsAsset A/c [unrecorded] Dr.To Revaluation A/c(Unrecorded asset recorded at actual value)(vi) For unrecorded LiabilityRevaluation A/c Dr.To Liability A/c [unrecorded](Unrecorded Liability recorded at actual value)(vii) For transfer of gain on revaluationRevaluation A/c Dr.To Existing Partner’s Capital/Current A/c(Profit on revaluation transferred to capital account in existing ratio)(viii) For transfer of loss on revaluationExisting Partner’s Capital/Current A/c Dr.To Revaluation A/c(Loss on revaluation transferred to capital account in existing ratio) Q10) Explain revaluation of assets and liabilities at the time of retirementA10) In case of retirement or death of a partner the assets and liabilities of the firm should be revalued in the same way as at the time of admission of a partner. At the time of retirement/death some of the assets or liabilities may not have been shown at their current values. To ascertain the net profit and loss on revaluation of assets and liabilities Revaluation A/c is prepared.The following journal entries are passed for the revaluation of assets and liabilities:(i) For increase in the value of AssetsAsset A/c Dr.To Revaluation A/c(Increase in the value of assets)(ii) For decrease in the value of AssetRevaluation A/c Dr.To Asset A/c(Decrease in the value of assets)(iii) For increase in the value of LiabilitiesRevaluation A/c Dr.To Liabilities A/c(Increase in the value of Liabilities)(iv) For decrease in the value of LiabilitiesLiabilities A/c Dr.To Revaluation A/c(Decrease in the value of Liabilities)(v) For unrecorded AssetsAsset A/c [unrecorded] Dr.To Revaluation A/c(Unrecorded asset recorded at actual value) (vi) For unrecorded Liability NotesRevaluation A/c Dr.To Liability A/c [unrecorded](Unrecorded Liability recorded at actual value)(vii) For transfer of gain on revaluation:Revaluation A/c Dr.To All Partner’s Capital A/c (Old ratio)(Profit on revaluation transferred to capital account in old profit sharing ratio)(viii) For transfer of loss on revaluation:All Partner’s Capital Dr.To Revaluation A/c(Loss on revaluation transferred to capital account in existing ratio)

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