Accounts of Partnership Firms-Fundamentals

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Questions:

Generic 3

8 x 3 = 24

The firm of A and B earned a profit of Rs.2,75,000 during the year ending on 31st March, 2015. They have decided to donate 10% of this profit to an NGO working for senior citizens. Pass necessary journal entry for the distribution of profits. Identify the values shown by the firm in donating a part of profit of NGO.

What is Fluctuating capital method?

Explain the procedure for preparation of final accounts of a partnership firm.

Ahamad and Basheer contribute Rs. 60,000 and Rs. 40,000 respectively as capital. Their respective share of profit is 2:1 and the profit before interest on capital for the year is Rs. 5,000. Compute the amount of interest on capital in each of the following situations:
(i) if the partnership deed is silent as to the interest on capital
(ii) if interest on capital @ 4% is allowed as per the partnership deed
(iii) if the partnership deed allows interest on capital @ 6% per annum.

From the following balance sheets of Subha and Sudha who share profits and losses in 2 : 3, calculate interest on capital at 5% p.a. for the year ending 31st December, 20

**Balance sheet as on 31st December, 2018**
Liabilities	Rs.	Rs.	Assets	Rs.
Capital accounts			Fixed assets	70,000
Subha	40,000		Current assets	60,000
Sudha	60,000	1,00,000
Current liabilities		30,000
		1,30,000		1,30,000

Drawings of Subha and Sudha during the year were Rs. 8,000 and Rs. 10,000 respectively. Profit earned during the year was Rs. 30,000

The capital account of Begum and Fatima on 1st January, 2018 showed a balance of Rs. 50,000 and Rs. 40,000 respectively. On 1st October, 2018, Begum introduced an additional capital of Rs. 10,000 and on 1st May, 2018 Fatima introduced an additional capital of Rs. 9,000. Calculate interest on capital at 4% p.a. for the year ending 31st December, 2018.

Syed, Samuel and Sudhakar are partners in a firm sharing profits and losses equally. As per the terms of the partnership deed, Samuel is allowed a monthly salary of Rs. 2,000 and Sudhakar is allowed a commission of Rs. 6,000 per annum for their contribution to the business of the firm. You are required to pass the necessary journal entry. Assume that their capitals are fluctuating.

Arul is a partner in a partnership firm. As per the partnership deed, interest on drawings is charged at 12% p.a. During the year ended 31st December 2018 he drew as follows:

Date	Rs.
March 1	3,000
June 1	3,000
September 1	3,000
December 1	3,000

Calculate the amount of interest on drawings.

Generic 5

2 x 5 = 10

Anand and Narayanan are partners in a firm sharing profits and losses in the ratio of 5:3. On 1st January 2018, their capitals were Rs. 50,000 and Rs. 30,000 respectively. The partnership deed specifies the following:
(a) Interest on capital is to be allowed at 6% per annum.
(b) Interest on drawings charged to Anand and Narayanan are Rs. 1,000 and Rs. 800 respectively.
(c) The net profit of the firm before considering interest on capital and interest on drawings amounted to Rs. 35,000.
Give necessary journal entries and prepare profit and loss appropriation account as on 31st December 2018. Assume that the capitals are fluctuating.

10.

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.
Give necessary journal entries and prepare Profit and loss appropriation account for the year ending 31st December 2018. Assume that the capitals are fluctuating.

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Answers Key:

Generic 3

8 x 3 = 24

Journal entry
Particulars	Debit Rs.	Credit Rs.
Profit and loss appropriation A/c Dr	2,47,500
To A's capital A/c		1,23,750
To A's capital A/c (Being profit transferred to capital account)		1,23,750

Values shown by the firm are
i. Responsibility :
Firm has shown responsibility towards senior citizens by giving them their dues.
ii. Compassion:
Partners have shown compassion towards senior citizens by fulfilling their duties towards senior citizens .

(i) Under this method, only one capital account is maintained for each partner.
(ii) The capital is changing from period to period.
(iii) This capital account shows always a credit balance
(iv) All adjustment relating to partners are recorded directly in the capital account.

(i) In sole proprietorship, the profit or loss in the profit and loss account is transferred directly to the sole proprietor's capital account. In partnership, profit and loss appropriation account is prepared to which net profit or loss from profit and to which net profit or loss from profit and loss account is transferred.
(ii) In the profit and loss appropriation account, adjustments for interest on capital, interest on drawings, salary and other remuneration due to the partners are shown. Finally, the balance in the appropriation account is transferred to the partner's capital account in the profit sharing ratio.
(iii) Capital account balance of the sole proprietor alone is shown in the balance sheet of sole proprietorship. The balance sheet of a partnership concern shows the balances in the individual capital accounts (an current accounts) of the partners.

(i) No Interest on capital will not allowed as the partnership deed.
(ii) Profit before interest on capital is Rs. 5,000.
Computation of interest on capital:
Ahamed: 60,000 \(\times\) \(\frac{4}{100}\) = Rs. 2,400
Basheer : 40,000 \(\times\) \(\frac{4}{100}\) = Rs. 1,600
Since there is sufficient profit, interest on capital will be provided
(iii) Profit before interest on capital is Rs. 5,000
Computation of interest on capital :
Ahamed: 60,000 \(\times\) \(\frac{6}{100}\) = Rs. 3,600
Basheer: 40,000 \(\times\) \(\frac{6}{100}\) = Rs. 2,400
Since the profit is insufficient, interest on capital will not be provided. Profit of 5,000 will be distributed to the partners on their capital ratio of 3 : 2

Particulars	Subha Rs.	Sudha Rs.
Capital on 31^st December 2018	40,000	60,000
Add: Drawings	8,000	10,000
	48,000	70,000
Less: Profit already creditted	12,000	18,000
Capital on 1^st January 2019	36,000	52,000

Calculation of interest on capital:
Subha:
On opening capital = 36,000 \(\times\) \(\frac{5}{100}\) = Rs. 1,800
Sudha:
On opening capital = 52,000 \(\times\) \(\frac{5}{100}\) = Rs. 2,600

Calculation of Interest on capital:
Begum:

On opening capital for 1 year	= 50,000 \(\times\) \(\frac{4}{100}\)	= Rs. 2,000
On additional capital for 3 months (October to December)	= 10,000 \(\times\) \(\frac{4}{100}\) \(\times\) \(\frac{3}{12}\)	= Rs. 100
Interest on capital		= Rs. 2,100

Fathima:

On opening capital for 1 year	= 40,000 \(\times\) \(\frac{4}{100}\)	= Rs. 1600
On additional capital for 3 months (October to December)	= 9,000 \(\times\) \(\frac{4}{100}\) \(\times\) \(\frac{8}{12}\)	= Rs. 240
Interest on capital		= Rs. 1,840

Salary to Samuel = 2,000 \(\times\) 12 = Rs. 24,000
Commission to Sudhahar = Rs. 6,000

Journal entry
Particulars		Dr. Rs.	Cr. Rs.
Samuel’s salary A/c	Dr.	24,000
To Samuel’s capital A/c (Samuel’s salary transferred to his capital account)			24,000
Sudhahar’s commission A/c	Dr.	6,000
To Sudhahar’s capital A/c (Sudhahar’s commission transferred to his capital accoun			6,000
Profit and loss appropriation A/c	Dr.	30,000
To Saumel’s salary A/c			24,000
To Sudhahar’s commission A/c (Salary and commission account transferred)			6,000

Interest on drawings = Amount of drawings × Rate of interest × Period of interest

Withdrawal on March 1	Rs. 3,000 \(\times\) \( \frac { 12 }{ 100 } \times \frac { 10 }{ 12 }\)	Rs. 300
Withdrawal on June 1	Rs. 3,000 \(\times\) \( \frac { 12 }{ 100 } \times \frac { 7 }{ 12 }\)	Rs. 210
Withdrawal on September 1	Rs. 3,000 \(\times\) \( \frac { 12 }{ 100 } \times \frac { 4 }{ 12 }\)	Rs. 200
Withdrawal on December 1	Rs. 3,000 \(\times\) \( \frac { 12 }{ 100 } \times \frac { 1 }{ 12 }\)	Rs. 30
Total interest on drawings		Rs. 660

Generic 5

2 x 5 = 10

Journal entries
Date	Particulars	Debit Rs.	Credit Rs.
2018	Interest on capital A/c Dr	4,800
Dec. 31	To Anand's capital A/c		3,000
	To Narayanan's capital A/c		1,800
	(Interest on capital @ 6% provided)
2018	Profit and loss appropriation A/c Dr	4,800
Dec. 31	To Interest on capital A/c		4,800
	(Interest on capital account closed)
2018	Anand's capital A/c Dr	1,000
Dec. 31	Narayanan's capital A/c Dr	800
	To Interest on drawings A/c		1,800
	(Interest on drawings charged)
2018	Interest on drawings A/c	1,800
Dec. 31	To profit and loss appropriation A/c		1,800
	(Interest on drawings account closed)
2018	Profit and loss appropriation A/c Dr	32,000
Dec. 31	To Anand's capital A/c		20,000
	To Narayanan's capital A/c		12,000
	(Profit transferred)

10.

**Journal entries**
Date	Particulars		Dr. Rs.	Cr. Rs
2018	Interest on capital A/c	Dr.	1,500
Dec. 31	To Arulappan’s capital A/c			1,000
	To Nallasamy’s capital A/c (Interest on capital @ 5% provided)			500
"	Profit and loss appropriation A/c	Dr.	1,500
	To Interest on capital A/c (Interest on capital account closed)			1,500
'	Arulappan’s capital A/c	Dr.	200
	Nallasamy’s capital A/c	Dr.	300
	To Interest on drawings A/c (Interest on drawings charged)			500
"	Interest on drawings A/c	Dr.	500
	To Profit and loss appropriation A/c (Interest on drawings account closed)			500
"	Profit and loss appropriation A/c Dr.		17,000
	To Arulappan’s capital A/c			13,600
	To Nallasamy’s capital A/c (Profit transferred)			3,400

**Dr. Profit and loss appropriation account for the year ended 31st December 2018 Cr.**
Particulars	Rs.	Rs.	Particulars	Rs.
To Interest on capital			By Profit and loss A/c	18,000
Arulappan		1,000	By Interest on drawings A/c
Nallasamy		500	Arulappan	200
To Partners’ capital A/c (profit)			Nallasamy	300
Arulappan (4/5)	13,600	17,000
Nallasamy (1/5)	3,400	18,500		18,500