Fundamentals of partnership and Goodwill Test - 6

Correct Entry is Profit and loss A/c Debit and Profit and loss appropriation account Credit. To find out the net profit all charge items should be deducted and all non operating incomes should be added to the profit. Net Profit shown by profit and loss account is transferred to the credit side of profit and loss appropriation account.

Inerest on partner’s loan is a charge against the profit. It should be shown in the debit side of Profit and Loss account and credit side of Partner’s Loan account. In a normal situation Interest on partner’s loan should not be shown in the partners capital account or partners current account.

In a normal situation salary or commission paid to a partner is treated as an appropriation. It means salalry or commission is paid only when there is profit and amount of salary or commission cannot be more than the profits.

1.Profit and loss appropriation account is prepared only in case of partnership business. The main purpose of preparing this account to distribute the profits amongst the partners in the form of appropriations and profits.
2.Other firms i.e. companies and sole proprietorship firms are not required to prepare profit and loss appropriation account. These firms are required to prepare only profit and loss account.

It is a good decision by the partners to create a reserve. A reserve is created only out of profits when there is sufficient profit in the business. In case of loss, a reserve cannot be created. The main purpose of creating a reserve is to strengthen the financial position of the business firm

Reserve account should be credited at the time of creation of a reserve, when it is created out of the profit available for appropriations. Reserve is to be shown in the debit side of profit and loss appropriation account and in liabilities side of the balance sheet

The main difference between drawings against profit and drawings against capital is:
1. Drawings against capital will reduce the amount of capital but not the profit.
2. Drawings against profit will reduce the amount of profit but not the capital

Rent paid to a partner is an expense for the business. All expenses and losses are considered as Nominal account. Rent paid to partner is a charge against the profit and it will be paid whether there is profit or loss in the business.

Rent paid to a partner is a charge against the profit. It means it will be paid whether there is profit or loss in the business. In this case rent payable to the partners is Rs.10,000.

When capitals are fixed, we prepare two accounts (i) Partner’s fixed capital account and (ii) Partner's Current Account. In capital account only capitals are shown with additional capital and withdrawl of capital (if any). In current all items are recorded except capitals i.e. Interest on capital, profit, drawings, interest on drawings etc.