Fundamentals of partnership and Goodwill Test - 12

When interest on capital is treated as charge, amount of interest will be paid in full irrespective or profits/losses. In a normal situation, interest on capital is an appropriation; it means it will be paid out of profits and up to the profits only. But in some cases it is paid as a charge, it means whether there is profit or loss, it will be paid. Only in such cases interest on capital is treated as a charge.

There are two main views. One is from the accounting point of view, according to that, status of partnership is different i.e.. it has a separate business entity. From the point of view of law, it has no separate business entity. Partners and firm are one.

Mostly, the liability of the partners of a firm is unlimited. Their personal properties can be disposed off to pay the debts of the firm if required. The creditors can claim their dues from any one of the partner or from all of them, meaning partners are liable:

• Individually

• Collectively

Insurance Premium paid for business is a charge against the profit. It means this transaction will reduce the profit of the firm. All charge items are shown in profit and loss account only. That’s why Insurance Premium paid for business is shown in profit and loss account and not in profit and loss appropriation account.

Anything which will reduce the net profit of the firm is called charge. Normally interest on capital is an appropriation; it means it will be paid out of profits and up to the profits only. But in some cases it is paid as a charge, it means whether there is profit or loss, it will be paid. Only in such cases interest on capital is treated as a charge.

The beginning of partnership is always because of an agreement. There should be an agreement among the partners to start a partnership business. Agreement can be written or oral that does not matter.

In case of drawings, when a fixed amount is withdrawn at the end of the last day of every month, interest on drawings will be calculated as follows:

Step 1. Average Time Period = 11 + 0 = 11/2 = 5.5

Step 2. Total Drawings × Rate/100 × 5.5/12

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.

Interest paid on debentures is a charge against the profit. Partnership Deed is mainly concerned with the appropriations and some charge. Main contents of partnership deed are interest on capital, interest on drawings, name of the firm, partners, their names and address etc.

The word per annum is the key element in the calculation of interest on drawings. When per annum word is given, it means interest on drawings is to be calculated on the time basis or for a particular time period. When word per annum is not given with the rate of interest on drawings, it means interest on drawings is to be calculated for the full year irrespective of time period.