Financial Statements 2 Test 28

Calculation of commission = 21000 * 5 / 105 

The manager of the business is sometimes given the commission on the net profit of the company. The percentage of the commission is applied on the profit either before charging such commission or after charging such commission. In the absence of any such information, it is assumed that the commission is allowed as a percentage of the net profit before charging such commission.

Garner Vs Murray: Loss by Insolvent Partner (Dissolution of Partnership Firm)!

If, at the time of dissolution, a partner owes a sum of money to the firm, he has to pay it to the firm. But if he is insolvent, he will not be able to do so, at least lot fully. The sum which is irrecoverable from an insolvent partner is, therefore, a loss. The question arises whether this loss is an ordinary loss to be shared by the solvent partners in the profit sharing ratio or whether it is an extraordinary loss. Before the decision in Garner vs. Murray was made, such a loss was treated as an ordinary loss.

The judgment in this case was that:

(a) First, the solvent partners should bring in cash equal to their respective shares of the loss on realisation; and

(b) Second, the loss due to the insolvency of a partner should be divided among the other partners in the ratio of capitals then standing (i.e., after partners have brought in cash equal to their shares of loss on realisation).

The practical effect of this is that the loss due to the insolvency of a partner has to be borne by the solvent partners in the ratio of their capitals standing just prior to dissolution.

When a partner withdraws cash from the firm for domestic use, the withdrawal of cash is termed as drawings. If the partnership deed has a provision of charging interest on drawings, the firm may charge interest on drawings from partners. Interest on drawing is a gain for the firm. It is calculated at the agreed rate. The amount of interest on drawings will be credited to Profit and Loss Appropriation Account and will be debited to partner’s capital account/current account (Individually). 

Bad debts refer to the amount that the firm has not been able to realize from its debtors. It is regarded as a loss and is termed as bad debt. The entry for recording bad debt is:

Sometimes, the proprietor may like to know the profit made by the business after providing for interest on capital. In such a situation, interest is calculated at a given rate of interest on capital as at the beginning of the accounting year. If however, any additional capital is brought during the year, the interest may also be computed on such amount from the date on which it was brought into the business. Such interest is treated as and expense for the business and the following journal entry is recorded in the books of account:

Depreciation is the decline in the value of assets on account of wear and tear and passage of time. It is treated as a business expense and is debited to profit and loss account. This, in effect, amounts to writing-off a portion of the cost of an asset which has been used in the business for the purpose of earning profits. In the balance sheet, the asset will be shown at cost minus the amount of depreciation. 

Old ratio (A, B C and D) = 5 : 4 : 3 : 2

Sometimes, a certain income is received but the whole amount of it does not belong to the current period. The portion of the income which belongs to the next accounting period is termed as income received in advance or an Unearned Income. Income Received in advance is adjusted by recording the following entry:

Profit sharing ratio of X, Y and Z is 4:3:2