Fundamentals of partnership and Goodwill Test - 11

C is correct. Profit will be distributed in Equal ratio. When there is no partnership deed or partnership deed is prepared but it is silent on profit sharing ratio, in such a case rules of Partnership Act, 1932 will be applicable. According to which, profits or losses will be shared by the partners equally irrespective of their capitals.

When drawing is made in the beginning of each quarter and per annum word is given with the rate of interest, in such a case, first step is to find out the average period and then interest. In this question time period is 7.5 months and total drawings are 16,000 (4,000 × 4 quarters) Hence, Interest on drawings will be = 16,000 ×7.5/12 × 6/100 = Rs. 600.

Liabilities side is also known as credit side, all credit balances are shown in the balance sheet (personal accounts). This is the only reason that credit balance of capital accounts and current accounts of the partners are shown in the liabilities side of balance sheet.

When a partner draws a fixed amount in the beginning of each quarter for his personal use then average period will be calculated as : Time after first drawing 12 months + Time after last drawing 3 months, and average period will be = 15/2 = 7.5.

Partners are entitled to interest on capital only if rate of interest is mentioned in the partnership deed. But in this case business is continued without partnership deed. As per the Partnership Act, 1932, partners are entitled to interest on capital only when there is partnership deed and rate of interest is mentioned in it.

When rate of interest on drawings is fixed, interest will be calculated for the full year i.e. Interest on drawings = 20,000 × 6/100 = 1,200.

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.

Sharing of profits is must for a partnership business. Profits earned by a partnership firm should be divided amongst partners in the agreed profit sharing ratio. If profit sharing ratio is not mentioned in the partnership deed or partnership deed is silent on the distribution of profits, in such a case profits will be shared equally.

Calculation of Interest on loan:

Interest on A’s Loan = 40,000 × 5/100 × 6/12 = 1,000

Interest on B’s Loan = 20,000 × 5/100 × 6/12 = 500

A person who joins a partnership business, individually called a partner. The group of partners is called Firm and the name under which all business activities going on is known as firm’s name.

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.

Section 4 of the Indian Partnership Act, 1932 defines Partnership as the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.

When partnership deed provides for the interest on drawings but dates of withdrawal of drawings are not given, in such a case average time period should be taken as six months. Interest on Drawings = Total Drawings × Rate/100 × 6/12

The business of partnership can be carried on by all the partners or any one of them acting for all. Thus, every partner is principal as well as agent of other partners and of the firm. Thus,

(i) Each partner is liable for acts performed by other partners,
(ii) Each partner can bind other partners and the firm by his acts done in the ordinary course of business.