GIFT UNIVERSITYFinancial accounting 2 Assignment 1

Fall 2011 SESSION

Issues related to the partnership accountsFollowing are the issues related to the partnership accounts:

1. Interest on capital

The amount of interest on capital is to be calculated on the time basis after taking into consideration the with drawl or introducing of capital. Interest on capital is chargeable to the extent of available profit only.

Treatment:

Example:-

L and M are partners sharing profit and loses in the ratio of 3:2. They earn Rs 90,000 as profit before allowing an interest of 10% per annum. L’s Capital was 720,000 and M`s Capital was 360,000.

Solution:

L`s interest = 720,000*10/100

= Rs. 72,000

M`s Capital = 360,000*10/100

= Rs. 36,000

2. Partners Drawings

For meeting personnel needs partner may require to draw money from the firm in varying amounts. They can draw money against their salary, commission or profit from the business.

Treatment:

When drawings are made the drawing accounts in the name of each partner is debited and cash account is credited. At the end of the period the drawing account is credited and the partners capital account is debited.

3. Interest on drawings

If there is a provision in the partnership deed, only then the interest on drawing is to be charged.

Treatment:

It is gain for the firm so it is credited in the profit and loss appropriation account and debited in the partners’ capital account.

i. If partner draw an amount at the beginning of each month then the interest on drawing will be equal to the interest of 6.5 months.

ii. If partner draw an amount at the end of each month then the interest on drawing will be equal to the interest of 5.5 months.

iii. If partner draw an amount at the mid of each month then the interest on drawing will be equal to the interest of 6.0 months.

4. Partners salaries, commission, etc

Like interest on capital, partners are also not allowed any type of salary or commission unless specifically provided in the agreement.

Treatment:

Like labor took salary for their work in the company similarly partner took salary. Some partners remain sleeping partners in the business but some are taking full contribution in the business so their salary should be given to them because of their more effort than the sleeping partners.

5. Appropriation of net income

In case of partner ship account there is a need to make an account which tell us division of profit and loss among the partners. This shows how the profit and loss is being apportioned among the partners.

Treatment:

In it we will add interest on capital and net profit in the opening balance and less interest on drawings and also the drawings.

6. Sharing of profit

The partnership deed is provided the ratio in which the profit and loss of the business is shared but if partnership is silent in this point then the profit and the loss is shared among the partners equally.

Treatment:

Each and every partner is contributed the capital in the business in some ratio then there is a duty of business that it give profit and loss to the partner in that ratio but some times that ratio is not mentioned then the profit and loss of the business is distributed equally.

7. Partners loan accounts

Some time business is run short of money then to run business some time one or more partners gave some loan to the business.

Treatment:

When the partner provided such types of loans then this loan account is credited separately and not included in the partner’s capital account.

8. Interest on Partners loan accounts

Generally partner got interest on the loan at the fixed rate but if partner ship deed is silent at this point then the partner got interest on the rate of 6% per annum.