BISHOP SCOTT BOYS’ SCHOOL

(Affiliated to CBSE, New Delhi) Affiliation No.: 330726, School Campus: Chainpur, Jaganpura,

By-Pass, Patna 804453.

Phone Number: 7061717782, 9798903550. ,

Web: www.bishopscottboysschool.com Email: info@bishopscottboysschool.com

ONLINE TEACHING MATERIAL ACCOUNTS

SESSION-2020-21

CLASS-XII

TOPIC: BASIC FUNDAMENTAL OF

PARTNERSHIP FIRM

DAY-1

TEACHING MATERIAL

INTEREST ON CAPITAL

Interest on partners’ capital will be allowed only when it has been

specifically mentioned in the partnership deed. Interest on Capital

can be treated as either an Appropriation of profit or a charge against

profits.

Charge Appropriation

• Charge is compulsory in nature.

Whether there is profit or loss, all

charge items will be met.

• Example of charge:

Office Rent

Salary to Employees

Manager’s Commission etc.

• Appropriation is not compulsory

in nature. Appropriation is that

amount of profit which is paid to

the partners in the form of interest

on capital, salary,

commission/bonus etc.

• The concept of appropriation is

applicable only when there is

some profit.

• In case of loss no appropriations.

• Example of Appropriation:

Interest on capital, salary or

remuneration to partners, bonus or

commission to partners etc.

A. Interest on Capital : An Appropriation of Profits:

When there is loss Interest on Capital is not allowed because it

is an appropriation and will be paid only

when there is some profit

In Case of Sufficient Profits

Interest on Capital is allowed in full. All

partners are entitled for the interest on

capital at the agreed rate or rate of

interest on capital already mentioned in

the partnership deed.

In case of Insufficient Profits Interest on Capital is allowed only to the

extent of profits in the ratio of interest on

capital of each partner. In this case

partners do not get full amount of

interest.

B. Interest on Capital: As a Charge against Profits:

Interest on Capital is always allowed in full irrespective of amount of

profits or losses

Journal Entries

a. In case of sufficient profits

Profit and Loss Appropriation A/c Dr.

To Interest on Capital A/c

(Being interest on capital transferred to P & L Appropriation A/c)

b. In case of Insufficient Profits or Losses

Profit and Loss / Profit and Loss Adjustment A/c Dr.

To Interest on Capital A/c

(Being interest on capital transferred to P&L Adjustment A/c)

Note :

Interest on Capital is always calculated on the opening capital. If

Opening Capital is not given in the question, it should be ascertained as

follows:

DAY-2

Calculation of Opening Capital

Capital at the end (closing capital) xxxx

ADD : Drawings made during the year xxxx

ADD : Share of Loss During the year (if any) xxxx

xxxx

Less : Additional Capital introduced (if any) xxxx

Less : Share of Profit during the year (if any) xxxx

Capital in the beginning xxxx

For additional capital interest is calculated for period for which capital is

utilised.

E.g if additional capital is introduced on 1st October in firm where accounts

are closed on 31st March.

Interest = Amount introduced x Rate/100 x 6/12 as money is utilised for 6

months

EXAMPLE : On March 31, 2006 after the close of accounts, the capitals of Mountain, Hill

and Rock stood in the books of the firm at Rs. 4,00,000,Rs.3,00,000 and Rs. 2,00,000,

respectively. Subsequently, it was discovered that the interest on capital @ 10% p.a. had

been omitted. The profit for the year amounted to Rs. 1,50,000 and the partner’s drawings

had been Mountain: Rs. 20,000, Hill Rs. 15,000 and Rock Rs. 10,000. Calculate interest on

capital.

SOLUTION

EXAMPLE : On March 31, 2003, after the close of books of accounts, the capital accounts of Ram,

Shyam and Mohan showed balance of Rs. 24,000 Rs. 18,000 and Rs. 12,000, respectively. It was

later discovered that interest on capital @ 5% had been omitted. The profit for the year ended

March 31, 2003, amounted to Rs. 36,000 and the partner’s drawings had been Ram, Rs.3,600;

Shyam, Rs. 4,500 and Mohan, Rs. 2,700. The profit sharing ratio of Ram, Shyam and Mohan was

3:2:1. Calculate interest on capital.

DAY-3

Interest on Drawings

Drawings means cash or goods withdrawn from the business by the proprietor

for personal use. It reduces the capital of the proprietor. Interest on

drawings will be charged from the partner’s capital account, only if

it is mentioned in the partnership deed. If partnership deed is silent,

no interest on drawings will be charged. According to the business

entity concept interest on drawings will be treated as income for the business

and loss for the partners.

Distinction between drawings against profit and drawings against capital

Drawings against profit Drawings against capital

1. This is the amount withdrawn from

profits.

2. It is shown in the debit side of drawings

account

3. It is made out of profit, so does not

affect the capital

4. It is ignored at the time of calculation

of interest on drawings

1. This is the amount withdrawn from

capital

2. It is shown on the debit side of capital

account

3. It is made out of capital, it reduces the

capital

4. It is considered for the calculation of

interest

Methods for Calculation of interest on drawings

1. When rate of interest is given without the word per annum

In such a case, Interest on Drawings is calculated with a flat rate irrespective of

date of drawings. Drawing Amount X Rate

------------------------------------------

100

2. When Different amounts are withdrawn at different time intervals

We have the following two methods to calculate the amount of Interest on Drawing :

1. Simple Interest Method

In this method, interest on drawing is calculated for each amount of drawing

individually of the basis of periods for which

Rate Month

Drawing Amount X --------- X------------

100 12

2. Product Method

In this method, the amounts of drawings are multiplied by the period for

which it remained withdrawn during the period, Interest for 1 month is

calculated on the sum of these products.

DAY-4

Case (1) When Drawings are made in the beginning of every Month :

When

drawings are made in the first day of every month, the interest on

drawings

will be calculate as below :

Average Period = Time left after first Drawings + Time left after Last Drawings

2

12 Months + 1 Month = 6.5 Month

2

Int. on Drawings = Drawings Amount X Rate X 6.5

100 X 12

Drawings Amount = Drawing Amount X 12

EXAMPLE 1 : A draws RS.10,000 from the firm in the beginning of every

Month, Interest Drawings is to be charged @8% p.a. Calculate int. On

partner’s Drawings

SOLUTION : Average period = 12 Month + 1 Month = 13 = 6.5 Months

2 2

Drawings Amount = 10,000 X 12 = 1,20,000

Int. on Drawings = Drawings Amount X Rate X 6.5

100 X 12

1,20,000 X 8 X 6.5 = 5,200

100 X 12

Case (2) When Drawings are made at the ending of every Month : When

drawings are made on the last day of every month, the interest on drawings

will be calculate as below :

Average Period = Time left after first Drawings + Time left after Last Drawings

2

11 Months + 0 Month =5.5

2

Int. on Drawings = Drawings Amount X Rate X 5.5

100 X 12

Drawings Amount = Drawing Amount X 12

EXAMPLE 2. B draws RS.10,000 from the firm at the end of every Month,

Interest Drawings is to be charged @8% p.a. Calculate int. On partner’s

Drawings

SOLUTION : Average period = 11 month + 0 month = 11 = 5.5 Months

2 2

Drawings Amount = 10,000 X 12 = 1,20,000

Int. on Drawings = Drawings Amount X Rate X 5.5

100 X 12

1,20,000 X 8 X 5.5 = 4,400

100 X 12

Case (3) When Drawings of equal amount are made in the beginning of

each

Quarter : When drawings are made in the beginning of each

quarter, the interest on drawings will be calculate as below :

Average Period = Time left after first Drawings + Time left after Last Drawings

2

12 Months + 3 Month =7.5

2

Int. on Drawings = Drawings Amount X Rate X 7.5

100 X 12

Drawings Amount = Drawing Amount X 4

EXAMPLE 3. Mr. Ajay draws RS.20,000 from the firm in the beginning of

each quarter,

Interest Drawings is to be charged @10% p.a. Calculate int. On

partner’s

Drawings

SOLUTION : Average period = 12 month + 3 month = 15 = 7.5 Months

2 2

Drawings Amount = 20,000 X 4 = 80,000

Int. on Drawings = Drawings Amount X Rate X 7.5

100 X 12

80,000 X 10 X 7.5 = 5,000

100 X 12

Case (4) When Drawings of equal amount are made at the ending of each

Quarter : When drawings are made at the last of each quarter, the

interest on drawings will be calculate as below :

Average Period = Time left after first Drawings + Time left after Last Drawings

2

9 Months + 0 Month =4.5

2

Int. on Drawings = Drawings Amount X Rate X 4.5

100 X 12

Drawings Amount = Drawing Amount X 4

EXAMPLE 4. Mr. Vijay draws RS.20,000 from the firm in the end of each

quarter,

Interest Drawings is to be charged @10% p.a. Calculate int. On

partner’s

Drawings

SOLUTION : Average period = 9 Month + 0 Month = 9 = 4.5 Months

2 2

Drawings Amount = 20,000 X 4 = 80,000

Int. on Drawings = Drawings Amount X Rate X 4.5

100 X 12

80,000 X 10 X 4.5 = 3,000

100 X 12

Case (5) When Drawings are made in the middle of each month, middle of

each quarter, middle of Half year or year : When drawings are made at the last

of each quarter, the interest on drawings will be calculate as below :

Average Period = 6 months

Int. on Drawings = Drawings Amount X Rate X 6

100 X 12

Drawings Amount = Drawing Amount X 12 / 4 / 0

EXAMPLE 5 : D draws RS.10,000 from the firm in the middle of every Month,

Interest on Drawings is to be charged @8% p.a. Calculate int. On partner’s

Drawings

SOLUTION : Average period = 11.5 Month + 0.5 Month = 12 = 6 Months

2 2

Drawings Amount = 10,000 X 12 = 1,20,000

Int. on Drawings = Drawings Amount X Rate X 6.5

100 X 12

1,20,000 X 8 X 6 = 4,800

100 X 12

EXAMPLE 6. Mr. Sanjay draws RS.20,000 from the firm in the middle of each

quarter, Interest Drawings is to be charged @10% p.a. Calculate int. On

partner’s Drawings

SOLUTION : Average period = 10.5 Month + 1.5 Month = 12 = 6 Months

2 2

Drawings Amount = 20,000 X 4 = 80,000

Int. on Drawings = Drawings Amount X Rate X 6

100 X 12

80,000 X 10 X 6 = 4,000

100 X 12

DAY-5

Interest on half yearly Drawings or 6 months

Case (1) When Drawings are made in the beginning of every Month for 6

months:

When drawings are made in the first day of every month, the interest

on

drawings will be calculate for 6 months as below :

Average Period = Time left after first Drawings + Time left after Last Drawings

2

6 Months + 1 Month = 3.5 Month

2

Int. on Drawings = Drawings Amount X Rate X 3.5

100 X 12

Drawings Amount = Drawing Amount X 6

EXAMPLE 1 : P draws RS.6,000 from the firm in the beginning of every Month

for 6 Month ending 31’st March 2018, Interest on Drawings is to be charged

@8% p.a. Calculate int. On partner’s Drawings

SOLUTION : Average period = 6Month + 1 Month = 7 = 3.5 Months

2 2

Drawings Amount = 6,000 X 6 = 36,000

Int. on Drawings = Drawings Amount X Rate X 3.5

100 X 12

36,000 X 8 X 3.5 = 840

100 X 12

Case (2) When Drawings are made at the ending of every Month for 6

months : When drawings are made on the last day of every month for 6

months , the interest on drawings will be calculate as below :

Average Period = Time left after first Drawings + Time left after Last Drawings

2

5 Months + 0 Month = 2.5

2

Int. on Drawings = Drawings Amount X Rate X 2.5

100 X 12

Drawings Amount = Drawing Amount X 6

EXAMPLE 2. Q draws RS.6,000 from the firm at the end of every Month for 6

months ending 31’st March 2018, Interest on Drawings is to be charged @8%

p.a. Calculate int. On partner’s Drawings

SOLUTION : Average period = 5 Month + 0 month = 5 = 2.5 Months

2 2

Drawings Amount = 6,000 X 6= 36,000

Int. on Drawings = Drawings Amount X Rate X 2.5

100 X 12

36,000 X 8 X 2.5 = 600

100 X 12

Case (3) When Drawings are made in the middle of each month for 6

Months :

When drawings are made in the middle of every month for 6 months

, the

interest on drawings will be calculate as below :

Average Period = Time left after first Drawings + Time left after Last Drawings

2

5.5 Months + 0.5 Month = 3

2

Int. on Drawings = Drawings Amount X Rate X 3

100 X 12

Drawings Amount = Drawing Amount X 6

EXAMPLE 3 : R draws RS.6,000 from the firm in the middle of every Month,

for 6 months ending 31’st March 2018 Interest on Drawings is to be charged

@8% p.a. Calculate int. On partner’s Drawings

SOLUTION : Average period = 5.5 Month + 0.5 Month = 6 = 3 Months

2 2

Drawings Amount = 6,000 X 6 = 36,000

Int. on Drawings = Drawings Amount X Rate X 3

100 X 12

36,000 X 8 X 3 = 720

100 X 12

Interest on Drawings for 9 months

Case (1) When Drawings are made in the beginning of every Month for 9

months:

When drawings are made in the first day of every month, the interest

on

drawings will be calculate for 9 months as below :

Average Period = Time left after first Drawings + Time left after Last Drawings

2

9 Months + 1 Month = 5 Month

2

Int. on Drawings = Drawings Amount X Rate X 5

100 X 12

Drawings Amount = Drawing Amount X 9

EXAMPLE 1 : A draws RS.8,000 from the firm in the beginning of every

Month for 9 Month ending 31’st March 2018, Interest on Drawings is to be

charged @10% p.a. Calculate int. On partner’s Drawings

SOLUTION : Average period = 9 Month + 1 Month = 10 = 5 Months

2 2

Drawings Amount = 8,000 X 9 = 72,000

Int. on Drawings = Drawings Amount X Rate X 5

100 X 12

72,000 X 10X 5 = 3000

100 X 12

Case (2) When Drawings are made at the ending of every Month for 9

months : When drawings are made on the last day of every month for 9

months , the interest on drawings will be calculate as below :

Average Period = Time left after first Drawings + Time left after Last Drawings

2

8 Months + 0 Month = 4

2

Int. on Drawings = Drawings Amount X Rate X 4

100 X 12

Drawings Amount = Drawing Amount X 9

EXAMPLE 2. B draws RS.8,000 from the firm at the end of every Month for 9

months ending 31’st March 2018, Interest on Drawings is to be charged

@10% p.a. Calculate int. On partner’s Drawings

SOLUTION : Average period = 8 Month + 0 month = 8 = 4 Months

2 2

Drawings Amount = 8,000 X 9= 72,000

Int. on Drawings = Drawings Amount X Rate X4

100 X 12

72,000 X 10 X 4 = 2400

100 X 12

Case (3) When Drawings are made in the middle of every month for 9

Months :

When drawings are made in the middle of every month for 9 months

the interest on drawings will be calculate as below :

Average Period = Time left after first Drawings + Time left after Last Drawings

2

8.5 Months + 0.5 Month = 4.5

2

Int. on Drawings = Drawings Amount X Rate X 4.5

100 X 12

Drawings Amount = Drawing Amount X9

EXAMPLE 3 : C draws RS.8,000 from the firm in the middle of every Month,

for 9 months ending 31’st March 2018 Interest on Drawings is to be charged

@10% p.a. Calculate int.on partner’s Drawings

SOLUTION : Average period = 8.5 Month + 0.5 Month = 9 = 4.5 Months

2 2

Drawings Amount = 8,000 X 9 = 72,000

Int. on Drawings = Drawings Amount X Rate X 4.5

100 X 12

72,000 X 10 X 4.5 = 2700

100 X 12

When date of withdrawal is not specified

Sometimes date of withdrawal is not given in the question; amount withdrawn by the

partners as drawings is given only. In such a case it is assumed that the amount is withdrawn

at average basis or withdrawn evenly throughout the year and interest will be charged for

the average period which will be assumed to be 6 months. It is assumed that amount is

withdrawn in the middle of every month. The following formula will be used.

Interest on Drawings = Total Drawings x Rate/100 x 6/12

Important Points 1. If amount is withdrawn in the beginning of each month, interest is calculated for 6.5 months.

2. If amount is withdrawn at the end of each month, interest is calculated for 5.5 months.

3. If amount is withdrawn in the beginning of each quarter, interest is calculated for7.5 months.

4. If amount is withdrawn at the end of each quarter, interest is calculated for 4.5 months.

5. If amount is withdrawn in the middle of each month, middle of each quarter , interest is

calculated for 6 months When date of withdrawal is not given, it is mainly assumed to be in the

middle of month.

6. When different amounts are withdrawn at different intervals, product method is used for the

calculation of interest.

7. In the absence of partnership deed or if partnership deed is there but silent about interest, No

interest will be charged on drawings.

8. Interest will be credited to P/L Appropriation Account and Debited to partners’ capital/current

Account.

� Video link

LINK 1

Books / Links for introduction of accounting:

REER NCERT/ D K GOEL / HC VERMA / TR JAIN