Fundamentals of partnership and Goodwill Test - 14

Interest due to X and Y is Rs. 3,000 and Rs. 2,000 (total Rs.5,000) but profit is only Rs. 1,500. In this case Ratio of appropriation will be 3 : 2 (3,000 : 2,000). Now divide profit Rs. 1,500 in Ratio of appropriation i.e. 3:2.

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.

Registration of a partnership firm is optional. It means there is no need for the registration of a partnership firm. As per the Partnership Act, 1932, it is an option for a partnership firm to get registered or not. But it is always advisable to get registered.

When capitals of the partners are fixed, two accounts are prepared at that time i.e. Partners Fixed capital account and Partners Current account. Partners fixed capital account shows only capital balance and additional capital or withdrawl of some part of capital permanently (if any). That’s why this account cannot show a negative balance.

In India, Partnership Act, 1932 is followed by all the partnership firms. Specially in the absence of partnership deed, all provisions of Partnership Act, 1932 will be applicable.

Salary paid to manager 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 salary paid to manager is shown in profit and loss account.

Calculation of interest on capital should be always done on the opening capital first and after that on additional capital introduced (if any) by the partner during the year. Interest on opening capital and additional capital should be shown in a combined manner as total interest on capital during the year.

Interest on bank loan will be fixed by the bank and not by the partners or partnership deed. A partnership deed can show only those contents which are concerned with partners or firm. Interest on bank loan is a charge against the profit. It means it will be paid in all conditions whether there is profit or loss in the business.

The partners has taken a decision to provide employment to the women of economically backward section of the society. By this decision, partners are communicating the valued to the society i.e. financial security to the weaker section of society and social responsibility.

When accounts are prepared under fluctuating capital method, only one account is prepared for the partners i.e. partners capital account. All items related to partners i.e. capital, interest on capital, interest on drawings, salary, commission etc. are shown in partners capital account.