Fundamentals of Partnership and Goodwill Test - 6

Instead of changing the prepared accounts, a rectified entry or adjustment entry should be done for these types of adjustments. Profit and Loss adjustment is always prepared to make such adjustments. For example, Profit and Loss Adjustment account is prepared in case of change in existing profit sharing ratio, admission of a new partner, retirement/death etc., It is also known as Revaluation Account.

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.

There are two ways to provide commission:

1. Before charging such commission = Profit ×Rate/100

2. After charging such commission = Profit ×Rate/100 +Rate

In the above case commission will be calculated as : 1,20,000 × 10/100 = 12,000

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.

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.

Distribution of profit in 4:3:3:2 Ratio:

A’s share of profit = 96,000 × 4/12 = 32,000-2,000= Rs. 30,000

B’s share of profit = 96,000 × 3/12 = 24,000-1,333= Rs. 22,667

C’s share of profit = 96,000 × 3/12 = 24,000-667= Rs. 23,333

D’s share of profit = 96,000 × 2/12 = 16,000+4000= Rs. 20,000

D’s Guaranteed amount is Rs.20,000 but he is getting Rs.16,000 (remaining 4,000 will be paid by A, B and C in 3:2:1 Ratio)

Interest on Rohit’s Capital:

1,50,000 × 8/100 × 6/12 = 6,000

2,00,000 × 8/100 × 6/12 = 8,000

Total Interest on Rohit’s Capital = 6,000 + 8,000 = 14,000

Capitals of the partners : 50,000 : 40,000 : 30,000

Capital Ratio will be : 5 : 4 : 3

Distribution of Profit in capital Ratio:

A’s share of profit = 60,000 × 5/12 = 25,000

B’s share of profit = 60,000 × 4/12 = 20,000

C’s share of profit = 60,000 × 3/12 = 15,000

Entry for interest due on partner’s loan :

Interest on Partners Loan A/c        Dr.
To Partner' s Loan A/c 

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.

When drawings are made at the end of each quarter for the same amount, use these two steps to find out the interest on drawings:

Step 1. Average Time Period = 9 + 0 = 9/2 = 4.5

Step 2. Interest on Drawings = 24,000 × 10/100 × 4.5/12 = Rs. 900

In this case partner has withdran a fixed amount on a fixed date for the full year. To calculate the interest on drawings follow these two steps in this situation:

Step 1 : Average Time Period = 12 + 1 = 13/2 = 6.5 months

Step 2. Interest on Drawings = 24,000 × 10/100 × 6.5/12 = 1,300

New Profit Sharing Raio = 3:2:1

P’s Share of Profit = 90,000 × 3/6 = 45,000

Q’s Share of Profit = 90,000 × 2/6 = 30,000

R’s Share of Profit = 90,000 × 1/6 = 15,000

R should get 25,000 but he is getting only Rs.15,000 (deficiency Rs.10,000 will be met by P)

Now P’s Share will be = 45.000 – 10,000 = Rs. 35,000

Distribution of Profits:

First 10,000 of profit in 30%, 50% and 20% i.e. 3,000; 5,000 and 2,000

Next 15,600 (25,600 – 10,000) in equal ratio i.e. 5,200 each.

R’s Share of Profit = 3,000 + 5,200 = 8,200

S’s Share of Profit = 5,000 + 5,200 = 10,200

T’s Share of Profit = 2,000 + 5,200 = 7,200

Calculation of interest on drawings:

1. When drawings during the year are given but it is not mentioned that drawings are made in the beginning, middle or end, in such a case average period should be used because per annum word is given with the rate of interest.

2. Average Period = 6 Months

3. Interest on Drawings = 7,000 × 12/100 × 6/12 = Rs. 420

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.

Profit and Loss Account is prepared after calculating the net profit. Profit and loss appropriation account shows the distribution of net profit amongst the partners in the form of interest on capital, salary, commission and remuneration etc. and transfer of profit to various reserves. profit and loss appropriation account is prepared after the preparation of profit and loss account.

When amounts are different for each drawings and dates of drawings are also different, in such a case Product method should be used to calculate the interest on drawings:

Interest on drawings = Total products Rs.1,69,000 × 10/100 × 1/12 = 1,408.33

Minimum guarantee of profit to a partner means, that partner will not get the less amount than the guarantee amount. If there is any deficiency, it will borne by the existing partners who have given guarantee. But it does not mean that he will get only guarantee amount, if his profit exceeds the limit of guaranteed amount, that will be paid to him. For example, in the above question guaranteed amount of C is Rs. 8,000 but he is getting Rs. 10,000 as per the profit sharing ratio. So he will get Rs. 10,000

In this case there is no deficiency of profit to C:

1. Profit to A = 1,20,000 × 3/6 = 60,000

2. Profit to B = 1,20,000 × 2/6 = 40,000

3. Profit to A = 1,20,000 × 1/6 = 20,000

Guaranteed amount is Rs.15,000 but C is getting more than that so there is no deficiency.