Accounting For Partnership Firms - Fundamentals INTEREST ON CAPITAL BY: Ajay Garg PGT- Commerce KV CRPF Rampur
commercewithag.blogspot.com INTEREST ON CAPITAL Interest on capital is allowed to partners only if it is clearly given in partnership agreement. Entries: (i) Interest on Capital A/c Dr. To Partner’s Capital/Current A/c (for providing interest on capital) (ii) Profit & Loss Appropriation A/c Dr. To Interest on Capital A/c (for transferring interest on capital to P. & L. App. A/c)
commercewithag.blogspot.com INTEREST ON CAPITAL Rules: Interest on capital is calculated on the basis of amount, rate of interest and time. Formula is: Interest on Capital = Amount of capital x Rate x Month 100 12
commercewithag.blogspot.com INTEREST ON CAPITAL Q. A and B are partners in a firm having capitals Rs. 1,00,000 and Rs. 80,000 respectively. Interest on capital is to be provided @ 10% p.a. Calculate interest on capital. Sol. Interest on Capital = Amount of capital x Rate x Month 100 12 Interest on A’s Capital = 1,00,000 x 10 x 12 = Rs. 10,000 100 12 Interest on B’s Capital = 80,000 x 10 x 12 = Rs. 8,000 100 12 * Interest on capital is calculated fro full year as it is assumed that given capital is opening capital.
commercewithag.blogspot.com INTEREST ON CAPITAL Rules: Interest on capital is always calculated on opening capital. If opening capital is not given (in that case closing capital is given in question), first calculate the opening capital: Calculation of opening capital from closing capital: .. Closing Capital … … Add: Drawings xxx Add: Losses (…) (…) Less: Additional Capital xxx Less: Profits Opening capital
commercewithag.blogspot.com INTEREST ON CAPITAL Q. On March 31, 2020 after the close of accounts, the capitals of M and N stood at Rs. 4,00,000 & Rs. 3,00,000 respectively. Subsequently, it was found that the interest on capital @ 10% p.a. had been omitted. The profit for the year Rs. 1,50,000 and the partner’s drawings had been M - Rs. 45,000 and N - 35,000 . Calculate interest on capital. Sol. Calculation of Opening Capital: M N 4,00,000 3,00,000 Particulars (+) 45,000 (+) 35,000 Closing Capital (-) 75,000 (-) 75,000 Add: Drawings 3,70,000 2,90,000 Less: Profits Opening Capital * Now interest on capital is calculated as usual. (see next slide)
commercewithag.blogspot.com INTEREST ON CAPITAL Q. On March 31, 2020 after the close of accounts, the capitals of M and N stood at Rs. 4,00,000 & Rs. 3,00,000 respectively. Subsequently, it was found that the interest on capital @ 10% p.a. had been omitted. The profit for the year Rs. 1,50,000 and the partner’s drawings had been M - Rs. 45,000 and N - 35,000 . Calculate interest on capital. Sol. * opening capital has already been calculated in previous slide Interest on Capital = Amount of capital x Rate x Month 100 12 Interest on A’s Capital = 3,70,000 x 10 x 12 = Rs. 37,000 100 12 Interest on B’s Capital = 2,90,000 x 10 x 12 = Rs. 29,000 100 12
commercewithag.blogspot.com INTEREST ON CAPITAL Rules: Interest on capital is always calculated on opening capital. However, during year if additional capital is introduced or capital is withdrawn, then interest is calculated by following Simple Method or Productive Method. The formula for Productive Method is: = Sum of Products x Rate x 1 100 12
commercewithag.blogspot.com INTEREST ON CAPITAL Rules: 1. When partnership deed is No interest will be allowed on partners’ capital. silent upon interest on capital 2. When partnership provides According to Section 13(C) of the Partnership for interest on capital but Act, Interest on capital will be allowed only if silent upon treating it as a there is profit. charge or appropriation. a) If there is Loss - No interest on capital will be allowed. b) In case of adequate profits - Full interest will be allowed. c) In case of inadequate profits - Interest will be restricted to the amount of profits and it will be distributed in the ratio of interest on capitals of each partner. 3. When interest on capital is to Full interest will be allowed whether there is a be treated as a charge against profit or loss. profits.
Accounting For Partnership Firms - Fundamentals PARTNER’S COMMISSION BY: Ajay Garg PGT- Commerce KV CRPF Rampur
commercewithag.blogspot.com Partners’ Commission Partners are allowed commission only when it is clearly given in the partnership deed. If partnership deed is silent, commission will not be allowed. Entries: (i) Partner’s Commission A/c Dr. xxx xxx To Partner’s Capital/Current A/c (for crediting commission to partners' capital / current account) (ii) Profit & Loss Appropriation A/c Dr. xxx xxx To Partner’s Commission A/c (for transferring commission to P. & L. App. A/c)
commercewithag.blogspot.com Partners’ Commission Rules: Normally, a partner is to be allowed commission at a certain percentage of net profits. It is calculated as: Calculation of Partners’ Commission on ‘net profits before charging on ‘net profits before charging such commission’ such commission
commercewithag.blogspot.com Partners’ Commission Calculation of Partner’s Commission on ‘net profits before charging on ‘net profits after charging such commission’ such commission’ = Pr. before comm. X rate = Pr. before comm. X rate 100 (100 + rate)
commercewithag.blogspot.com Partners’ Commission Q. X, Y and Z are partners in a firm. X is entitled to a commission of 10% on the net profit after charging such commission. Net profit before charging such commission is Rs. 55,000. Determine the amount of commission payable to X. Sol. X’s commission = 55,000 X 10/110 = Rs. 5,000
Accounting For Partnership Firms - Fundamentals INTEREST ON LOAN BY: Ajay Garg PGT- Commerce KV CRPF Rampur
commercewithag.blogspot.com Interest on Partner's Loan Rules: 1. If partner has given a loan to the firm, he entitled to receive interest on his loan at an agreed rate. 2. If a partnership deed is silent upon the rate of interest on partner’s loan, then it should be given at 6% p.a. 3. The interest on loan is a charge against the profit. 4. It is to be transferred to the debit side of P. & L. Account and not to the P. & L. Appropriation Account.
commercewithag.blogspot.com Interest on Partner's Loan Journal Entries: (i) Interest on Partner's loan A/c Dr. xxx xxx To Partner's Loan A/c (for interest provided on Partner's Loan) (ii) Profit & Loss A/c Dr. xxx To Interest on Partner's Loan xxx (for closing of Interest on Partner's Loan A/c)
Accounting For Partnership Firms - Fundamentals GUARANTEE OF PROFITS BY: Ajay Garg PGT- Commerce KV CRPF Rampur
commercewithag.blogspot.com Guarantee of minimum profits It means assurance given to an incoming partner or an existing partner that a minimum amount of profits will be given to him irrespective of the profit earned or loss suffered by the firm. In such a case, the guaranteed partner must be paid with at least the guaranteed amount. Such a guarantee can be given by: by firm (remaining partners in their mutual profit sharing ratio) by all other partners in an agreed ratio by one of the partner by two or more of the remaining partners but not all of the remaining partners
commercewithag.blogspot.com Guarantee of minimum profits In such case, first of all we distribute all the profits/losses as usual and then check whether the guaranteed partner is getting his guaranteed amount or not. There may be two cases. In such case, first of all we distribute all the profits as usual and then check whether the guaranteed partner is getting the guaranteed amount or not. If he is getting the guaranteed amount or more than that, then its ok. But if he is getting less than the guaranteed amount, the deficiency will be borne by the guarantee givers.
commercewithag.blogspot.com Guarantee of minimum profits If there is profit: Ignore the quantum of profits for guarantee, because it is adjusted through capital accounts. First distribute the profits as usual without checking guarantee amount. The entry will be (i) Profit & Loss Appropriation A/c Dr. xxx To Partner's Capital A/c xxx (for profits distributed) If there is Loss: First distribute the loss without checking guarantee amount. The entry will be: (i) Partner's Capital A/c Dr. xxx To Profit & Loss A/c xxx (for loss transferred) Now check whether the guaranteed partner is getting the guaranteed amount or not. There may be two cases:
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commercewithag.blogspot.com Guarantee of minimum profits A:B:C=2:2:1 With guarantee of Profits earned during year Rs. 80,000 minimum profits to C = Rs. 20,000 ? Who has given either, firm (remaining partners in their mutual guarantee to C profit sharing ratio) has given guarantee for minimum profits? or remaining partners in an agreed ratio or, by one of the partner Particulars A B C Total 32,000 32,000 16,000 80,000 Profits Rs. 80,000 to be distributed in 2:2:1 Adjustment of C’s guarantee
commercewithag.blogspot.com Guarantee of minimum profits A:B:C=2:2:1 With guarantee of Profits earned during year Rs. 80,000 minimum profits to C = Rs. 20,000 CASE 1: When the firm has given guarantee to c * In this case, remaining partners i.e. A and B will compensate C (his deficiency) in their mutual profit sharing ratio i.e. 2:2 = 1:1. Particulars A B C Total 32,000 32,000 16,000 80,000 Profits Rs. 80,000 to be distributed in 2:2:1 (-) 2,000 (-) 2,000 (+) 4,000 … 28,000 32,000 20,000 80,000 Adjustment of C’s guarantee (Deficiency of Rs. 4,000 by A & B in their mutual PSR i.e. 2:2 = 1:1)
commercewithag.blogspot.com Guarantee of minimum profits A:B:C=2:2:1 With guarantee of Profits earned during year Rs. 80,000 minimum profits to C = Rs. 20,000 CASE 2: When A & B given guarantee to C in 3:1. * In this case, remaining partners i.e. A and B will compensate C (his deficiency) in 3:1. Particulars A B C Total 32,000 32,000 16,000 80,000 Profits Rs. 80,000 to be distributed in 2:2:1 (-) 3,000 (-) 1,000 (+) 4,000 … 29,000 31,000 20,000 80,000 Adjustment of C’s guarantee (Deficiency of Rs. 4,000 by A & B in 3:1)
commercewithag.blogspot.com Guarantee of minimum profits A:B:C=2:2:1 With guarantee of Profits earned during year Rs. 80,000 minimum profits to C = Rs. 20,000 CASE 3: When A has given guarantee to C personally. * In this case, A will compensate C (his deficiency) personally. Particulars A B C Total Profits Rs. 80,000 to be distributed 32,000 32,000 16,000 80,000 in 2:2:1 (-) 4,000 … (+) 4,000 … 28,000 20,000 Adjustment of C’s guarantee 32,000 80,000
commercewithag.blogspot.com Guarantee of minimum profits A:B:C=2:2:1 With guarantee of Profits earned during year Rs. 80,000 minimum profits to C = Rs. 20,000 CASE 4: When B has given guarantee to C personally. * In this case, B will compensate C (his deficiency) personally. Particulars A B C Total Profits Rs. 80,000 to be distributed 32,000 32,000 16,000 80,000 in 2:2:1 … (-) 4,000 (+) 4,000 … 28,000 20,000 Adjustment of C’s guarantee 32,000 80,000
commercewithag.blogspot.com Q. A, B and C were in partnership sharing profits and losses in the ratio of 4:2:1 respectively. It was provided that in no case C’s share in profits should be less than Rs. 7,500. the profits for the year ending 31st March 2019 amounted to Rs. 31,500. You are required to show the appropriation among the partners by passing journal entries. (i) Profit & Loss Appropriation A/c Dr. 31,500 To A’s Capital A/c To B's Capital A/c 18,000 To C’s Capital A/c 9,000 4,500 (for profits distributed) (ii) A's Capital A/c Dr. 2,000 1,000 B’s Capital A/c Dr. To C’s Capital A/c 3,000 (for The deficiency of C Rs. 3,000 (7,500 – 4,500) will be borne by A and B in their mutual profit sharing ratio i.e. 4:2 = 2:1.)
commercewithag.blogspot.com Q. A, B and C were in partnership sharing profits and losses in the ratio of 4:2:1 respectively. It was provided that in no case C’s share in profits should be less than Rs. 7,500. the profits for the year ending 31st March 2019 amounted to Rs. 31,500. You are required to show the appropriation among the partners by preparing the profit and loss appropriation account. Profit & Loss Appropriation Account for the year ending 31st March 2019 Particulars Amount Particulars Amount To Profit trfd. to: 31,500 By Net Profit A (4/7) 31,500 (-) 18,000 B (2/7) (-) 2,000 16,000 C (1/7) (+) 9,000 1,000 8,000 4,500 3,000 7,500 31,500 Note: The deficiency of C Rs. 3,000 (7,500 – 4,500) will be borne by A and B in their mutual profit sharing ratio i.e. 4:2 = 2:1 because nothing is mentioned in question.
Accounting For Partnership Firms - Fundamentals PAST ADJUSTMENTS BY: Ajay Garg PGT- Commerce KV CRPF Rampur
commercewithag.blogspot.com Past Adjustments Past Adjustments : Detection and Correction of Errors Sometime, while preparing final accounts, accountant commits mistakes related to Partnership Deed. Following are some examples of such errors a. Omission of interest on capital or drawing although there were provisions for such interest in partnership deed. b. Interest on capital provided to partners at wrong rate. c. Distribution of profit in the ratio other that that mentioned in the deed. d. Omission of salary to partners , etc.
commercewithag.blogspot.com Past Adjustments Adjustment in closed Partnership Accounts Sometimes after the closing of accounts of the partnership firms, it is discovered that there have been some errors or omission in the accounts. In such cases instead of altering the old accounts an adjustment entry is passed in the books. Rule: a. Items, which were wrongly recorded (credited or debited in partners’ capital accounts), will be reversed. b. Items, which were omitted to be recorded, should be recorded in partners’ capital accounts like interest on capital; salary or remuneration, commission etc.
commercewithag.blogspot.com Past Adjustments Adjustment Table Particulars Partner A Partner B Total/P&L Adj. Dr. Cr. Dr. Cr. Dr. Cr. Profits wrongly credited now Debited Interest on capital to be Credited Salary to be Credited Profit / Loss due to adj. trfd. Total Net Effect Notes: Net Effect: If Cr. > Dr., then Cr. and If Dr. > Cr.; then Dr.
commercewithag.blogspot.com Thanks Prepared By: Ajay Garg PGT Commerce KV CRPF Rampur
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