Accountancy Test - 2

The correct answer is ALL OF THE ABOVE.

Key Points

The Partnership deed usually includes the following:​

• Description of the partners.
• Description of the firm.
• Principal Place of business.
• Nature of business.
• Commencement of Partnership.
• Capital contribution.
• Interest on Capital.
• Interest on Drawings.
• Profit-sharing Ratio.
• Interest on Loan.
• Salary, commission, etc. (if any).
• Valuation of Assets.
• Settlement of Accounts.
• Accounting Period.
• Rights and Duties of Partners.
• Duration of Partnership.
• Bank Operation.
• Settlement of Disputes.

Additional Information

• As per Section 4 of the Indian Partnership Act, 1932, "Partnership is defined as the relation between persons who have agreed to share the profits of a business carried on by all or any one of them acting for all".
•  Partnership Deed: It is the document containing the agreement in writing among all the partners. It is stamped according to the provision of Stamp Act.

The correct answer is the Credit Side of Profit & Loss Appropriation Account.

• Interest on Drawings is the rate at which interest is charged on the drawings. It is credited to the Profit and Loss Appropriation A/c and debited to Partners' Capital A/c if the capital accounts are maintained following fluctuating capital method or the current account if capital accounts are maintained following the fixed capital method.

Key Points

• Drawings mean the amount withdrawn, by partners, in cash or in-kind, for their personal use.
• Profit & Loss A/c is meant for recording all the expenses, losses, incomes, profit and gain; to ascertain the net profit or net loss during a financial year.

Additional Information

Here are the formulas for calculating interest on drawings in different cases:

• When drawings of a fixed amount are made at the beginning of every month:
  • Interest on Drawings = Total Drawings * Rate of interest/100 * 6.5/12 
• When drawings of a fixed amount are made at the end of every month:
  • Interest on Drawings = Total Drawings * Rate of interest/100 * 5.5/12
• When drawings of a fixed amount are made in the middle of every month:
  • Interest on Drawings = Total Drawings * Rate of interest/100 * 6/12
• When drawings of a fixed amount are made at the beginning of each quarter during the year:
  • Interest on Drawings = Total Drawings * Rate of interest/100 * 7.5/12
• When drawings of a fixed amount are made at the end of each quarter during the year:
  • Interest on Drawings = Total Drawings * Rate of interest/100 * 4.5/12
• When drawings of a fixed amount are made in the middle of each quarter during the year:
  • Interest on Drawings = Total Drawings * Rate of interest/100 * 6/12
• When drawings of a fixed amount are made at the beginning of every month for 6 months:
  • Interest on Drawings = Total Drawings * Rate of interest/100 * 3.5/12
• When drawings of a fixed amount are made at the end of every month for 6 months:
  • Interest on Drawings = Total Drawings * Rate of interest/100 * 3/12
• When drawings of a fixed amount are made in the middle of every month for 6 months:
  • Interest on Drawings = Total Drawings * Rate of interest/100 * 2.5/12

The correct answer is 7.5 

• When drawings of a fixed amount are made in the beginning of each quarter during the year:
  • Interest on Drawings = Total Drawings * Rate of interest/100 * 7.5/12
• Interest on Drawings is the rate at which interest is charged on the drawings. It is credited to the Profit and Loss Appropriation A/c and debited to Partners' Capital A/c if the capital accounts are maintained following fluctuating capital method or current account if capital accounts are maintained following fixed capital method

Important Points

• When drawings of a fixed amount are made in the beginning of every month:
  • Interest on Drawings = Total Drawings * Rate of interest/100 * 6.5/12 
• When drawings of a fixed amount are made at the end of every month:
  • Interest on Drawings = Total Drawings * Rate of interest/100 * 5.5/12
• When drawings of a fixed amount are made in the middle of every month:
  • Interest on Drawings = Total Drawings * Rate of interest/100 * 6/12
• When drawings of a fixed amount are made at the end of each quarter during the year:
  • Interest on Drawings = Total Drawings * Rate of interest/100 * 4.5/12
• When drawings of a fixed amount are made in the middle of each quarter during the year:
  • Interest on Drawings = Total Drawings * Rate of interest/100 * 6/12
• When drawings of a fixed amount are made in the beginning of every month during 6 months:
  • Interest on Drawings = Total Drawings * Rate of interest/100 * 3.5/12
• When drawings of a fixed amount are made at the end of every month during 6 months:
  • Interest on Drawings = Total Drawings * Rate of interest/100 * 3/12
• When drawings of a fixed amount are made in the middle of every month for 6 months:
  • Interest on Drawings = Total Drawings * Rate of interest/100 * 2.5/12

Key Points

• Rent paid to the partner is a type of fixed expense of the firm.
• Rent, whether paid to partner or any third party, is considered as a fixed expense as the firm is using partner's property to carry out its business.
• Therefore, it is considered as Charge against Profit as it is payable whether the business makes profit or loss.

Important Points

Difference Between Charge Against profit and Appropriation out of profit: 

The correct answer is EITHER 1 OR 2.

Important Points

Commission may be allowed to the partner either as a percentage of the net profit after charging the commission; or as a percentage of the net profit before charging the commission.

It is computed under two methods:

1. Before charging the commission:

• Commission = Net Profit (before commission) * Rate of commission / 100

​2. After charging the commission:

• Commission = Net Profit (before commission) * Rate of commission / (100 + rate of commission)

Key Points

• Commission is a sum of money paid to a salesperson for every sale that he or she makes. If a salesperson is paid on commission, the amount they receive depends on the amount they sell.  

The correct answer is SHALL NOT BE ALLOWED.

In the absence of any agreement between the partners, Indian Partnership Act will be applicable.

According to the Indian Partnership Act, 1932 the following matters are related to Accounting treatment.

• Profits and losses are to be shared equally.
• No interest on Capital is to be paid.
• No interest on Drawings is to be charged.
• Interest on loans is to be paid @ 6% p.a. Such interest is payable even if there are losses.
• No remuneration i.e., salary, commission, etc. is to be paid (allowed) to any partner for taking part in the conduct of business.

The correct answer is A charge against the profit

Key Points

• Depreciation- The fall in the monetary value of an asset due to its constant use, wear, and tear, obsolescence is termed as Depreciation. It is considered a yearly non-cash expense of a company.
• Provision for depreciation- It's a provision created to record the value of depreciation on assets separately. The purpose of this account is to transfer the total amount of depreciation into the assets account at the time of sale of the assets. This separate account maintained for depreciation allows more accuracy in the accounting of an asset.

Important Points

• A charge against the profit- These are those expenses that are not dependent on profits. These are deducted from revenues in arriving at the company's net profit or a net loss. These are recorded in the company's Profit and Loss Account. 
• Provision for depreciation is a charge against profit, as it is deducted from revenues independent of whether the company is earning profit or incurring a loss.

Additional Information

• Appropriation of the profit- These expenses are deducted from net profits obtained from the Profit and Loss account. These expenses are payable only when the firm earns profits. These are recorded in the Profit and Loss Appropriation Account which is prepared after Profit and Loss account for the distribution of leftover profit among partners. For Example- Interest on capital, Salary to partners, etc.

The correct answer is ALL OF THE ABOVE.

Key Points

• A separate Capital Account is maintained for each partner. Under these two methods can be followed:
  • Fixed Capital Accounts
  • Fluctuating Capital Accounts
• A Capital Account is a general ledger account that shows some of the special transactions like the proprietor’s investment in his own business,  the aggregate amount of earning, expenses of companies, etc.

Important Points

Fluctuating Capital Account Method

• In a firm, there is a single account under the name “Capital” which shows all the necessary information about the different transactions related to the capital.
• It mostly starts with a credit amount of the capital invested by the partner in the initial time of the business.
• All the adjustments leading to a decrease in the Capital are shown on the debit side of the Capital Account.
• For example, Drawings by Partners and interest comes on the debit side of the Capital account. All the adjustments leading to an increase in the Capital are shown on the credit side.

Fixed Capital Account Method
Under this method, the firm prepares 2 accounts that show different transactions related to the capitals of the partners.

These two accounts are as follows :

(a) Capital Account

• A firm prepares Fixed Account with very basic capital-related transactions. Unlike the Capital account, these repetitive capital-related transactions do not affect the Capital balance.
• Like, Salary of employees, commission for employees, interest on capital, interest on drawings, etc.
• The firm opens the account in the name of “Fixed Capital Account”. Initial Investment will appear on the credit side as the starting entry.
• Only 2 kinds of Capital related transactions can affect its balance : (1) Addition of Capital (2) Permanent Withdrawal of Capital

(b) Current Account
           It includes all the capital-related transactions other than the initial investment of capital, addition of capital, and withdrawal of capital. Hence, It mainly includes items such as :

 1. Interest on Capital

  2. Interest on Drawings

  3. Salaries and other remuneration to employees

  4. Commission to employees and even more.

         Hence, by preparing this account, we can let the main capital of the business “fixed”. As a result of which, there is no fluctuation at all. Hence, the firm will be able to find out the exact reasons behind the change.

The correct answer is SHALL BE ALLOWED @ 6%.

• In the absence of partnership deed, Indian Partnership Act should be applied.
• According to the Indian Partnership Act, 1932 following matters are related to Accounting treatment.
  • Profits and losses are to be shared equally.
  • No interest on Capital is to be paid.
  • No interest on Drawings is to be charged.
  • Interest on loan by the partner to the firm is to be paid @ 6% p.a. Such interest is payable even if there are losses.
  • No remuneration i.e., salary, commission, etc. is to be paid (allowed) to any partner for taking part in the conduct of business.

The correct answer is EQUAL.

• In the absence of partnership deed, the provisions of Indian Partnership Act, 1932 will apply.
• Therefore, If no partnership deed is acquiring by the partners in their partnership firm then, the profit-sharing ratio among all the partners would be equal.

Important Points

According the Indian Partnership Act, 1932 following matters are related to Accounting treatment.

•               Profits and losses are to be shared equally.
• No interest on Capital is to be paid.
• No interest on Drawings is to be charged.
• Interest on loans is to be paid @ 6% p.a. Such interest is payable even if there are losses.
• No remuneration i.e. salary ,commission, etc. is to be paid (allowed) to any partner for taking part in the conduct of business.

              Key Points

• Capital: It is the amount which is invested by the each partner into their partnership business.
• Drawings: It is the amount which is withdrawn by any partner from the business for their personal use.