CBSE Class 12 Accountancy Revision Notes...CBSE C Chapte Meaning Not-for-P of prom for-profi...

CBSEC

Chapte

Meaning

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VIDYA MRANCHI – 8

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VIDYA MRANCHI – 8

mes in a cash

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MANDIR834002

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JAWSH

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Amount

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VIDYA MRANCHI – 8

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MANDIR834002

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VIDYA MRANCHI – 8

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he ch ne is

There are certain organisations which are set up

for providing service to its members and thepublic in general. Such organisations include clubs,

charitable institutions, schools, religious

organisations, trade unions, welfare societies andsocieties for the promotion of art and culture. These

organisations have service as the main objective andnot the profit as is the case of organisations in

business. Normally, these organisations do not

undertake any business activity, and are managedby trustees who are fully accountable to their

members and the society for the utilization of thefunds raised for meeting the objectives of the

organisation. Hence, they also have to maintain

proper accounts and prepare the financial statementwhich take the form of Receipt and Payment

Account; Income and Expenditure Account; andBalance Sheet. at the end of for every accounting

period (normally a financial year).

This is also a legal requirement and helps themto keep track of their income and expenditure, the

nature of which is different from those of the businessorganisations. In this chapter we shall learn about

the accounting aspects relating to not-for-profit

organisation.

1.1 Meaning and Characteristics of Not-for-ProfitOrganisation

Not-for -Profit Organisations refer to the

organisations that are for used for the welfare of the

society and are set up as charitable institutions

Accounting for Not-for-Profit Organisation 1

LEARNING OBJECTIVES

After studying this chapter,you will be able to;

• Identiy the need for, andnature of accounting records

relating to not-for-profitorganisations;

• List the principal financialstatements prepared by not-for-profit organisations andexplain their nature;

• Prepare the Receipt andPayment Account from agiven data;

• Explain the procedure ofpreparing the Income andExpenditure Account from agiven Receipt and PaymentAccount and some

additional information;

• Distinguish between theReceipt and PaymentAccount and theIncome and ExpenditureAccount;

• Prepare Income andExpenditure Account andBalance Sheet from a givenReceipt and PaymentAccount and the relevantadditional information;

• Explain treatment of certainpeculiar items of receipts

and payments such assubscriptions from members,special funds, legacies, saleof old fixed assets, etc.

2015-16

2 Accountancy – Not-for-Profit Organisation and Partnership Accounts

which function without any profit motive. Their main aim is to provide service to a

specific group or the public at large. Normally, they do not manufacture, purchase orsell goods and may not have credit transactions. Hence they need not maintain

many books of account (as the trading concerns do) and Trading and Profit and Loss

Account. The funds raised by such organisations are credited to capital fund orgeneral fund. The major sources of their income usually are subscriptions from their

members donations, grants-in-aid, income from investments, etc. The main objectiveof keeping records in such organisations is to meet the statutory requirement and

help them in exercising control over utilisation of their funds. They also have to prepare

the financial statements at the end of each accounting period (usually a financialyear) and ascertain their income and expenditure and the financial position, and

submit them to the statutory authority called Registrar of Societies.

The main characteristics of such organisations are:

1. Such organisations are formed for providing service to a specific group or

public at large such as education, health care, recreation, sports and so onwithout any consideration of caste, creed and colour. Its sole aim is to provide

service either free of cost or at nominal cost, and not to earn profit.2. These are organised as charitable trusts/societies and subscribers to

such organisation are called members.

3. Their affairs are usually managed by a managing/executive committeeelected by its members.

4. The main sources of income of such organisations are: (i) subscriptionsfrom members, (ii) donations, (iii) legacies, (iv) grant-in-aid, (v) income

from investments, etc.

5. The funds raised by such organisations through various sources arecredited to capital fund or general fund.

6. The surplus generated in the form of excess of income over expenditureis not distributed amongst the members. It is simply added in the

capital fund.

7. The Not-for-Profit Organisations earn their reputation on the basis oftheir contributions to the welfare of the society rather than on the

customers’ or owners’ satisfaction.8. The accounting information provided by such organisations is meant for

the present and potential contributors and to meet the statutory requirement.

1.2 Accounting Records of Not-for-Profit Organisations

As stated earlier, normally such organisations are not engaged in any trading

or business activities. The main sources of their income are subscriptions frommembers, donations, financial assistance from government and income from

investments. Most of their transactions are in cash or through the bank. These

2015-16

3Accounting for Not-for-Profit Organisation

institutions are required by law to keep proper accounting records and keepproper control over the utilization of their funds. This is why they usually keep

a cash book in which all receipts and payments are duly recorded. They alsomaintain a ledger containing the accounts of all incomes, expenses, assets

and liabilities which facilitates the preparation of financial statements at theend of the accounting period. In addition, they are required to maintain a stockregister to keep complete record of all fixed assets and the consumables.

They do not maintain any capital account. Instead they maintain capitalfund which is also called general fund that goes on accumulating due tosurpluses generated, life membership fee, donation, legacies, etc. received

from year to year. In fact, a proper system of accounting is desirable to avoidor minimise the chances of misappropriations or embezzlement of the fundscontributed by the members and other donors.

Final Accounts or Financial Statements: The Not-for-Profit Organisations are alsorequired to prepare financial statements at the end of the each accounting period.Although these organisations are non-profit making entities and they are not requiredto make Trading and Profit & Loss Account but it is necessary to know whether the

income during the year was sufficient to meet the expenses or not. Not only thatthey have to provide the necessary financial information to members, donors, andcontributors and also to the Registrar of Societies. For this purpose, they have to

prepare their final accounts at the end of the accounting period and the generalprinciples of accounting are fully applicable in their preparation as stated earlier,the final accounts of a ‘not-for-profit organisation’ consist of the following:

(i) Receipt and Payment Account(ii) Income and Expenditure Account, and(iii) Balance Sheet.

The Receipt and Payment Account is the summary of cash and banktransactions which helps in the preparation of Income and Expenditure Accountand the Balance Sheet. Besides, it is a legal requirement as the Receipts and

Payments Account has also to be submitted to the Registrar of Societies alongwith the Income and Expenditure Account, and the Balance Sheet.

Income and Expenditure Account is akin to Profit and Loss Account. The

Not-for-Profit Organisations usually prepare the Income and ExpenditureAccount and a Balance Sheet with the help of Receipt and Payment Account.However, this does not imply that they do not make a trial balance. In order to

check the accuracy of the ledger accounts, they also prepare a trial balancewhich facilitates the preparation of accurate Receipt and Payment Account aswell as the Income and Expenditure Account and the Balance Sheet.

In fact, if an organisation has followed the double entry system they must

prepare a trial balance for checking the accuracy of the ledger accounts and itwill also facilitate the preparation of Receipt and Payment account. Income

and Expenditure Account and the Balance Sheet.

2015-16


1.3 Receipt and Payment Account

It is prepared at the end of the accounting year on the basis of cash receipts andcash payments recorded in the cash book. It is a summary of cash and bank

transactions under various heads. For example, subscriptions received from the

members on different dates which appear on the debit side of the cash book, shallbe shown on the receipts side of the Receipt and Payment Account as one item

with its total amount. Similarly, salary, rent, electricity charges paid from time totime as recorded on the credit side of the cash book but the total salary paid, total

rent paid, total electricity charges paid during the year appear on the payment

side of the Receipt and Payment Account. Thus, Receipt and Payment Accountgives summarised picture of various receipts and payments, irrespective of whether

they pertain to the current period, previous period or succeeding period or whetherthey are of capital or revenue nature. It may be noted that this account does not

show any non cash item like depreciation. The opening balance in Receipt and

Payment Account represents cash in hand/cash at bank which is shown on itsreceipts side and the closing balance of this account represents cash in hand and

bank balance as at the end of the year, which appear on the credit side of theReceipt and Payment Account. However, if it is bank overdraft at the end it shall

be shown on its debit side as the last item. Let us look at the cash book of Golden

Cricket Club given in the example to show how the total amount of each item ofreceipt and payment has been worked out.

Example 1

Golden Cricket ClubCash Book (Columnar)

Dr. Cr.

Date Receipts L.F. Bank Office Date Payments L.F. Bank Office

Amount Amount Amount Amount

(Rs.) (Rs.) (Rs.) (Rs.)

2014 2014

April 1 Balance b/d 35,000 20,000 April 15 Insurance premium 15,000April 10 Subscriptions 1,20,000 May 12 Printing and 10,750

stationeryApril 10 Entrance fees 13,000 May 20 Postage and 430

May 20 Life membership 12,000 courier fees

fees June 16 Telephone 810June 12 Locker rent 42,000 expenses

July 23 Life membership 8,000 July 10 Wages and salaries 22,000 fees July 15 Rates and Taxes 17,000

Aug. 20 Donation for 60,000 July 30 Govt. securities 1,00,000

building Aug. 13 Printing and 15,000Sept. 13 Subscriptions 30,000 statienary

(2005-2006) Aug. 15 Postage and 480Sept. 13 Subscription 45,000 courier service

Sept. 10 Lighting 12,250

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Sept. 14 Entrance fees 10,000 Sept 13 Telephone expenses 830

Nov. 9 Subscription 35,000 Oct. 1 Wages and salaries 10,000 12,000

Oct. 18 Printing and 13,000Nov. 9 Subscription 10,000 stationary

(2009-2010) Oct. 31 Govt. securities 1,00,0002015 Dec. 31 Wages and Salaries 22,000

Feb. 07 Subscription 25,000 2015

Jan. 21 Courier charges 240Mar. 28 Interest on 18,000 Feb. 2 Telephone 960

government expensessecurities Mar. 10 Postage and 850

Courier fees

Mar. 27 Lighting 14,000Mar. 27 Wages and Salaries 22,000

Mar. 31 Balance c/d 70,000 23,400

4,21,000 62,000 4,21,000 62,000

Part A

Item wise Aggregation of various Receipts

Subscriptions (2014–2015)

Date Amount (Rs.)

April 10, 2014 1,20,000Sept. 13, 2014 45,000Nov. 9, 2014 35,000Feb. 7, 2015 25,000

Total 2,25,000

Subscriptions (2013–14)

Date Amount (Rs.)

Sept. 13, 2014 30,000

Total 30,000

Subscription

Date Amount (Rs)

Nov. 9, 2014 10,000

Total 10,000

Entrance Fees

Date Amount (Rs)

April 10, 2014 13,000

Sept.14, 2014 10,000

Total 23,000

2015-16


Locker Rent

Date Amount (Rs)

April 12, 2014 42,000

Total 42,000

Life Membership fee

Date Amount (Rs)

May 12, 2014 12,000

July 23, 2014 8,000

Total 20,000

Donation for Buildings

Date Amount (Rs)

Aug. 20, 2014 60,000

Total 60,000

Interest on Government securities

Date Amount (Rs)

March 28, 2015 18,000

Total 18,000

Part B

Item wise Aggregation of various Payments

Insurance Premium

Date Amount (Rs)

April 15, 2014 15,000

Total 15,000

Printing and Stationery

Date Amount (Rs.)

May 12, 2014 10,750

Aug. 13, 2014 15,000

Oct. 18, 2014 13,000

Total 38,750

Lighting

Date Amount (Rs.)

Sept. 10, 2014 12,250

March 27, 2015 14,000

Total 26,250

2015-16


Telephone Expenses

Date Amount (Rs.)

June 16, 2014 810

Sept. 13, 2014 830

Feb. 12, 2015 960

Total 2,600

Rates and Taxes

Date Amount (Rs.)

July 15, 2014 17,000

Total 17,000

Government Securities

Date Amount (Rs.)

July 30, 2014 1,00,000

Oct. 31, 2014 1,00,000

Total 2,00,000

Wages and Salaries

Date Amount (Rs.)

July 10, 2014 22,000

Oct. 1, 2014 22,000

Dec. 31, 2014 22,000

March 30, 2015 22,000

Total 88,000

Postage and Courier Service

Date Amount (Rs.)

May 20, 2014 430

Aug. 15, 2014 480

Jan. 22, 2015 240

March 10, 2015 850

Total 2,000

The above data can also be shown in the form of the respective accounts in

the ledger. A detailed illustrative list of items of receipts and payments is given

in figure 1.

2015-16


Figure 1

Receipts Payments

1. Donations 1. Purchase of Fixed Assets(a) General 2. Purchase of Sports Material(b) Specific purpose 3. Investment in Securities

2. Entrance Fees 4. Printing and Stationery3. Legacies 5. Postage and Courier Charges4. Sale of Investments 6. Advertisements5. Sale of Fixed Assets 7. Wages and Salary6. Subscriptions from Members 8. Honorarium7. Life Membership Fees 9. Telephone Charges8. Sale of old Newspapers 10. Electricity and Water Charges9. Sale of Old Sports Material 11. Repairs and Renewals

10. Interest on Fixed Deposits 12. Upkeep of Play Ground11. Interest/ Dividend on Investments 13. Conveyance Charges12. Proceed from Charity Shows 14. Subscription for Periodicals13. Sale of Scrap 15. Audit Fees14. Grant-in-aid 16. Entertainment Expenses15. Interest/Dividend on Specific 17. Municipal Taxes

Fund Investments 18. Charity16. Miscellaneous Receipts. 19. Insurance

Receipt and Payment Account is given below:

Receipt and Payment Account for the year ending ————-

Receipts Amount Payments Amount(Rs.) (Rs.)

Balance b/d Balance b/d (Bank overdraft) xxxCash in Hand xxx Wages and Salaries xxxCash at Bank xxx Rent xxx

Subscriptions xxx Rates and Taxes xxxGeneral Donations xxx Insurance xxxSale of newspaper/ xxx Printing and Stationery xxxperiodicals/waste paper Postage and courier xxxSale of old sports materials xxx Advertisement xxxInterest on fixed deposits Sundry expenses xxxInterest/Dividend on general xxx Telephone charges xxxinvestments Entertainment expenses xxxLocker Rent xxx Audit fees xxxSale of scraps xxx Honorarium xxxProceeds from charity show xxx Repair and Renewals xxxMiscellaneous receipts xxx Upkeep of ground xxxGrant-in-aid** xxx Conveyance xxxLegacies xxx Newspapers and Periodicals xxx

Specific Donations xxx Purchases of Assets xxxSale of Investments xxx Purchase of Investments xxxSale of Fixed Assets xxx Balance c/d xxx

2015-16


Life membership fees xxx Cash in hand xxxEntrance fees xxx Cash at Bank* xxxReceipts on account of xxxspecific purpose fundsInterest on specific funds' xxxinvestmentsBalance b/d (Bank Overdraft)* xxx

xxxxx xxxxx

Fig. 1.1: Format of Receipt and Payment Account

* There will be either of the two amounts i.e., each at bank or bank overdraft, not both.

It may be noted that the receipts side of the Receipt and Payment Account gives a

list of revenue receipts (for past, current and future periods) as well as capital receipts.Similarly, the payments side of the Receipts and Payments Account lists the Revenue

Payments (for past, current and future periods) as well as Capital Payments.

1.3.1 Salient Features

1. It is a summary of the cash book. Its form is identical with that of simple

cash book (without discount and bank columns) with debit and creditsides. Receipts are recorded on the debit side while payments are entered

on the credit side.

2. It shows the total amounts of all receipts and payments irrespective ofthe period to which they pertain . For example, in the Receipt and Payment

account for the year ending on March 31, 2015, we record the totalsubscriptions received during 2014–15 including the amounts related

to the years 2013–2014 and 2015-2016. Similarly, taxes paid during

2014–15 even if they relate to the years 2013–14 and 2015–2016.3. It includes all receipts and payments whether they are of capital nature

or of revenue nature.4. No distinction is made in receipts/payments made in cash or through

bank. With the exception of the opening and closing balances, the total

amount of each receipt and payment is shown in this account.5. No non-cash items such as depreciation outstanding expenses accrued

income, etc. are shown in this account.6. It begins with opening balance of cash in hand and cash at bank (or

bank overdraft) and closes with the year end balance of cash in hand/

cash at bank or bank overdraft. In fact, the closing balance in thisaccount (difference between the total amount of receipts and payments)

which is usually a debit balance reflects cash in hand and cash at bankunless there is a bank overdraft.

2015-16


1.3.2 Steps in the preparation of Receipt and Payment Account

1. Take the opening balances of cash in hand and cash at bank and enterthem on the debit side. In case there is bank overdraft at the begining of

the year, enter the same on the credit side of this account.

2. Show the total amounts of all receipts on its debit side irrespective oftheir nature (whether capital or revenue) and whether they pertain to

past, current and future periods.3. Show the total amounts of all payments on its credit side irrespective of

their nature (whether capital or revenue) and whether they pertain to

past, current and future periods.4. None of the receivable income and payable expense is to be entered in

this account as they do not involve inflow or outflow of cash.5. Find out the difference between the total of debit side and the total of

credit side of the account and enter the same on the credit side as the

closing balance of cash/bank. In case, however, the total of the creditside is more than that of the total of the debit side, show the difference on

the debit as bank overdraft and close the account.From the following information based on the data assimilated from the cash

book given in example 1, at page 4, the Receipt and Payment Account of Golden

Cricket Club for the year ended on March 31, 2015 will be prepared as follows:

Summary of Cash Book

Details Amount(Rs.)

Cash in hand as on April 1, 2014 20,000Cash at bank as on April 1, 2014 35,000Subscription: Rs.

2013-14 30,0002014-15 2,25,0002015-16 10,000 2,65,000

Donation for Building 60,000Entrance fees 23,000Life membership fee 20,000Printing and Stationery 38,750Lighting 26,250Rates and Taxes 17,000Telephone charges 2,600Postage and courier 2,000Wages and Salaries 88,000Insurance Premium 15,000Interest on government securities 18,000Locker rent 42,000Purchase of government securities 2,00,000Cash in hand as on March 31, 2015 23,400Cash at bank as on March 31, 2015 70,000

2015-16


Receipt and Payment Account for the year ending March 31, 2015

Dr. Cr.

Receipts Amount Payments Amount

(Rs.) (Rs.)

Cash in hand as on 20,000 Printing and Stationery 38,750

April 1, 2014 Lighting 26,250

Cash at bank as on 35,000 Rates and Taxes 17,000

April 1, 2014 Telephone charges 2,600

Subscription: Postage and Courier 2,000

2013–14 30,000 Wages and Salaries 88,000

2014–15 2,25,000 Insurance Premium 15,000

2015–16 10,000 2,65,000 Purchase of govt. securities 2,00,000

Donation for building 60,000 Cash in hand as on 23,400

Entrance fees 23,000 March 31, 2015

Life membership fee 20,000 Cash at bank as on 70,000

Interest on investment in 18,000 March 31, 2015

Government securities

Locker rent 42,000

4,83,000 4,83,000

Illustration 1

From the following particulars relating to Silver Point, prepare a Receipt and

Payment account for the year ending March 31, 2015.

Particulars Amount Particulars Amount

(Rs.) (Rs.)

Opening cash balance 1,000 Sale of old sports materials 1,200

Opening bank balance 7,200 Donation received for pavilion 4,600

Subscriptions collected for: Rent paid 3,000

2013-14 Rs. 500 Sports materials purchases 4,800

2014-15 Rs. 7,600 Purchase of refreshments 600

2015-16 Rs. 900 9,000 Expenses for maintenance 2,000

Sale of refreshments 1,000 of tennis court

Entrance fees received 1,000 Salary paid 2,500

Tournament expenses 2,400

Furniture purchased 1,500

Office expenses 1,200

Closing cash in hand 400

2015-16


SolutionBooks of Silver Point

Receipt and Payment Accountfor the year ending March 31, 2015

Dr. Cr.


(Rs.) (Rs.)

Balance b/d Rent 3,000Cash 1,000 Sports materials purchased 4,800Bank 7,200 Purchase of refreshments 600Subscriptions Maintenance expenses for 2,000

2013-14 500 tennis court2014-15 7,600 Salary 2,5002015-16 900 9,000 Tournament expenses 2,400

Sale of refreshments 1,000 Furniture purchased 1,500Entrance fees 1,000 Office expenses 1,200Sale of old sports materials 1,200 Balance c/dDonation for pavilion 4,600 Cash 400

Bank (balancing figure) 6,600

25,000 25,000

1.4 Income and Expenditure Account

It is the summary of income and expenditure for the accounting year. It is just

like a profit and loss account prepared on accrual basis in case of the businessorganisations. It includes only revenue items and the balance at the end

represents surplus or deficit. The Income and Expenditure Account serves

the same purpose as the profit and loss account of a business organisationdoes. All the revenue items relating to the current period are shown in this

account, the expenses and losses on the expenditure side and incomes andgains on the income side of the account. It shows the net operating result in

the form of surplus (i.e. excess of income over expenditure) or deficit (i.e. excess

of expenditure over income), which is transferred to the capital fund shown inthe balance sheet.

The Income and Expenditure Account is prepared on accrual basis with thehelp of Receipts and Payments Account along with additional information

regarding outstanding and prepaid expenses and depreciation etc. Hence, many

items appearing in the Receipts and Payments need to be adjusted. For example,as shown in Example 1, (Page No. 10) subscription amount of Rs.2, 65,000 received

during the year 2014-15 appearing on the receipts side of the Receipt and PaymentAccount includes receipts for the periods other than the current period. But the

subscription amount of Rs. 2,25,000 pertaining to the current year only will be

shown as income in Income and Expenditure Account for the year 2014-15.

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1.4.1 Steps in the Preparation of Income and Expenditure Account

Following steps may be helpful in preparing an Income and Expenditure Accountfrom a given Receipt and Payment Account:

1. Persue the Receipt and Payment Account thoroughly.

2. Exclude the opening and closing balances of cash and bank as theyare not an income.

3. Exclude the capital receipts and capital payments as these are to beshown in the Balance Sheet.

4. Consider only the revenue receipts to be shown on the income side of

Income and Expenditure Account. Some of these need to be adjusted byexcluding the amounts relating to the preceding and the succeeding

periods and including the amounts relating to the current year not yetreceived.

5. Take the revenue expenses to the expenditure side of the Income and

Expenditure Account with due adjustments as per the additionalinformation provided relating to the amounts received in advance and

those not yet received.6. Consider the following items not appearing in the Receipt and Payment

Account that need to be taken into account for determining the surplus/

deficit for the current year :(a) Depreciation of fixed assets.

(b) Provision for doubtful debts, if required.(c) Profit or loss on sale of fixed assets.

Now you will observe how the income and expenditure account is prepared

from the receipts and payments account given in example 1, on page 10.

Income and Expenditure Accountfor the year ending on March 31, 2015

Dr. Cr.

Expenditure Amount Income Amount

(Rs.) (Rs.)

Printing and Stationery 38,750 Subscriptions 2,25,000Lighting 26,250 Entrance fees 23,000Rates and Taxes 17,000 Interest on investment 18,000Telephone charges 2,600 in government securitiesPostage and courier charges 2,000 Locker rent 42,000Wages and Salaries 88,000Insurance Premium 15,000Surplus (Excess of income 1,18,400over expenditure)

3,08,000 3,08,000

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Note that-

1. Opening and closing cash/bank balances have been excluded.2. Payment for purchase of Government securities being capital expenditure has

been excluded.3. Amount of subscriptions received for the year 2013-14 and 2014-15 have been excluded.4. Life membership fee is an item of capital receipt and so excluded.

5. Donation for building is a receipt for a specific purpose and so excluded.

Illustration 2

From the Receipt and Payment Account given below, prepare the Income andExpenditure Account of Clean Delhi Club for the year ended March 31, 2014.

Receipt and Payment Account for the year ending March 31, 2014Dr. Cr.


Balance b/d 3,200 Salary 1,500(Cash in hand) Rent 800Subscriptions 22,500 Electricity 3,500Entrance Fees 1,250 Taxes 1,700Donations 2,500 Printing and Stationery 380Rent of hall 750 Sundry expenses 920Sale of investments 3,000 Books purchased 7,500

Govt. bonds purchased 10,000Fixed deposit with bank 5,000(on 31.03.2014)Balance c/d

Cash in hand 400Cash at bank 1,500 1,900

33,200 33,200

SolutionBooks of Clean Delhi Club

Income and Expenditure Account for the year ending March 31, 2014Dr. Cr.

Expenditure Amount Income Amount(Rs.) (Rs.)

Salary 1,500 Subscriptions 22,500Rent 800 Entrance fees 1,250Electricity 3,500 Donation 2,500Taxes 1,700 Rent of hall 750Printing & Stationery 380Sundray Expenses 920Surplus 18,200(excess of income overexpenditure)

27,000 27,000

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Illustration 3

From the following Receipt and Payment Account for the year ending March 31,2015 of Negi's Club, prepare Income and Expenditure Account for the same

period:Receipt and Payment Account for the year ending March 31, 2015

Dr. Cr.


Balance c/d Bank 25,000 Purchase of furniture (1.7.14) 5,000Subscriptions Salaries 2,000

2014 1,500 Telephone expenses 3002015 10,000 Electricity charges 6002016 500 12,000 Postage and Stationery 150

Donation 2,000 Purchase of books 2,500Hall rent 300 Entertainment expenses 900Interest on bank deposits 450 Purchase of 5% government 8,000Entrance fees 1,000 papers (1.7.14)

Miscellaneous expenses 600Balance c/d:

Cash 300Bank 20,400

40,750 40,750

The following additional information is available:

(i) Salaries outstanding – Rs. 1,500;

(ii) Entertainment expenses outstanding – Rs. 500;

(iii) Bank interest receivable – Rs. 150;

(iv) Subscriptions accrued – Rs. 400;

(v) 50 per cent of entrance fees is to be capitalised;

(vi) Furniture is to be depreciated at 10 per cent per annum.

SolutionBooks of Negi's Club

Income and Expenditure Account for the year ending 31.3.2015Dr. Cr.


(Rs.) (Rs.)

Salaries 2,000 Subscriptions 10,400

Add: Outstanding 1,500 3,500 Donation 2,000

Telephone expenses 300 Entrance Fees (50% of Rs. 1,000) 500

Electricity charges 600 Bank interest 450

Postage and Stationery 150 Add: Outstanding interest 150 600

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Entertainment expenses 900 Interest on investment 200Add: Outstanding 500 1,400 Hall rent 300

expensesMiscellaneous expenses 600Depreciation on furniture 375Surplus 7,075(Excess of Income overExpenditure)

14,000 14,000

1.4.2 Distinction between Income and Expenditure Account and Receiptand Payment Account

Based upon discussion made in regard to the Receipts and Payments Account

and the Income and Expenditure Account we make the distinction betweenIncome and Expenditure Account and Receipts and Payments Account in the

tabular form:

Basis of distinction Income and Expenditure Receipt and PaymentAccount Account

Nature It is like as profit and loss It is the summary of the cashaccount. book.

Nature of Items It records income and It records receipts andexpenditure of revenue payments of revenue as well as

nature only. capital nature.

Period Income and expenditure Receipts and payments mayitems relate only to the also relate to preceding andcurrent period. succeeding periods.

Debit side Debit side of this account Debit side of this accountrecords expenses and losses. records the receipts.

Credit side Credit side of this account Credit side of this accountrecords income and gains. records the payments.

Depreciation Includes depreciation. Does not includesdepreciation.

Opening Balance There is no opening balance. Balance in the beginningrepresents cash in hand /cashat bank or overdraft atthe beginning.

Closing Balance Balance at the end rep- Balance at the end representsresents excess of income cash in hand at the end andover expenditure or vice- bank balance (or bankversa. overdraft).

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1.5 Balance Sheet

‘Not-for-Profit’ Organisations prepare Balance Sheet for ascertaining the financialposition of the organisation. The preparation of their Balance Sheet is on the same

pattern as that of the business entities. It shows assets and liabilities as at the endof the year. Assets are shown on the right hand side and the liabilities on the left

hand side. However, there will be a Capital Fund or General Fund in place of theCapital and the surplus or deficit as per Income and Expenditure Account which

is either added to/deducted from the capital fund, as the case may be. It is alsoa common practice to add some of the capitalised items like legacies, entrance

fees and life membership fees directly in the capital fund.Besides the Capital or General Fund, there may be other funds created for

specific purposes or to meet the requirements of the contributors/donors suchas building fund, sports fund, etc. Such funds are shown separately in the

liabilities side of the balance sheet.Some times it becomes necessary to prepare Balance Sheet as at the beginning

of the year in order to find out the opening balance of the capital/general fund.

1.5.1 Preparation of Balance Sheet

The following procedure is adopted to prepare the Balance Sheet:1. Take the Capital/General Fund as per the opening balance sheet and

add surplus from the Income and Expenditure Account. Further, addentrance fees, legacies, life membership fees, etc. received during the year.

2. Take all the fixed assets (not sold/discarded/or destroyed during theyear) with additions (from the Receipts and Payments account) after

charging depreciation (as per Income and Expenditure account) and showthem on the assets side.

3. Compare items on the receipts side of the Receipts and Payments Accountwith income side of the Income and Expenditure Account. This is to

ascertain the amounts of: (a) subscriptions due but not yet received:(b) incomes received in advance; (c) sale of fixed assets made during the

year; (d) items to be capitalised (i.e. taken directly to the Balance Sheet)e.g. legacies, interest on specific fund investment and so on.

4. Similarly compare, items on the payments side of the Receipt andPayment Account with expenditure side of the Income and

Expenditure Account. This is to ascertain the amounts if: (a)outstanding expenses; (b) prepaid expenses; (c) purchase of a fixed

asset during the year; (d) depreciation on fixed assets; (e) stock ofconsumable items like stationery in hand; (f) Closing balance of cash

in hand and cash at bank as, and so on.A proforma Balance Sheet is given for the proper understanding of preparing

the balance sheet.

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Balance Sheet of as on ...............

Liabilities Amount Assets Amount

(Rs.) (Rs.)

Capital fund:Opening Balance ...... Cash in hand and /or Cash ......Add: Surplus at Bank

OR Outstanding Incomes ......Less: Deficit Prepaid Expenses ......Add: Capitalised Income of the ...... Stock of Consumable Items:

Current Year on account of: Previous Balance Legacies ...... Add: Purchases in the currentEntrance Fees ...... periodLife Membership Fees ...... Less: Value consumed during ......Closing Balance ...... the periodSpecial Fund/Donations: Previous Balance ......Previous Balance (If any ) Add: Purchases in the currentAdd: Receipts for the item period

during the period Less: Book Value of the AssetAdd: Income earned on sold/disposed off

fund/Donations’ Closing Balance ......Investments

Less: Expenses paid out offund/Donations

Net Balance ......Creditors for Purchasesand/or supplies ......Bank Overdraft ......Outstanding Expenses:Income received in Advance ......

...... ......

Fig. 1.2: Proforma Balance Sheet

Illustration 4

From the following Receipt and Payment Account and additional informationrelating to Excellent Cricket Club, prepare Income and Expenditure Account

for the year ended March 31, 2015 and Balance Sheet as on date.Dr. Cr.


Balance b/d (Cash in Hand) 18,000 Balance b/d (bank overdraft) 16,000Member’s subscriptions 2,50,000 Upkeep of field and pavilion 1,15,000Member’s admission fee 15,000 Tournament expenses 40,000Sale of old sports materials 2,500 Rates and Insurance 10,000Hire of ground 28,000 Telephone 3,500Subscription for tournament 60,000 Postage and Courier charges 4,000Life membership fee 20,000 Printing and Stationery 26,000Donations 6,00,000 Miscellaneous expenses 4,400

2015-16


Secretary’s honorarium 30,000Grass seeds 2,600Investments 6,00,000Purchase of sports materials 68,000Balance c/d 74,000

9,93,500 9,93,500

Assets at the beginning of the year were:Rs.

Play ground 5,00,000Cash in hand 18,000Stock of sports materials 85,000Printing and Stationery 11,000Subscriptions receivable 28,000

Donations and Surplus on account of tournament are to be kept in Reserve for apermanent pavilion. Subscriptions due on March 31, 2015 were Rs. 42,000. Write-off fifty

per cent of sports materials and thirty per cent of printing and stationery.

SolutionBooks of Excellent Cricket Club

Income and Expenditure Account for the year ending on March 31, 2015Dr. Cr.


Upkeep of field and pavilion 1,15,000 Subscriptions 2,50,000Rates and Insurance 10,000 Add: OutstandingTelephone 3,500 (closing) 42,000Postage and Courier charges 4,000 2,92,000Printing & stationery 26,000 Less: OutstandingAdd: Opening stock 11,000 (opening) 28,000 2,64,000

Available for use 37,000 Admission fees 15,000

Less: Closing stock 25,900 11,100 Sale of old sports material 2,500Stationery consumed 4,400 Rent of hall 28,000Miscellaneous expenses 30,000Secretary’s honorarium 2,600Grass seedsSports materials consumed:Opening stock 85,000Add: Purchases 68,000

1,53,000Less: Closing stock 76,500 76,500Surplus 52,400(Excess of income overexpenditure)

3,09,500 3,09,500

Note: Since the opening balance of the capital fund is not given, the same has been

ascertained by preparing opening balance sheet.

2015-16


Balance Sheet of Excellent Cricket Club as on March 31, 2015


(Rs.) (Rs.)

Capital Fund 6,26,000 Cash in hand 74,000Add: Surplus 52,400 Outstanding subscriptions 42,000

6,78,400 Stock of sports materials 76,500Add: Life membership Stock of printing 25,900

fee 20,000 6,98,400 and stationeryPavilion Fund: Investments 6,00,000Surplus from Tournament Play ground 5,00,000(Rs.60,000-40,000) 20,000Donation 6,00,000 6,20,000

13,18,400 13,18,400

Balance Sheet of Excellent Cricket Club as on March 31, 2014


(Rs.) (Rs.)

Bank overdraft 16,000 Cash in hand 18,000Capital/General fund Outstanding subscription 28,000

(balancing figure) 6,26,000 Stock of sports materials 85,000Printing and Stationery 11,000Play ground 5,00,000

6,42,000 6,42,000

Test your Understanding – I

State with reasons whether the following statements are TRUE or FALSE:(i) Receipt and Payment Account is a summary of all capital receipts and payments.

(ii) If there appears a sports fund, the expenses incurred on sports activities willbe shown on the debit side of Income and Expenditure Account.

(iii) A credit balance of Income and Expenditure Account denotes excess if expensesover incomes.

(iv) Scholarships granted to students out of funds provided by government will bedebited to Income and Expenditure Account.

(v) Receipt and Payment Account records the receipts and payments of revenuenature only.

(vi) Donations for specific purposes are always capitalized.(vii) Opening balance sheet is prepared when the opening balance of capital fund is

not given.(viii) Surplus of Income and Expenditure Account is deducted from the capital/

general fund.(ix) Receipt and Payment Account is equivalent to profit and loss account.(x) Receipt and Payment Account does not deference between capital and revenue

receipts.

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1.6 Some Peculiar Items

Final accounts of the Not-for-Profit organisations are prepared on the similarpattern as that of a business orgnisation. However, a few items of income and

expenses of such orgnisations are somewhat different in nature and need special

attention in their treatment in final accounts. They are peculiar to theseorgnisations. Some of the common peculiar items are explained as under:

Subscriptions: Subscription is a membership fee paid by the member on annual

basis. This is the main source of income of such orgnisations. Subscription paid

by the members is shown as receipt in the Receipt and Payment Account and asincome in the Income and Expenditure Account. It may be noted that Receipt

and Payment Account shows the total amount of subscription actually receivedduring the year while the amount shown in Income and Expenditure Account is

confined to the figure related to the current period only irrespective of the fact

whether it has been received or not. For example, a club received Rs. 20,000 assubscriptions during the year 2014-15 of which Rs.3,000 relate to year

2013-14 and Rs.2,000 to 2015-16, and at the end of the year 2014-15 Rs.6,000are still receivable. In this case, the Receipt and Payment Account will show

Rs.20,000 as receipt from subscriptions. But the Income and Expenditure

Account will show Rs. 21,000 as income from subscriptions for the year2014-15, the calculation of which is given as below:

Rs.

Subscriptions received in 2014-15 20,000Less: Subscriptions for the year 2013-14 3,000

17,000Less: Subscription for the year 2015-16 2,000

15,000Add: Subscriptions outstanding for the year 2014-15 6,000

Income from subscriptions for the year 2014-15 21,000

The above amount of subscriptions to be shown as income can also be

ascertained by preparing the subscription account as follows:

Subscription AccountDr. Cr.

Date Particulars J.F. Amount Date Particulars J.F. A m o u n t

(Rs.) (Rs.)

Balance b/d 3,000 Balance b/d Nil

(outstanding at the (received in advancebeginning) during previous year)

Income and Expenditure 21,000 Cash (subscription 20,000

Account (balancing figure) received)Balance c/d 2,000 Balance c/d 6,000

(received in advance) (outstanding at the end)

26,000 26,000

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Illustration 5

As per Receipt and Payment Account for the year ended on March 31, 2015, thesubscriptions received were Rs. 2,50,000. Additional Information given is as

follows:

1. Subscriptions Outstanding on 1.4.2014 Rs. 50,000

2. Subscriptions Outstanding on 31.3.2015 Rs.35,000

3. Subscriptions Received in Advance as on 1.4.2014 Rs.25,000

4. Subscriptions Received in Advance as on 31.3.2015 Rs.30,000

Ascertain the amount of income from subscriptions for the year 2014–15

and show how relevant items of subscriptions appear in opening and closingbalance sheets.

Solution

Details Amount

(Rs.)

Subscriptions Received as per Receipt and Payment account 2,50,000

Add: Subscriptions outstanding on 31.3.2015 35,000

Add: Subscriptions received in advance on 1.4.2014 25,000

3,10,000

Less: Subscriptions outstanding on 1.4.2014 50,000

2,60,000

Less: Subscriptions received in advance on 31.3.2015 30,000

Income from subscription for the year 2014–15 2,30,000

Alternately, income received from subscriptions can be calculated by

preparing a Subscriptions account as under.


Date Particulars J.F. Amount Date Particulars J.F. Amount

(Rs.) (Rs.)

Balance b/d (outstanding) 50,000 Balance b/d (advance) 25,000

Income and Receipts and Payments A/c 2,50,000Expenditure Account 2,30,000 Balance b/d (outstanding) 35,000

(balancing figure)Balance c/d (advance) 30,000

3,10,000 3,10,000

Relevant items of subscription can be shown in the opening and closing

balance sheet as under:

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Balance Sheet as on March 31, 2014


(Rs.) (Rs.)

Subscriptions received in advance 25,000 Subscription outstanding 50,000

*Relevant data onlyBalance Sheet as on March 31, 2015


(Rs.) (Rs.)

Subscriptions received in advance 30,000 Subscriptions outstanding 35,000

*Relevant data only

Illustration 6

Extracts of Receipt and Payment Account for the year ended March 31, 2015

are given below:

Receipt

Subscriptions (Rs.)

2013-14 2,5002014-15 26,7502015-16 1,000

30,250

Additional Information:

Total number of members: 230.Annual membership fee: Rs. 125.Subscriptions outstandings on April 1, 2013: Rs. 2,750.Prepare a statement showing all relevant items of subscriptions viz., income, advance,

outstandings, etc.

Solution

Amount of subscription due for the year 2014-15 irrespective of cash

Rs. 28,750 (i.e. Rs. 125 × Rs. 230).

Details Amount(Rs.)

Subscriptions received as per Receipts and Payments Account 30,250

Add: Subscriptions outstanding on March 31, 2014 2,250Add: Subscriptions received in advance on April 1, 2013 NIL

32,500Less: Subscriptions outstanding on April 1, 2013 2,750

29,750Less: Subscriptions received in advance on March 31, 2014 1,000

Income from Subscription for the year 2014-15. (125×230) 28,750

Note: The amount of subscriptions outstanding as on 01-04-2014 has been ascertainedas follows:

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Details (Rs.) (Rs.)

(i) Outstanding as on 01.04.2014 2,750Received for 2013–14 2,500 250

(ii) Due for 2014–15 (125×230) 28,750Received for 2014–15 26,750 2,000

Outstanding as on 31-3-2015 2,250

Illustration 7

From the following extract of Receipt and Payment Account and the additional

information given below, compute the amount of income from subscriptions

and show as how they would appear in the Income and Expenditure Accountfor the year ending March 31, 2015 and the Balance Sheet.



(Rs.) (Rs.)

Subscriptions:2013-14 7,0002014-15 30,0002015-16 5,000 42,000

Additional Information: Rs.

1. Subscriptions outstanding March 31, 2014 8,5002. Total Subscriptions outstanding March 31, 2015 18,5003. Subscriptions received in advance 4,000

as on March 31, 2014

SolutionIncome and Expenditure Account

for the year ending on March 31, 2015


(Rs.) (Rs.)

Subscriptions 30,000Received for 2014-15Add: Outstanding for 2014-15 17,000Add: Received in advance for 4,000

2014-15

51,000

Note: Total amount of subscriptions outstanding as on 31-3-2015 are Rs. 18,500. This,includes Rs. 1,500 (Rs. 8,500 – Rs. 7,000) for subscriptions still outstanding for2013–14. Hence, the subscriptions outstanding for 2014–15 are Rs. 17,000

(Rs. 18,500 – Rs. 1,500).

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Balance Sheet (Relevant Data) as on March 31, 2015


(Rs.) (Rs.)

Subscription Received in Subscription Outstanding:Advance for 2014-15 2013-14 1,500

5,000 2014-15 1,7000 18,500

*Relevant data only

Do it Yourself

1. Subscriptions received by the health club during the year 2013 were as under: Rs.

2012 3,0002013 96,0002014 2,000

1,01,000Rs.

Subscriptions Outstanding as on 31.12.12 5,000Subscriptions Outstanding as on 31.12.13 12,000Subscriptions received in advance in 2012 for 2013 5,000

Calculate the amount of subscriptions to be shown on the income side of Incomeand Expenditure A/c.

2. During the year 2013, subscriptions received by a sports club were Rs. 80,000.These included Rs. 3,000 for the year 2010 and Rs.6,000 for the year 2014. OnDecember 31, 2012 the amount of subscriptions due but not received wasRs.12,000. Calculate the amount of subscriptions to be shown in Income andExpenditure Account as income from subscription.

3. Subscriptions received during the year ended December 31, 2013 by RoyalClub were as under:

Rs.

2012 3,0002013 93,0002014 2,000

98,000

The club has 500 members each paying @ Rs.200 as annual subscription.Subscriptions outstanding as on December 31, 2012 are Rs. 6,000. Calculate

the amount of subscriptions to be shown as income in the Income andExpenditure Account for the year ended December 31, 2013 and show therelevant data in the Balance Sheet as on date.

Donations: It is a sort of gift in cash or property received from some person ororganisation. It appears on the receipts side of the Receipts and Payments

Account. Donation can be for specific purposes or for general purposes.(i) Specific Donations: If donation received is to be utilised to achieve specified

purpose, it is called Specific Donation. The specific purpose can be an

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extension of the existing building, construction of new computer

laboratory, creation of a book bank, etc. Such donation is to be capitalisedand shown on the liabilities side of the Balance Sheet irrespective of the

fact whether the amount is big or small. The intention is to utilise the

amount for the specified purpose only.(ii) General Donations: Such donations are to be utilised to promote the

general purpose of the organisation. These are treated as revenue receiptsas it is a regular source of income hence, it is taken to the income side of

the Income and Expenditure Account of the current year.

Legacies: It is the amount received as per the will of a deceased person. It appearson the receipts side of the Receipt and Payment Account and is directly added to

capital fund/general fund in the balance sheet, because it is not of recurringnature. However, legacies of a small amount may be treated as income and shown

on the income side of the Income and Expenditure Account.

Life Membership Fees: Some members prefer to pay lump sum amount as lifemembership fee instead of paying periodic subscription. Such amount is treated

as capital receipt and credited directly to the capital/general fund.

Entrance Fees: Entrance fee also known as admission fee is paid only once by

the member at the time of becoming a member. In case of organisations like clubs

and some charitable institutions, is limited and the amount of entrance fees isquite high. Hence, it is treated as non-recurring item and credited directly to

capital/general fund. However, for some organisations like educational institutions,the entrance fees is a regular income and the amount involved may also be small.

In their case, it is customary to treat this item as a revenue receipt. However, if

there is specific instruction, it is advisable to treat the entire amount as capitalreceipt and the relevant amount should be directly added to capital/general fund.

Sale of old asset: Receipts from the sale of an old asset appear in the Receiptsand Payments Account of the year in which it is sold. But any gain or loss on the

sale of asset is taken to the Income and Expenditure Account of the year. For

example, if an item furniture with a book value of Rs. 800 is sold for Rs. 700,this amount of Rs. 700 will be shown as receipt in Receipts and Payments

Account and Rs. 100 on the expenditure side of the Income and ExpenditureAccount as a loss on sale of old asset and while showing furniture in the balance

sheet Rs. 800 will be deducted from its total book value.

Sale of Periodicals: It is an item of recurring nature and shown as the incomeside of the Income and Expenditure Account.

Sale of Sports Materials: Sale of sports materials (used materials like old balls,bats, nets, etc) is the regular feature with any Sports Club. It is usually shown

as an income in the Income and Expenditure Account.

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Payments of Honorarium: It is the amount paid to the person who is not the

regular employee of the institution. Payment to an artist for giving performanceat the club is an example of honorarium. This payment of honorarium is shown

on the expenditure side of the Income and Expenditure Account.

Endowment Fund: It is a fund arising from a bequest or gift, the income ofwhich is devoted for a specific purpose. Hence, it is a capital receipt and shown

on the Liabilities side of the Balance Sheet as an item of a specific purpose fund.

Government Grant: Schools, colleges, public hospitals, etc. depend upon

government grant for their activities. The recurring grants in the form of

maintenance grant is treated as revenue receipt (i.e. income of the current year)and credited to Income and Expenditure account. However, grants such as

building grant are treated as capital receipt and transferred to the building fundaccount. It may be noted that some Not-for-Profit organisations receive cash

subsidy from the government or government agencies. This subsidy is also

treated as revenue income for the year in which it is received.

Special Funds

The Not-for-Profit Organisations office create special funds for certain purposes/activities such as 'prize funds', 'match fund' and 'sports fund', etc. Such funds

are invested in securities and the income earned on such investments is added

to the respective fund, not credited to Income and Expenditure Account.Similarly, the expenses incurred on such specific purposes are also deducted

from the special fund. For example, a club may maintain a special fund forsports activities. In such a situation, the interest income on sports fund

investments is added to the sports fund and all expenses on sports deducted

therefrom. The special funds are shown in balance sheet. However, if, afteradjustment of income and expenses the balance in specific or special fund is

negative, it is transferred to the debit side of the Income and ExpenditureAccount or adjusted as per prescribed directions. (see Illustrations 8 and 9.)

Illustration 8

Show how you would deal with the following items in the financial statements ofa Club:

Details Debit CreditAmount Amount

(Rs.) (Rs.)

Prize Fund 80,000Prize Fund Investments 80,000Income from Prize Fund Investments 8,000Prizes awarded 6,000

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SolutionBalance Sheet as on………..


(Rs.) (Rs.)

Prize fund 80,000 Prize Fund Investments 80,000Add: Income from 8,000

Investments 88,000Less: Prizes Awarded 6,000 82,000

Illustration 9

(a) Show the following information in financial statements of a ‘ Not-for-Profit’

Organisation:

Details Amount

(Rs.)

Match Expenses 16,000Match Fund 8,000Donation for Match Fund 5,000Sale of Match tickets 7,000

(b) What will be the effect, if match expenses go up by Rs. 6,000 other thingsremaining the same?

Solution

(a)Balance Sheet as on………..*


(Rs.) (Rs.)

Match fund 8,000Add: Donation 5,000

(Specific)Add: Sale of Match 7,000

Tickets 20,000Less: Match Expenses 16,000 4,000

4,000

* Only relevant data.

(b)If match expenses go up by Rs. 6,000, the net balance of the match fund

becomes negative i.e. Debit exceeds the Credit, and the resultant debit balance

of Rs. 2,000 shall be charged to the Income and Expenditure Account of thatyear.

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Test your Understanding – II

How would you treat the following items in the case of a ‘not-for-profit’ organisation?1. Tournament Fund Rs. 40,000. Tournament Expenses Rs. 14,000. Receipts

from Tournament Rs. 16,000.2. Table Tennis match expenses Rs. 4,000.3. Prize Fund Rs. 22,000. Interest on Prize fund Investments Rs. 3,000. Prizes

given Rs. 5,000. Prize fund Investments Rs. 18,000.4. Receipts from Charity Show Rs. 7,000. Expenses on Charity Show Rs. 3,000.

Illustration 10

Extract of a Receipt and Payment Account for the year ended on March 31,

2015:Payments:

Stationery Rs. 23,000


Details April 1, 2014 March 31, 2015

Stock of stationery 4,000 3,000Creditors for stationery 9,000 2,500

Solution

Details Amount(Rs.)

Payment made for the purchase of stationery as perReceipts and Payments account 23,000Less: Payment for 2013-14 (i.e. creditors in the beginning) 9,000

Payment made for the year 2014-15 14,000Add: Payment not yet made (i.e. creditors at the end) 2,500

Stationery Purchased for the year 2014-15 16,500Add: Stock in the beginning 4,000

Stationery Available for consumption during 2014-15 20,500Less: Stock at the end 3,000

Stationery Consumed during 2014-15 to be taken to theExpenditure side of the Income and Expenditure account 17,500

Stationery: Normally expenses incurred on stationary, a consumable items are

charged to Income and Expenditure Account. But in case stock of stationery(opening and/or closing) is given, the approach would be make necessary

adjustments in purchases of stationery and work out cost of stationery consumed

and show that amount in Income and Expenditure Account and its stock in the

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balance sheet. For example, the Receipt and Payment Account shows a payment

for stationery amounting to Rs. 40,000 and there is an opening and closingstationery amounting to Rs. 12,000 and Rs. 15,000. The amount of expense on

stationery will be worked out as follows:StationeryPurchases 40,000Add: Opening stock 12,000

52,000Less: Closing stock 15,000

37,000

In case stationery is also purchased on credit, the amount of its consumptionwill be worked out as given in Illustration 12.

Do it Yourself

1. Find out the cost of medicines consumed during 2014-15 from the followinginformation:

Details Amount

(Rs.)

Payment for purchase of medicines 3,70,000Creditors for medicines purchased:On 1.4.2014 25,000On 31.3.2015 17,000Stock of Medicines:On 1.4.2014 62,000On 31.3.2015 54,000Advance to suppliers of medicines:On 1.4.2014 11,500

On 31.3.2015 18,200

2. What amount of sports material will be posted to Income and ExpenditureAccount for the year ended March 31, 2014 as expenditure? :

Amount

(Rs.)

Stock of sports materials as on April 1, 2014 7,500Creditors for sports material as on April 1, 2014 2,000Stock of sports material as on March 31, 2015 6,200Amount paid for sports material during the year 2014-15 17,000Advance paid for sports material as on March 31, 2015 3,500Creditors for sports material as on March 31, 2015 1,200

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Illustration 11

Following is the Receipt and Payment Account of an Entertainment Club for theperiod April 1, 2015 to March 31, 2016.



(Rs.) (Rs.)

Balance b/d Salaries 24,000Cash 27,500 Electric bill 21,000Bank 60,000 87,500 Food stuff for restaurant 60,000Member’s subscriptions: Telephone bill 35,0002014-2015 12,500 Subscription for periodicals 14,5002015-2016 1,00,000 Printing and stationery 13,0002016-2017 10,000 1,22,500 Sports expenses 50,000Sale of furniture Secretary’s honorarium 30,000(book value: Rs. 8,000) 10,000 8% Investments (31.3.2007) 1,00,000Sale of food stuffs 1,00,000 Balance c/d:Sale of old periodicals 3,200 Cash 21,500and newspapers Bank 45,000 66,500Hire of ground used 48,750for marriageDonation for sports fund 25,000Locker Rent 17,050

4,14,000 4,14,000

Additional Information

1. The club had 225 members, each paying an annual subscription of Rs. 500.Subscription outstanding as on 31 March 2016 Rs. 15,000.

2. Telephone bill outstanding for the year 2015-2016 is Rs. 2,000.

3. Locker Rent Rs. 3,050 outstanding for the year 2014-15 and Rs. 1,500 for2015-16.

4. Salary outstanding for the year 2015-16 Rs. 4,000.

5. Opening Stock of Printing and stationery Rs. 2,000 and closing stock of printingand stationery is Rs. 3,000 for the year 2015-16.

6. On 1st April 2015 other balances were as under:Rs.

Furniture 1,00,000Building 6,50,000Sports fund 15,000

7. Depreciation Furniture and Building @ 12.5% and 5% respectively assuming thatit is on reducing balance for the year ending March 31.2016

Prepare Income and Expenditure account and Balance Sheet as on

that date.

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SolutionBook of Entertainment Club



(Rs.) (Rs.)

Salary 24,000 Subscriptions 1,00,000Add: Outstanding 4,000 28,000 Add: Outstanding 12,500 1,12,500Electric Bill 21,000 Sale of old periodicals 3,200Telephone Bill 35,000 Profit on sale of furniture 2,000

Add: Outstanding 2,000 37,000 Hire of ground for marriage 48,750Subscription for periodicals 14,500 Locker rent 17,050Printing and Stationery 13,000 Less: Opening o/s 3,050Add: Opening Stock 2,000 14,000

15,000 Add: Closing o/s 1,500 15,500Less: Closing stock 3,000 12,000Secretary's honorarium 30,000 Sale of Food Stuff 1,00,000Sports Expenses 50,000 Cost of food Consumed 60,000 40,000Less: Opening Balance

of sports fund 15,000

35,000Less: Donation for

Sports 25,000 10,000

Depreciation On:Furniture 11,500Building 32,500 44,000Surplus (Excess of Income over 25,450

Expenditure)

2,21,950 2,21,950

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Balance Sheet of Entertainment Club as on March 31, 2015


(Rs.) (Rs.)

Sports fund 15,000 Cash in hand 27,500Capital/General Fund 8,42,550 Cash at bank 60,000(Balancing figure) Outstanding subscription 15,000

Outstanding locker Rent 3,050Printing & Stationery 2,000Furniture 1,00,000Buildings 6,50,000

8,57,550 8,57,550


Liabilities Amount Assets Amount(Rs.) (Rs.)

Subscriptions received inadvanced 10,000 Cash in hand 21,500Outstanding Telephone Bill 2,000 Cash at bank 45,000Salary Outstanding 4,000 Outstanding subscriptions 15,000Capital/General Fund 8,42,550 (2015 Rs 2500 and 2016 Rs 12500)

Add: Surplus 25,450 8,68,000 Outstanding locker Rent 1,500Printing and Stationery 3,000Furniture 1,00,000Less: Sales 8,000

92,000Less: Depreciation 11,500 80,500

Building 6,50,000Less: Depreciation 32,500 6,17,500Investment 1,00,000

8,84,000 8,84,000

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Illustration 12

Prepare Income and Expenditure Account and Balance Sheet for the year endedMarch 31, 2015 from the following information.



Balance b/d 41,000 Salaries and Wages:Subscriptions: 2013-14 4,8002013-14 7,200 2014-15 83,200 88,0002014-15 3,37,600 Sundry expenses 37,0002015-16 12,000 3,56,800 Freehold land 60,000Entrance fees 16,000 Stationery 16,000Locker rent 58,000 Rates 24,000Revenue from refreshment 48,000 Refreshment expenses 37,500Income from investments 56,000 Telephone charges 4,000

Investments 2,50,000Audit fee 6,000Balance c/d 53,300

5,75,800 5,75,800

The following additional information is provided to you:

1. There are 1800 members each paying an annual subscription of

Rs. 200, Rs. 8,000 were in arrears for 2013-14 as on April 1, 2014.

2. On March 31, 2015 the rates were prepaid to June 2015; the chargepaid every year being Rs. 24,000.

3. There was an outstanding telephone bill for Rs. 1,400 on March 31, 2015.

4. Outstanding sundry expenses as on March 31, 2014 totaled Rs. 2,800.

5. Stock of stationery as on March 31, 2014 was Rs. 2000; on March 31, 2015, it

was Rs. 3,600.

6. On March 31, 2014 Building stood at Rs. 4,00,000 and it was subject to

depreciation @ 2.5% p. a.

7. Investment on March 31, 2014 stood at Rs. 8,00,000.

8. On March 31, 2015, income accrued on investments purchased during

the year amounted to Rs. 1,500.

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for the year ending on March 31, 2015Dr. Cr.


(Rs.) (Rs.)

Salaries and Wages 83,200 Subscriptions 3,60,000

Sundry Expenses 37,000 Entrance fees 16,000

Less: Outstanding on Locker rent 58,000

31.3.2014 2,800 34,200 Income from refreshment:

Stationery : (consumed) Revenue from 48,000

Opening stock 2,000 refreshment

Add: Purchases 16,000 Less: Refreshment 37,500 10,500

Less: Closing stock 3,600 14,400 expenses

Rates 24,000 Income from 56,000

Less: Paid for 2015-16 6,000 investments

Add: Prepaid in 2014-15 6,000 24,000 Add: Accrued income 1,500 57,500

Telephone charges 4,000 on current year

Add: Outstanding 1,400 5,400 investment

audit fee 6,000

Surplus Depreciation on building 10,000

(excess of Income over

expenditure) 3,24,800

5,02,000 5,02,000



Outstanding Telephone 1,400 Cash and Bank Balance 53,300Expenses Subscription in Arrears 23,200Subscription received in 12,000 Stock of Stationery 3,600Advance Rates Prepaid 6,000General Fund 12,49,400 Accrued Interest on investment: 1,500Add: Surplus 3,24,800 15,74,200 Investments 8,00,000

Additions 2,50,000 10,50,000Building 4,00,000Less: Depreciation 10,000 3,90,000Land 60,000

15,87,600 15,87,600

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Outstanding Sundry Expenses 2,800 Cash and Bank balance 41,000Outstanding Salary and Wages 4,800 Subscription in arrears 8,000General Fund 12,49,400 Stock of stationery 2,000(Balancing figure) Rates prepaid 6,000

Investments 8,00,000Building 4,00,000

12,57,000 12,57,000

Working Note :


Date Particulars J.F. Amount Date Particulars J.F. Amount

(Rs.) (Rs.)

Opening Balance or 8,000 Receipt and Payment 3,56,800

Balance b/d (Arrears Balance c/d 23,200for 2013-14)

Income and Expenditure 3,60,000(1800×200)

Balance 12,000c/d (Advance for

2015-16)

3,80,000 3,80,000

Illustration 13

Following is the Receipt and Payment Account of Friendship Club in respect of

the Year on 31.3.2015.

Receipt and Payment Account for the year ending March 31, 2015.

Receipts Amount Payment Amount(Rs.) (Rs.)

Opening cash in hand 10,000 Salaries 20,000Subscription: Stationery 4,5002013-14 15,000 Rates and Taxes 1,5002014-15 20,000 Telephone charges 7,5002015-16 5,000 40,000 8% govt. securities at par 25,000Profit from sports 17,800 Sundry expenses 500Interest on 8% govt. securities 5,000 Courier service charges 300

Closing cash in hand 13,500

72,800 72,800

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Additional Information :

1. There are 500 members, each paying an annual subscription of Rs. 50, Rs. 17,500being in arrears for 2013-14 at the beginning of 2014-15. During 2013-14,subscriptions were paid in advance by 40 members for 2014-15.

2. Stock of stationery at March 31, 2014, was Rs. 1,500 and at March 31, 2015, Rs. 2,000.

3. At March 31, 2006, the rates and taxes were prepaid to the following January 31,the annual charge being Rs. 1,500.

4. A quarter’s charge for telephone is outstanding, the amount accrued being Rs.1,500. There is no change in quarterly charge.

5. Sundry expenses accruing at 31.3.2014 were Rs. 250 and at March 31, 2015 Rs. 300.

6. At March 31, 2014 Building stood in the books at Rs. 2,00,000 and it is requiredto write off depreciation @ 10% p.a.

7. Value of 8% Government Securities at March 31, 2005 was Rs. 75,000 which werepurchased at that date at Par. Additional Government Securities worth Rs. 25,000are purchased on March 31, 2015.

You are required to prepare:(a) An Income and Expenditure Account for the year ended on 31.3.2015

(b) A Balance Sheet on that date.

SolutionBooks of Friendship Club



(Rs.) (Rs.)

Outstanding Expenses: Building 2,00,000Telephone charges 3,000 Investment in 8% Govt. 75,000Sundry Expenses 250 3,250 SecuritiesSubscription received in 2,000 Stock of stationery 1,500Advance Prepaid Rates and Taxes 1,250General Fund 3,00,000 Subscription outstanding 17,500(balancing figure) Cash in hand 10,000

3,05,250 3,05,250



Salaries 20,000 Profit on Sports 17,800Stationery (paid) 4,500 Interest on 8% Govt. 5,000Add: Opening stock 1,500 Securities Received

6,000 Add: Receivable 1,000 6,000Less: Closing stock 2,000 Total Subscription 40,000Stationery consumed 4,000 Received duringRates and Taxes 1,500 the current year

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Less: Closing Prepaid 1,250 Add: Opening 2,000250 Subscription in advance

Add: Opening Prepaid 1,250 1,500 Add: Outstanding at 5,500Telephone charges paid 7,500 the end of theAdd: Outstanding 1,500 Current Year

(Current Year) 9,000 (2,500+3,000)= 47,500Less: Outstanding 3,000 6,000 Less: Subscription 5,000

(Previous year) received in 42,500Sundry expenses paid 500 Advance(Closing)Add: Outstanding 300 Less: Outstanding 17,500 25,000*

(Current Year) 800 at the start ofLess: Outstanding 250 550 the Current Year

(Previous year) Deficit: (Excess of Expenditure 3,550Depreciation on building 20,000 over to Income)Courier charges 300

52,350 52,350

• Verification: 500 × 50 = 25000.

Balance Sheet of Friendship Club as on March 31, 2015


(Rs.) (Rs.)

Outstanding Expenses: Building : 2,00000Telephone charges 1,500 Less: depreciation 20,000 1,80,000Sundry Expenses 300 1,800 Investment in 8% 75,000Subscription received in 5,000 Govt. Securities:Advance Add: Purchases 25,000 1,00,000General Fund 3,00,000 Stock of stationery 2,000Less: Deficit 3,550 2,96,450 Interest on 8% 1,000

Govt. securities ReceivablePrepaid Rates and Taxes 1,250Subscription outstanding 5,500(Rs.17,500-Rs. 5,000)+Rs. 3,000= Rs.5,500Cash in hand 13,500

3,03,250 3,03,250

1.7 Income and Expenditure Account based on Trial Balance

In case of not-for-profit organisations, normally the Income and Expenditure

Account and Balance Sheet is prepared based on the Receipts and PaymentsAccount and the additional information given. But, sometimes, the trial

balance along with some additional information is given for this purpose.See Illustration 14.

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Illustration 14

From the trial balance and other information given below for a school, prepare

Income and Expenditure Account for the year ended on 31.3.2014 and a BalanceSheet as on that date:

Debit Balance Amount Credit Balance Amount(Rs.) (Rs.)

Building 6,25,000 Admission fees 12,500Furniture 1,00,000 Tuition fees received 5,00,000Library books 1,50,000 Creditors for supplies 15,000Investment @12% 5,00,000 Rent for the school hall 10,000Salaries 5,00,000 Miscellaneous receipts 30,000Stationery 40,000 Government grant 3,50,000General expenses 18,000 General fund 10,00,000Sports expenses 15,000 Donation for library books 62,500Cash at bank 50,000 Sale of old furniture 20,000Cash in hand 2,000

20,00,000 20,00,000


(i) Fees yet to be received for the year are Rs. 25,000.(ii) Salaries yet to be paid amount to Rs.30,000.

(iii) Furniture costing Rs. 40000 was purchased on October 1, 2010.(iv) The book value of the furniture sold was Rs. 50,000 on April 1, 2013(v) Depreciation is to be charged @ 10% p.a. on furniture, 15% p.a. on Library books,

and 5% p.a. on building.


for the year ending on March 31, 2014


Loss on sale of old furniture 30,000 Admission fees 12,500(50,000 –20,000) Tuition fees 5,00,000Salaries 5,00,000 Add: Outstanding 25,000 5,25,000Add: outstanding 30,000 5,30,000 Rent for the school hall 10,000Stationery 40,000 Miscellaneous receipts 30,000General expenses 18,000 Government grant 3,50,000Depreciation: Interest accrued on 60,000 Furniture 3,000 investments Building 31,250 Library books 22,500 56,750Sports expenses 15,000Surplus (excess of income 2,97,750over expenditure)

9,87,500 9,87,500

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Working Notes:

1. As admission fee is a regular income of a school, so it has been taken as a revenueincome of the school.

2. Depreciation on furniture has been computed as following on the assumptionthat furniture was sold on April 1, 2013.

Amount

(Rs.)

Book Value on March 31, 2014 1,00,000Less: Book Value of Sold furniture (50,000)

50,000

Depreciation on furniture of Rs. 10,000 for one year 1,000Depreciation on furniture of Rs. 40,000 for 6 months 2,000

Total depreciation 3,000



Creditors for Supplies 15,000 Buildings 6,25,000Outstanding Salaries 30,000 Less: Depreciation 31,250 5,93,750Donation for Library Books 62,500 Furniture 1,00,000General fund 10,00,000 Less: Sold 50,000Add: Surplus 2,97,750 12,97,750 50,000

Less: Depreciation 3,000 47,000Accrued fees 25,000Library books 1,50,000Less: Depreciation 22,500 1,27,500Investments @ 12% 5,00,000Interest accrued 60,000Cash at bank 50,000Cash in hand 2,000

14,05,250 14,05,250

1.8 Incidental Trading Activity

Sometimes, trading activities such as chemist Shop, hospital, canteen, beauty

parlour etc. also take place in such organisations to provide certain facilities tomembers or public in general. In such a situation, trading account has to be

prepared to ascertain the results of such incidental activity. The profit from such

commercial (trading) activities is applied to fulfill the main objectives for whichthe organisation was set up, and so it is transferred to the Income and

Expenditure Account. It is pertinent to note the following procedure:1. Prepare trading account to determine profit (or Loss) due to incidental

commercial (trading) activity. All costs and revenues directly and exclusively

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related to such activity are recorded in the trading account. Balance of

trading account is transferred to the Income and Expenditure Account.2. Income and Expenditure Account records, in addition to trading Profit

(or loss), all other incomes and expenses not recorded in the Trading

Account. Surplus or deficit revealed by the Income and ExpenditureAccount is transferred to capital/general fund.

Illustration 15

Following balances have been extracted from the books of Pleasant Club for the

year ended on March 31, 2015:

Details Amount

(Rs.)

Capital Fund as on March 31, 2014 2,05,000Furniture as on March 31, 2014 21,000Additions of furniture during the year 23,500Billiard Table and other accessories as on March 31, 2014 22,250China glass and cutlery and Linen as on March 31, 2014 6,250Restaurant receipts during the year 9,68,000Restaurant stock as on March 31, 2014 9,750Receipts from billiard Room during the year 86,000Subscription received during the year 88,750Interest on deposit received during the year 6,000Honorarium paid to Secretary 80,000Purchases for restaurant 5,59,500Rent and Rates 87,250Wages (restaurant Rs. 1,25,000) 2,30,750Repairs and Renewals 44,750Lighting 44,250Fuel 33,500Sundry expenses 8,000Cash in hand as on March 31, 2014 4,375Bank balance as on March 31, 2014 36,875Bank deposit @10% as on March 31, 2014 1,00,000

Payment for purchases included Rs.7,500 for the year ended on March 31,2014. Restaurant stock as on March 31, 2015 were Rs. 11,250. Amount of

Subscription received included Rs. 12,000 for the previous year and Rs. 3,000for the next year. Subscription outstanding as on March 31, 2015 were Rs. 12,500.

Depreciation should be provided as per following rate Structure:

(a) Furniture @ 10 %; (b) Billiard Table and other accessories@ 12%; (c)China glass and cutlery @ 20%.

Cost of boarding expenses of the staff is estimated at Rs. 68,750 of whichRs. 50,000 is to be charged to Restaurant.

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Prepare the Receipt and Payment Account; Income and Expenditure Account

and the Balance Sheet showing the working of the Restaurant separately. Cashin hand on March 31, 2015 was Rs. 8,500.

SolutionBooks of Pleasant Club

Receipt and Payment Accountfor the year ending on March 31, 2012


(Rs.) (Rs.)

Opening Balance: Rent and Rates 87,250Cash in hand 4,375 Wages:

Cash at bank 36,875 41,250 Restaurant 1,25,000Subscriptions 88,750 Others 1,05,750 2,30,750Interest on deposit 6,000 Repairs and Renewals 44,750Restaurant receipts 9,68,000 Furniture purchased 23,500Billiard receipts 86,000 Honorarium of Secretary 80,000

Purchases for restaurant 5,59,500Lighting 44,250Fuel 33,500Sundry expenses 8,000Closing balance:Cash in hand 8,500Cash at bank 70,000 78,500(balancing figure)

11,90,000 11,90,000

Trading Accountfor the year ending on March 31, 2015

Details Amount Details Amount

(Rs.) (Rs.)

Opening stock 9,750 Restaurant receipts 9,68,000Purchases 5,59,500 Cost of boarding expenses 68,750Less: Previous year 7,500 5,52,000 of the staffWages 1,25,000 Closing stock 11,250Depreciation of china 1,250glass cutleryCost of boarding expenses 50,000of the staffFuel 33,500Profit transferred to 2,76,500Income and Expenditure

10,48,000 10,48,000

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(Rs.) (Rs.)

Wages 1,05,750 Subscription Received 88,750Repairs and Renewals 44,750 Add: Outstanding 12,500Honorarium of Secretary 80,000 this year 1,01,250Lighting 44,250 Less: Outstanding 12,000Rent and Rates 87,250 previous year 89,250Cost of boarding Less: Advance for 3,000 86,250expenses of the staff 18,750 Next yearSundry expenses 8,000 Interest received 6,000Depreciation on: Add: Accrued 4,000 10,000Furniture 4,450 Billiard receipts 86,000Billiard table 2,670 7,120 Profit transferred 2,76,500Surplus: (Excess of Income from trading Accountover Expenditure) 62,880

4,58,750 4,58,750

Balance Sheet of Pleasant Club as on March 31, 2015


(Rs.) (Rs.)

Capital Fund 2,05,000 Furniture:Add: Surplus 62,880 2,67,880 Opening Balance 21,000Subscription received 3,000 Add: Additions 23,500in Advance 44,500

Less: Depreciation 4,450 40,050Billiard Table 22,250Less: Depreciation 2,670 19,580China glass and cutlery 6,250Less: Depreciation 1,250 5,000Restaurant stock 11,250Subscription Outstanding 12,500Interest Accrued 4,000Bank deposit 1,00,000Cash in hand 8,500Cash at bank 70,000

2,70,880 2,70,880

Illustration 16

Prepare Income and Expenditure Account of Entertainment Club for the yearending March 31, 2015 and Balance Sheet as on that date from the following

information:

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Receipt and Payment AccountFor the year ending on March 31, 2015


(Rs.) (Rs.)

Balance b/d 24,000 Rent and Rates 48,750Subscriptions Furniture purchased 40,000

2013-14 23,250 Creditors for sports materials 61,0002014-15 3,36,000 Purchases for sports materials 10,000

2015-16 13,000 3,72,250 Cost of prizes awarded 20,750Sale of sports materials 26,000 Match expenses 35,150

Entrance fees 40,000 Miscellaneous expenses 1,50,000General donation 20,250 Balance c/d 1,34,050

Donation for prize fund 14,000Interest on prize fund

Investments 1,500

Miscellaneous receipts 1,700

4,99,700 4,99,700


Details Apr. 01, 2014 Mar. 31, 2015

Sports materials 20,000 25,000Furniture 2,00,000 ?

5% Prize fund investments 60,000 ?Creditors for sports materials 7,000 14,750

Subscription in arrears 23,750 ?Prize fund 60,000 ?

Rent paid in advance ---- 3,750Outstanding rent 3,750

Outstanding miscellaneous expenses 11,400 20,100Miscellaneous expenses paid in advance 3,750 4,250

Book value of sports materials sold was Rs. 20000Depreciation on furniture is to be provided @ 10%.

Half of the entrance fee is to be capitalised.There are 1440 members, each paying an annual

subscription @ Rs. 250.Subscription received in advance on 1.4.2014

were Rs. 7,000.

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SolutionBooks of Entertainment Club

Income and Expenditure Accountfor the year ending March 31, 2015


(Rs.) (Rs.)

Rent 48,750 Subscriptions 3,36,000

Less: Opening 3,750 Add: ReceivedOutstanding in advance

45,000 (2014-2015) 7,000Less: paid in advance 3,750 41,250 Add: OutstandingSports Materials (2013–2014) 17,000 3,60,000

Opening stock 20,000 (Rs.3,60,000–Rs.3,43,000) 3,60,000Add: Payments 61,000 General donations 20,250

to creditor Entrance fees 20,00081,000 Sports materials

Add: Closing creditor 14,750 (Profit on sale)

95,750 (i.e. 26,000–20,000) 6,000Add: Cash purchase 10,000 Miscellaneous receipts 1,700

1,05,750Less: Opening creditor 7,000

98,750

Less: Sports material 20,000Sold

78,750Less: Closing stock 25,000 53,750Match expenses 35,150

Depreciation on furniture 24,000Miscellaneous expenses:Paid 1,50,000Less: Outstanding 11,400

(2013-2014)

1,38,600Paid in advance 4,250

(2013-2014)1,34,350

Add: Outstanding 20,100

(2013-2014)1,54,250

Paid in advance 3,750 1,58,200(2012-2013)

Surplus (Excess of 95,600

income over expenditure)

4,07,950 4,07,950

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(Rs,) (Rs,)

Capital Fund (Balancing figure) 2,42,350 Furniture 2,00,000Prize fund 60,000 5% Prize Fund Investments 60,000Creditors for 7,000 Subscription Receivable 23,750Sports Materials (i.e. outstanding)Subscription Received in 7,000 Stock of Sports Materials 20,000Advance Outstanding Miscellaneous Expenses 3,750Expenses: Paid in AdvanceRent 3,750 Cash in hand 24,000Miscellaneous 11,400 15,150Expenses

3,31,500 3,31,500

Balance Sheet of Entertainment as on March 31, 2015


(Rs.) (Rs.)

Capital fund 2,42,350 Furniture:

Add: Surplus 95,600 Opening balance 2,00,000Entrance fees 20,000 3,57,950 Additions 40,000

Prize fund 60,000 2,40,000Add: Donations 14,000 Less: Depreciation 24,000 2,16,000

Interest received 1,500 5% Prize fund investments 60,000Interest accrued* 1,500 Subscription receivable

77,000 (i.e. Outstanding):Less: Prizes awarded 20,750 56,250 (2013-2014) 500Creditors for sports materials 14,750 (2014-2015) 17,000 17,500Subscription received in advance 13,000 Stock of sports materials 25,000Outstanding miscellaneous 20,100 Miscellaneous expenses 4,250expenses Paid in advance

Prepaid rent 3,750Accrued interest on 1,500Prize fund investmentsCash in hand 1,34,050

4,62,050 4,62,050

Note: * Interest on Prize Fund Investments @ 5% amounts to Rs. 3,000 whereas onlyRs. 1,500 have been received; so the balance is treated as Accrued interest.

It is preferable to prepare separate accounts of various items involving

many transactions. In this case Account for Subscription, Miscellaneous

Expenses, and Sports Materials may be made as a Classroom activity.

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Illustration 17

Shiv-e-Narain Education Trust provides the information in regard to Receiptand Payment Account and Income and Expenditure Account for the year ended

March 31st 2015:



Cash in hand as on 3,000 Printing and Stationery 6,000April 1, 2014 Lighting & Water 2,600Cash at bank as on 15,000 Rent 21,000April 1, 2014 Advertisement 2,820Subscription: Miscellaneous Expenses 4,400

2013-14 12,000 Staff Salaries 85,0002014-15 46,000 Furniture purchased 28,0002015-16 15,600 73,600 Honorarium 15,000

Entrance fees 25,200 Books 5,000Tuition fees: Cash in hand as on 9,180

2014-15 80,000 March 31, 20152014-15 10,000 90,000 Cash at bank as on 45,000

Interest on investment: March 31, 20152013-14 4,0002014-15 6,000 10,000

Miscellaneous receipts 7,200

2,24,000 2,24,000

On March 31, 2015 the following balances appeared:

Investments Rs.1, 60,000; Furniture Rs.40, 000; and Books Rs.20, 000.



Printing and Stationery 7,800 Subscription 46,000Lighting & Water 2,600 Interest on investment 6,800Rent 24,000 Miscellaneous incomes 7,200Staff salaries 84,000 Tuition fees 90,000Advertisement 3,200Honorarium 15,000Misc. expenses 4,400Depreciation on furniture 4,000Surplus(Excess of income 5,000over expenditure)

1,50,000 1,50,000

Prepare opening and closing balance sheet

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SolutionShiv-e-Narain Education Trust



(Rs.) (Rs.)

Capital/General Fund 2,54,000 Investments 1,60,000(Balancing figure) Furniture 40,000

Books 20,000Outstanding subscription 12,000Accrued Interest on Invest. 4,000Cash in hand 3,000Cash at bank 15,000

2,54,000 2,54,000

Balance Sheet of Shiv-e-Narain Education Trust as on March 31, 2015


(Rs.) (Rs.)

Tuition fee advance 10,000 Investments 1,60,000Rent Outstanding 3,000 Furniture 40,000Advertisement Outstanding 380 Less: Depreciation 4,000Printing & Stationery 1,800 36,000Outstanding Add: Purchases 28,000 64,000Advance Subscription 15,600 Books 20,000Capital/ Add: Purchases 5,000 25,000General Fund 2,54,000 Interest Accrued 800Add Entrance fee 25,200 Outstanding tuition fee 10,000Add Surplus 5,000 2,84,200 Staff Salary Advance 1,000

Cash in Hand 9,180Cash at Bank 45,000

3,14,980 3,14,980

Note:

1. Income and Expenditure Account for the current year shows interest on

investment income Rs.6,800 while Receipts and Payments Account showsthe receipts of Rs.6,000 the difference of Rs.800 means interest oninvestment has become due but not yet receivable during the year.

2. Income and Expenditure Account shows Rs.90,000 as income from Tuitionfees. However, the Receipts and Payments Account shows Rs.10,000 as

tuition fees received for the year 2015-16 and Rs.80,000 for 2014-15. Itimplies that Rs.10,000 on account of tuition fees for the year 2014-15 arestill receivable (i.e. Tuition fees are outstanding).

3. Receipt and Payment Account shows a payment of Rs.85,000 on account ofstaff salaries, but the Income and Expenditure Account shows expenditure

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of Rs.84,000 on account of staff salaries. It means the excess of Rs.1,000

shown in the Receipt and Payment Account may either belong to thepervious year or the next year. Their is no evidence that staff salaries of

Rs.1,000 was outstanding at the end of the previous year 2013-14. This iswhy this payment of Rs.1,000 has been considered as an advance salariesto the staff.

Terms Introduced in the Chapter

1. Not-for-Profit Organisation.

2. Receipts and Payments Account3. Income and Expenditure Account

4. Entrance Fee5. Life Membership6. Special Receipts

7. Subscription8. Donation

9. Incidental Trading Activity10. Legacy

Summary

1. Difference between Profit Seeking Entities and Not-for-Profit Entities: Profit-seekingentities undertake activities such as manufacturing trading, banking and

insurance to bring financial gain to the owners. Not-for-Profit entities exist toprovide services to the member or to the society at large. Such entities might

sometimes carry on trading activities but the profits arising therefrom are usedfor further the service objectives.

2. Appreciation of the need for separate Accounting Treatment for Not-for-Profit

Organisations: Since not-for-profit entities are guided primarily by a servicemotive, the decisions made by their managers are different from those made by

their counterparts in profit-seeking entities. Differences in the nature ofdecisions implies that the financial information on which they are based, mustalso be different in content and presentation.

3. Explanation of the nature of the Principal Financial Statements prepare by Not-for-Profit enterprises: Not-for-Profit Organisations that maintain accounts based

on the double-entry system of accounting, generally prepare three principalstatements to fulfil their information needs. These include Receipts andPayments Account, Income and Expenditure Account, and a Balance Sheet.

The Receipts and Payments Account is a summarised cash book which recordsall cash Receipts and cash Payments without distinguishing between capital

and revenue items, and between items relating to the current year and thoserelating to previous or future years.The Income and Expenditure Account is an income statement which is prepared

to ascertain the excess of revenue income over revenue expenditure or vice

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versa, for a particular accounting year, as a result of the entity’s overall activities.

Although it is considered to be a substitute for the Trading and Profit and LossAccount of a profit-seeking entity, there are certain conceptual differences

between the two statements. The Balance Sheet is prepared at the end of theentity’s accounting year to depict the financial position on that date. It includesthe Capital Fund or Accumulated Fund, special purpose funds, and current

liabilities on the left hand or liabilities side, and fixed assets and current assetson the right hand or assets side.

4. Difference between the Receipt and Payment Account and the Income andExpenditure Account: Many differences exist between the Receipt and PaymentAccount and the Income and Expenditure Account which is evident from the

nature and purpose of two statements. While the former records both capitaland revenue receipts and payments relating to any accounting year, the latter

records only revenue items relating to the current accounting year. Non-cashexpenses such as depreciation on fixed assets and outstanding incomes andexpenses are shown in the latter but omitted in the former. The Receipt and

Payment Account has an opening balance while the Income and ExpenditureAccount does not. The closing balance of the former account represents cash

and bank balances on the closing date while in the latter account it indicatessurplus or deficit from the activities of the enterprise.

5. Conversion of a Receipt and Payment Account into an Income and Expenditure

Account: This essentially involves five steps namely, (i) adjusting the revenuereceipts on the debit side to include outstanding incomes and incomes relating

to the current year received earlier and to exclude amounts received in arrearsor in advance; (ii) adjusting revenue payments on the credit side; (iii) identifyingand showing non-cash expenses and losses on the debit side of the Income

and Expenditure Account; (iv) computing and showing profits/losses fromtrading and/or social activities on the credit/debit side of the Income and

Expenditure Account; and (v) ascertaining the surplus or deficit as the closingbalance of the Income and Expenditure Account.

Questions for Practice

Short Answer Questions

1. State the meaning of ‘Not- for- Profit’ Organisations.

2. State the meaning of Receipt and Payment Account.3. State the meaning of Income and Expenditure Account.

4. What are the feature of Receipt and Payment Account?5. What steps are taken to prepare Income and Expenditure Account from a

Receipt and Payment Account?

6. What is subscription? How is it calculated?7. What is Capital Fund? How is it calculated?

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Long Answer Questions

1. Explain the statement: “Receipt and Payment Account is a summarisedversion of Cash Book”.

2. “Income and Expenditure Account of a Not-for-Profit Organisation is akinto Profit and Loss Account of a business concern”. Explain the statement.

3. Distinguish between Receipts and Payments Account and Income and

Expenditure Account.4. Explain the basic features of Income and Expenditure Account and of

Receipt and Payment Account.5. Show the treatment of the following items by a not-for-profit organisation:

(i) Annual subscription

(ii) Specific donation(iii) Sale of fixed assets

(iv) Sale of old periodicals(v) Sale of sports materials(vi) Life membership fee

6. Show the treatment of items of Income and Expenditure Account whenthere is a specific fund for those items.

7. What is Receipt and Payment Account? How is it different from Income andExpenditure Account?

Numerical Questions

1. From the following particulars taken from the Cash Book of a health club,prepare a Receipts and Payments Account.

Rs.

Opening balance:Cash in Hand 5,000Cash at Bank 25,000Subscriptions 1,65,000Donations 35,000Investment Purchased 80,000Rent Paid 20,000General Expenses 21,500Postage and stationery 2,000Courier charges 1,000Sundry Expenses 2,500Closing Cash in Hand 12,000

(Ans: Cash at Bank (balancing figure) Rs. 91,000)

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2. The Receipt and Payment Account of Harimohan charitable institution is given:



Balance b/d Furniture 3,000Cash at Bank 22,000 Investments 55,000Cash in Hand 8,800 Advance for building 20,000Donations 32,000 Charities 60,000Subscriptions 50,200 Salaries 10,400Endowment fund 60,000 Rent and Taxes 4,000Legacies 24,000 Printing 1,000Interest on Investment 3,800 Postage 300Interest on Deposits 800 Advertisements 1,100Sale of old newspapers 500 Insurance 4,800

Balance c/d:Cash at bank 32,000Cash in hand 10,500

2,02,100 2,02,100

Prepare the Income and Expenditure Account for the Year ended on March 31, 2015

after considering the following:(i) It was decided to treat Fifty per cent of the amount received on account of

Legacies and Donations as income.

(ii) Liabilities to be provided for are: Rent Rs. 800; Salaries Rs. 1,200; advertisement Rs. 200.

(iii) Rs. 2,000 due for interest on investment was not actually received.

(Ans : Excess of income over Expenditure Rs. 2,500.)

3. From the following particulars , prepare Income and Expenditure account:

Details Amount

(Rs.)

Fees collected, including Rs.80,000 on account of the 5,20,000previous yearFees for the year outstanding 30,000Salary paid , including Rs. 5,000 on account 68,000of the previous yearSalary outstanding at the end of the year 3,000Entertainment expenses 8,000Tournament expenses 25,000Meeting Expenses 18,000Traveling Expenses 7,000Purchase of Books and Periodicals, including 40,000Rs. 31,000 for purchase of BooksRent 15,000Postage, telegrams and telephones 6,000Printing and Stationery 18,000Donations received 25,000

(Ans : Excess of income over expenditure Rs. 3,07,000)

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4. Following is the information given in respect of certain items of a Sports Club.

Show these items in the Income and Expenditure Account and the Balance

Sheet of the Club:

Rs.

Sports Fund as on 1.4.2015 35,000

Sports Fund Investments 35,000

Interest on Sports Fund 4,000

Donations for Sports Fund 15,000

Sports Prizes awarded 10,000

Expenses on Sports Events 4,000

General Fund 80,000

General Fund Investments 80,000

Interest on General Fund Investments 8,000

(Ans : Balance of Sports Fund Rs. 40,000.)

5. How will you deal with the following items while preparing for the Bombay

Women Cricket Club its income and expenditure account for the year ending

31.3.2015 and its Balance Sheet as on 31.3.2015:

Rs.

(a) Donation received during the year for the 12,25,000

construction of a permanent Pavilion

Expenditure incurred up to 31.3.2015 on its construction 10,80,000

The total estimated expenditure on construction 25,00,000

of Pavilion being

(b) Tournament Fund:

Balance as on 1.4.2014 10,700

Subscriptions for tournament received during the year 65,800

Expenditure incurred during the year on conducting 72,400

tournaments

(c) Life Membership fee received during the year 28,000

Give reasons for your answers.

(Ans : (a) Balance of Pavilion Fund Rs. 1,45,000; (b) Balance of Tournment

Fund Rs. 4,100; (c) Life Membership fee to the Capitalised).

6. From the following receipts and payments and information given below, Prepare

Income and Expenditure Account and opening Balance Sheet of Adult Literacy

Orgnisation as on December 31, 2015.

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Receipt and Payment Account for the year ending as on December 31, 2015


(Rs.) (Rs.)

Balance b/d General Expenses 3,200Cash in hand 4,000 News paper 1,850Cash at Bank 15,550 Electricity 3,000

Subscriptions Fixed deposit with bank 18,0002014 1,200 (on 31.06.2015) @ 10% p.a.2015 26,500 Books 7,0002016 500 28,200 Salary 3,600

Sale of old newspapers 1,250 Rent 6,500Govt. grant 12,000 Postage charges 300Sale of old furniture Furniture (purchased) 10,500(book value Rs.5000) 3,700 Balance c/dInterest received on FD 450 Cash in hand 3,000

Cash at bank 8,200

65,150 65,150

Information: (i) Subscription outstanding as on 31.12.2014 Rs.2,000 and on December 31,

2015 Rs.1,500. (ii) On December 31, 2015 Salary outstanding Rs.600, and one month Rent

paid in advance.(iii) On Jan. 01, 2014 orgnisation owned Furniture Rs.12,000, Books Rs.5,000.

(Ans : Surplus Rs. 22,300, Opening Capital Fund Rs.38,550, Total Balance

Sheet Rs. 61,950).

7. The following is the account of cash transactions of the Nari Kalayan Samitteefor the year ended December 31, 2015:


(Rs.) (Rs.)

Balance from last year 2,270 Rent 6,600Subscriptions 32,500 Electric charges 3,200Life membership fee 3,250 Lecturer’s fee 730Donation 2,500 Office expenses 1,480Profit from entertainment 7,250 Printing and Stationery 1,050Sale of old Books 750 Legal fee 1,870(books value Rs.1,000) Books 6,500Interest 350 Furniture purchased 8,600

Expenses on nukar drama 1,300Cash in hand 8,040Cash at bank 9,500

48,870 48,870

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You are required to prepare an Income and Expenditure Account after thefollowing adjustments:

(a) Subscription still to be received are Rs.750 , but subscription include Rs.500

for the year 2014.(b) In the beginning of the year the Sangh owned building Rs.20,000 and

furniture Rs.3,000 and Books Rs.2,000.

(c) Provide depreciation on furniture @5% (including purchase ), books @10% and building @ 5%.

(Ans : Surplus Rs. 24,090)

8. Following is the Receipt and Payment Account of Indian Sports Club, preparedIncome and Expenditure Account, Balance Sheet as on December 31, 2015:

Receipt and Payment Account for the year ending December 31, 2015


(Rs.) (Rs.)

Balance b/d 7,890 Salary 11,000Subscriptions 52,000 Electric charges 5,500Life member ship fee 2,200 Billiard Table 17,500Entrance fee 3,200 Office expenses 4,100Tournament fund 26,000 Printing & Stationery 2,300Locker Rent 1,250 Tournament expenses 18,500Sale of old sports goods Repair of ground 2,000(Costing Rs.2,200) 2,500 Furniture purchased 7,700Sale of old newspaper 750 Sports equipments 12,000Legacy 37,500 Cash in hand 12,690

Cash at bank 10,000Fixed deposit(on 1.10.2015 for 10% p.a) 30,000

1,33,290 1,33,290

Other Information:

Subscription outstanding was on December 31, 2014 Rs.1,200 and Rs.3,200on December 31, 2015. Locker rent outstanding on December 31, 2015 Rs.250.

Salary outstanding on December 31, 2015 Rs.1,000.On January 1, 2015, club has Building Rs.36,000, furniture Rs.12,000,

Sports equipments Rs.17,500. Depreciation charged on these items @ 10%

(including Purchase).(Ans : Surplus Rs.26,300, Opening Capital fund Rs.74,590, Total of Closing

Balance Sheet Rs.1,49,090)

9. From the following Receipt and Payment Account of Jan Kalyan Club, prepare

Income and Expenditure Account and Balance Sheet for the year ending

March 31, 2015.

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Cash in hand as on 1.4.14 6,800 Salaries 24,000Subscription 60,200 Traveling Expenses 6,000Donation 3,000 Stationery 2,300Sale of furniture 4,000 Rent 16,000(Book value Rs.6000) Repair 700Entrance fee 800 Books purchased 6,000Life membership fee 7,000 Building purchased 30,000Interest on investment 5,000 Cash in hand as 31.03.2015 1,800(@ 5% for full year)

86,800 86,800


As on As on01.04.2014 31.03.2015

(i) Subscription received in advance 1,000 3,200(ii) Outstanding subscription 2,000 3,700

(iii) Stock of stationery 1,200 800(iv) Books 13,500 16,500

(v) Furniture 16,000 8,000(vi) Outstanding rent 1,000 2,000

(Ans : Surplus Rs.11,100 ,Opening Capital fund Rs.1,37,000, Total of ClosingBalance Sheet Rs.1,60,800]

10. Receipt and Payment Account of Shankar Sports club is given below, for theyear ended March 31, 2015



(Rs.) (Rs.)

Opening Cash in hand 2,600 Rent 18,000Entrance fees 3,200 Wages 7,000Donation for building 23,000 Billiard table 14,000Locker rent 1,200 Furniture 10,000Life membership fee 7,000 Interest 2,000Profit from entertainment 3,000 Postage 1,000Subscription 40,000 Salary 24,000

Cash in hand 4,000

80,000 80,000

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Prepare Income and Expenditure Account and Balance Sheet with help of

following Information:Subscription outstanding on March 31, 2014 is Rs.1, 200 and Rs.2, 300 on

March 31, 2015, opening stock of postage stamps is Rs.300 and closing stockis Rs. 200, Rent Rs.1, 500 related to 2005 and Rs.1, 500 is still unpaid.On April 1, 2014 the club owned furniture Rs.15, 000, Furniture valued at

Rs. 22,500On March 31, 2015, the club took a loan of Rs.20,000 (@ 10% p.a) in 2014.

(Ans : Deficit Rs.8,100, Opening Capital fund Deficit Rs.2,400, Total of ClosingBalance Sheet Rs. 53,500)

11. Prepare Income and Expenditure Account and Balance Sheet for the year ended

December 31, 2015 from the following Receipt and Payment Account andBalance Sheet of culture club:



(Rs.) (Rs.)

Opening cash balance 12,000 Furniture 4,000Subscription Telephone expenses 800

2013-14 2,000 Salary2014-15 22,000 24,000 2013-14 1,000

Entrance fees 2,800 2014-15 4,000Locker rent 1,000 Newspapers 700Life membership fee 1,200 Sundry expenses 1,000Government grant 11,000 Defence bonds 18,000

Land 20,000Closing cash balance 2,500

52,000 52,000

Balance Sheet for the year ending March 31, 2014


(Rs.) (Rs.)

Advance locker rent 200 Cash in hand 12,000Subscription received in 1,000 Outstanding expenses 3,000 Advance Building 35,000Outstanding salary 2,000Loan 10,000Capital fund 36,800

50,000 50,000

(Ans : Surplus Rs.31500, Total of Closing Balance Sheet Rs.80500)

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12. From the following Receipt and Payment Account prepare final accounts of a

Unity Club for the year ended March 31, 2015

Receipt and Payment Accounts for the year ending March 31, 2015


Balance b/d 15,000 Furniture 18,000Sale of Old furniture Library books 10,000(costing Rs. 6,000) 4,000 Salaries 72,000Subscriptions: General expenses 18,0002014-15 18,000 Electric charges 12,0002015-16 60,000 Newspapers 33,8002016-17 12,000 90,000 Postage 3,000Sale of old newspapers 10,800 Stationery 40,000Profit from entertainment 44,000 Audit fee 8,000Rent 84,000 Balance c/d 33,000

2,47,800 2,47,800



Outstanding Salary 6,000 Cash 15,000Capital Fund 6,94,000 Outstanding subscription 18,000

Library Books 30,000Furniture 37,000Land and Building 6,00,000

7,00,000 7,00,000


1. The Club had 500 members each paying an annual subscription of Rs. 150.2. On 31.3.2015 salaries outstanding amounted to Rs. 1,200 and salaries paid

included Rs. 6,000 for the year 2013-14.3. Provide 5% depreciation on Land and Building.

(Ans : Surplus Rs.14,000 Total of Closing Balance Sheet Rs.7,27,000)

13. Following is the information in respect of certain items of a Sports Club. You

are required to show them in the Income and Expenditure Account and theBalance Sheet.

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Details Amount

(Rs.)

Sports Fund as on April 1, 2015 80,000Sports Fund Investments 80,000Interest on Sports Fund Investments 8,000Donations for Sports Fund 30,000Sports Prizes awarded 16,000Expenses on Sports Events 7,000General Fund 2,00,000General Fund Investments 2,00,000Interest on General Fund Investments 20,000

14. Receipt and Payment Account of Maitrey Sports Club showed that Rs. 68,500

were received by way of subscriptions for the year ended on March 31, 2016.

The additional information was as under:

1. Subscription Outstanding as on March 31, 2015 were Rs. 6,500,2. Subscription received in advance as on March 31, 2015 were Rs. 4,100,3. Subscription Outstanding as on March 31, 2016 were Rs. 5,400,

4. Subscription received in advance as on March 31, 2016 were Rs. 2,500.Show how that above information would appear in the final accounts for the

year ended on March 31, 2016 of Maitrey Sports Club.

(Ans : Subscription credited to Income and Expenditure Account for the year

ended on March 31, 2016 is Rs. 69,000. Subscription Outstanding as on31.3.2016 is Rs. 5,400 and should be shown on the assets side of the Balancesheet as on March 31, 2016 and subscriptions of Rs. 2,500 received in advance

as on March 31, 2016 on the liabilities side of the balance sheet as on March31, 2016)

15. Following is the Receipt and Payment account of Rohatgi Trust :



(Rs.) (Rs.)

Cash in hand 14,000 Rent 6,000Cash at bank 60,000 Salary 12,000Subscription: Postage 300

2014 5,000 Electricity charges 6,0002015 83,000 Purchase of furniture 20,0002016 3,000 91,000 Books 3,000

Sale of investment 90,000 Defence Bonds 1,50,000Interest on investment 2,000 Help to needy students 22,000Sale of furniture 3,200 Cash in hand 10,900 (book value Rs.3,000) Cash at bank 30,000

2,60,200 2,60,200

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Prepare Income and expenditure account for the year ended December 31,

2015, and a balance sheet as on that date after the following adjustments:Subscription for 2013, still owing were Rs. 7,000. Interest due on defence

bonds was Rs.7,000, Rent still owing was Rs. 1,000. The Book value of investmentsold was Rs. 80,000, Rs. 30,000 of the investment were still in hand. Subscriptionreceived in 2013 included Rs. 400 from a life member. The total furniture on

January 1, 2015 was worth Rs.12,000. Salary paid for the year 2014 isRs.2,000.

(Ans : Surplus Rs. 59,900, Total of Closing Balance Sheet Rs. 2,68,900)

16. Following Receipt and Payment Account was prepared from the cash book ofDelhi Charitable Trust for the year ending December 31, 2015


Receipts Amount Payment Amount

(Rs.) (Rs.)

Balance b/d Charity 11,500Cash in hand 11,500 Rent and taxes 3,200Cash at bank 12,600 Salary 6,000Donation 9,000 Printing 600Subscription: 42,800 Postage 300Legacies 18,000 Advertisements 4,500Interest on investment 4,500 Insuranc es 2,000Sale of old newspapers 200 Furniture 21,600

Investment 23,000Balance c/d:Cash in hand 9,900Cash at bank 16,000

98,600 98,600

Prepare Income and expenditure account for the year ended December 31,2014, and a balance sheet as on that date after the following adjustments:

(a) It was decided to treat one-third of the amount received on account of

donation as income.

(b) Insurance premium was paid in advance for three months.

(c) Interest on investment Rs.1,100 accrued was not received.

(d) Rent Rs.600: salary Rs.900 and advertisement expenses Rs.1,000outstanding as on December 31, 2015.

(Ans : Surplus Rs.21,500, Total of Closing Balance Sheet Rs.72,100)

17. From the following Receipt and Payment Account of a club, prepare Income

and Expenditure Account for the year ended December 31, 2015 and the BalanceSheet as on that date.

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(Rs.) (Rs.)

Balance b/d 3,500 General expenses 900Subscription: Salary 16,0002014 2,000 Postage 1,3002015 70,000 Electricity charges 7,8002016 3,000 75,000 Furniture 26,500Sale of old Books 2,000 Books 13,000(costing Rs.3,200) Newspapers 600Rent from use of hall 17,000 Meeting expenses 7,200Sale of newspapers 400 T.V. set 16,000Profit from entertainment 7,300 Balance c/d 15,900

1,05,200 1,05,200


(a) The club has 100 members each paying an annual subscription of Rs.900.

Subscriptions outstanding on December 31, 2012 were Rs.3,600.

(b) On December 31, 2015, salary outstanding amounted to Rs.1,000, Salarypaid included Rs. 1,000 for the year 2014.

(c) On January 1, 2015 the club owned land and building Rs.25,000, furnitureRs.2,600 and books Rs.6,200.

(Ans : Surplus Rs.79,700, Total of Closing Balance Sheet Rs.1,23,800)

18. Following is the Receipt and Payment Account of Women’s Welfare Club for theyear ended December 31, 2015:



(Rs.) (Rs.)

Balance b/d 7,250 Salary 12,500Subscriptions 81,750 Stationery 1,700Donations 3,000 Electricity charges 9,550Grant from Government 15,000 Insurance 7,500Sale of newspapers 300 Equipments 30,000Proceeds of charity show 16,500 Petty expenses 500 Interest on investments 7,000 Expenses on charity show 12,900@ 10% for full year Newspapers 1,000Sundries income 400 Lectures fee 16,500

Honorarium to Secretary 12,000Balance c/d 27,050

1,31,200 1,31,200

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01.01.2015 31.12.2015Rs. Rs.

Outstanding salaries 1,200 1,800Insurance prepaid 700 300

Subscription outstanding 3,750 2,500Subscription received in advanced 1,750 1,000Electricity charges outstanding — 1,250

Stock of stationery 2,250 700Equipments 25,600 50,200

Building 1,20,000 1,14,000

Prepare Income and Expenditure Account for the year ended December 31,2015 and Balance Sheet as on date.

(Ans : Surplus Rs.79,700, Total of Closing Balance Sheet Rs.1,23,800)

19. As at March 31, 2015 the following balances have been extrated from the booksof the Indian Chartered Accountants Recreation Club and you are asked toprepare (1) Trading Account for ascertaining gross profit derived from runningresturant and dining room and (2) Income and Expenditure Account for theyear ended March 31, 2015 (3) and a Balance Sheet as at that date.

Debit Balances Credit Balances

Rs. Rs.

Stock-in-hand 1170 Receipts Dining Room 87,660Purchases 24,660 Subscriptions 9,450Dining Room 32,370 Billiard's Receipts 7,300Rent 10,470 Sunday Receipts 410Wages 18,690 Interest on Fixed Deposit 270Repairs and Renewals 5,400 Sundry Credtiors 5310Fuel and Light 5,280 Grant from Institute 42,000Misc. Expenses 4,050 (permanent)Cash in hand 560 Income and Exp. A/c 1,380Cash at bank 2,760 (1.4.14)Fixed Deposit 8,500Sundry Debtors 2,250China glass, cutlery & linen 600Billiard Table 2,070Fixtures and Fittings 870Furniture 4,140Club Premises 30,000

1,53,840 1,53,840

On March 31,2014 stock of restaurant consisted of Rs. 900 and Rs. 60respectively. Provide depreciations Rs. 60 on fixtures and fittings, Rs. 390 on billiardtable and Rs. 560 on furniture.(Ans: Excess of income over expenditure– Rs. 2,950: Total of Balance Sheet Rs. 51,700)

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Check-list to Test your Understanding

Test your Understanding – I

Ans. TRUE: (iii) (vi) (vii) (x); FALSE: (i) (ii) (iv).(v).(viii).(ix).

Test your Understanding – II

1. There is a specific tournament fund. The accounting treatment is as

under:Liabilities side of the Balance Sheet Amount (Rs.)Tournament fund 40,000Add: Receipts from tournament 16,000

56,000Less: Tournament Expenses 14,000Balance to remain on the Liabilities side of 42,000

the Balance Sheet

2. There is no specific fund. So the amount incurred on Table Tennis match

expenses Rs. 4,000 would be shown on the debit side of Income andExpenditure Account. It is the case of expenses independent of any specificfund.

3. There is a specific fund. The accounting treatment is as under:Liabilities side of the Balance Sheet Amount

(Rs.)

Prize Fund 22,000Add: Interest 3,000

25,000Less: Prizes Paid 5,000

Balance to remain on the Liabilities side of theBalance Sheet 20,000

Prize fund Investments would appear on the Assets

Side of the Balance Sheet 18,000

4. There is no specific fund. Receipts from Charity Show would be shownon the credit side and expenses on charity show are deducted from thereceipts and the net amount would be shown on the credit side of Incomeand Expenditure Account.

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2C H A P T E R

Accounting for Partnership Firms—Fundamentals

LEARNING OBJECTIVES

The study of this Chapter would enable you to understand:

Meaning and Definition of Partnership 2.1

Essential Features or Characteristics of Partnership 2.2

Rights of Partners 2.2

Partnership Deed: Meaning, Clauses and Importance 2.3

Provisions Affecting Accounting Treatment in the Absence of Partnership Deed 2.4

Interest on Loan by the Partner to the firm and by the firm to the Partner 2.6

Distribution of Profit among Partners: Profit and Loss Appropriation Account 2.10

Special Aspects of Partnership Accounts: 2.21

Partners’ Capital Accounts under Fixed and Fluctuating Methods

Salary or Commission to Partners Interest on Partners’ Capitals Interest on Partners’ Drawings

Adjustments for Incorrect Appropriations of Profits in the Past (Past Adjustments)

Guarantee of Profit

MEANING AND DEFINITION OF PARTNERSHIP

Partnership is defined by Indian Partnership Act, 1932, Section 4, as follows:

“Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all.”

A partnership, thus, is a business relationship among two or more persons to share profits and losses of the business, carried on by all or any of them acting for all.

Partners, Firm and Firm Name: The persons who have entered into a partnership with one another individually are called partners and collectively a firm. The name under which the business is carried is called firm name.

Nature of Partnership

Partnership, from the legal viewpoint, is not a separate legal entity from its partners. It means, firm’s debts can be paid from private assets of the partners, if the firm is not able to pay its liabilities.

Partnership is a separate business entity from the accounting viewpoint.

2.2 Double Entry Book Keeping—CBSE XII

ESSENTIAL FEATURES OR CHARACTERISTICS OF PARTNERSHIP

The essential characteristics of partnership are:1. Two or More Persons: There must be at least two persons to form a partnership and

all such persons must be competent to contract. According to Indian Contract Act, 1872, every person except the following are competent to contract:

(a) Minor, (b) Persons of unsound mind, and (c) Persons disqualified by any law. Maximum Number of Partners: The Companies Act, 2013 (Section 464) empowers the

Central Government to prescribe number of partners in a firm subject to maximum of 100 partners. The Central Government has prescribed maximum number of partners in a firm to be 50 vide Rule 10 of the Companies (Miscellaneous) Rules, 2014. Thus, in effect, a partnership firm cannot have more than 50 partners.

2. Agreement: Partnership comes into existence by an agreement, either written or oral. It is the basis of relationship among partners, which may be for a particular venture, for a period or at will. The written agreement among the partners is known as Partnership Deed.

3. Lawful Business: A partnership is established for a lawful business.4. Profit-sharing: The agreement between/among the partners must be to share profits and

losses of the business. It is not essential that all the partners must share losses.5. Business can be carried on by All or Any of the Partners Acting for All: Business of

the partnership can be carried on by all the partners or by any of them acting for all the partners. In other words, partners are agents as well as the principals.

As an agent, he represents other partners and thereby, binds them through his acts. As a principal, he is bound by the act of other partners.

RIGHTS OF PARTNERS

1. Every partner has the right to participate in the management of the business.2. Every partner has the right to be consulted about the affairs of the business.3. Every partner has the right to inspect the books of account and have a copy of it.4. Every partner has the right to share profits or losses with others in the agreed ratio.5. If a partner has advanced loan, he has the right to receive interest thereon at an agreed

rate of interest. In case the rate of interest is not agreed, interest is paid at the rate provided in the Indian Partnership Act, 1932, i.e., @ 6% p.a.

6. In case of an emergency, a partner has the right to act according to his best judgment and be indemnified for the expenses incurred by him.

7. A partner has the right not to allow the admission of a new partner.8. After giving proper notice, a partner has the right to retire from the firm.9. If a partner incurs expenses on the business or he pays amount on behalf of the firm,

that partner gets indemnified for the payments made by him from the firm.

Chapter 2 . Accounting for Partnership Firms—Fundamentals 2.3

PARTNERSHIP DEED

Partnership comes into existence by an oral or written agreement. It is better to have written agreement to avoid any dispute. This written document known as Partnership Deed details the terms and conditions of partnership. It is a legal document signed by all the partners and has clauses on the following:

(i) Description of the Partners: Names, description and addresses of the partners.

(ii) Description of the Firm: Name and address of the firm.

(iii) Principal Place of Business: Address of the principal place of business.

(iv) Nature of Business: Nature of business that the firm shall carry on.

(v) Commencement of Partnership: Date of commencement of partnership.

(vi) Capital Contribution: The amount of capital to be contributed by each partner, whether the Capital Accounts shall be fixed or fluctuating.

(vii) Interest on Capital: Rate of interest, if allowed, on capital.

(viii) Interest on Drawings: Rate of interest, if to be charged, on drawings.

(ix) Profit-sharing Ratio: Ratio in which profits or losses are to be shared by the partners.

(x) Interest on Loan: Rate of interest on loan by a partner to the firm.

(xi) Remuneration to Partners: Amount of salary, commission, etc., if agreed, to be paid.

(xii) Valuation of Goodwill: Method by which goodwill of the firm will be valued at the time of admission or retirement of a partner or at the time of death of a partner.

(xiii) Valuation of Assets: The manner in which assets of the firm shall be valued in the case of its reconstitution.

(xiv) Settlement of Account: The manner in which accounts of partner(s) shall be settled in case of his (their) retirement or death or at the time of dissolution of the firm.

(xv) Accounting Period: The date on which accounts shall be closed every year. Normally accounts are closed on 31st March every year because every entity must submit the return of income on 31st March every year.

(xvi) Rights and Duties of Partners: The rights and duties of partners are defined.

(xvii) Duration of Partnership: The period of partnership, i.e., whether it is for a specified period or for a venture or at will.

(xviii) Bank Account Operation: How shall the Bank Account be operated? Whether it shall be operated by any of the partners or jointly.

(xix) Death of a Partner: Whether the firm will continue or dissolve.

(xx) Settlement of Disputes: Disputes, if any, among the partners—how they shall be settled.


Importance of Partnership Deed

Partnership Deed is an important legal document which defines relationship among the partners. It is important to have written Partnership Deed to avoid and settle possible disputes. It is useful because: 1. It governs the rights, duties and liabilities of each partner. 2. Disputes arising, if any, among the partners are settled on the basis of Partnership Deed, it

being a written contract.

Is it essential to have a Partnership Deed?It is not essential but desirable to have a Partnership Deed. In case Partnership Deed does not exist, provisions of the Indian Partnership, Act, 1932 will apply.

Provisions Affecting Accounting Treatment in the Absence of Partnership Deed

In the absence of a Partnership Deed or where it is silent, i.e., it does not have a clause in respect of the following matters, the provisions of the Indian Partnership Act, 1932 apply:

Matters Provisions of the Indian Partnership Act, 1932

1. Sharing of Profits/Losses Profits/Losses are shared equally by the partners.

2. Interest on Capital Interest on capital is not paid (allowed) to partners.

3. Interest on Drawings Interest on drawings is not charged from partners.

4. Interest on Advance/Loan by a Partner Interest on loan by partner is paid (allowed) @ 6% p.a.

Interest on loan by partner is a charge against profit. It means interest is paid whether the firm earns profit or incurs loss.

5. Remuneration to Partners Remuneration (salary, commission, etc.,) is not paid (allowed) to any partner.

6. Admission of Partner New partner cannot be admitted unless all the partners agree to it.

The partners may amend the Partnership Deed to include or change any of the above clauses.

Liabilities of Partners

Subject to agreement among the partners,

1. If a partner carries on a business that is similar to that of the firm in competition with the firm and earns profit from it, the profit earned from such business shall be paid to the firm.

2. If a partner earns profit for himself from any transaction of the firm or from the use of firm’s property or business connection, the profit so earned shall be paid to the firm. For example, a partner gets commission from the buyer of goods on goods sold by the firm, the commission so earned shall be paid to the firm.

Some other Important Provisions of the Indian Partnership Act, 1932

(i) If all the partners agree, a minor may be admitted for the benefit of partnership. [Sec. 30]

(ii) A person may be admitted as a partner either with the consent of all the existing partners or in accordance with an agreement among the partners. [Sec. 31]

(iii) A partner may retire from the firm either with the consent of all the other partners or in accordance with an agreement among the partners. [Sec. 32]


(iv) Registration of the firm is optional and not compulsory. [Sec. 69] (v) Unless otherwise agreed by the partners in the Partnership Deed, a firm is dissolved

on the death of a partner. [Sec. 35]Note: It should be noted that above provisions of the Indian Partnership Act, 1932 are applied when Partnership

Deed does not exist or where it exists but it does not have a clause to this effect.

Illustration 1 (Provisions of the Indian Partnership Act, 1932). Ambrish, Lalit and Charu are partners in a firm without a Partnership Deed. (i) Ambrish, has contributed more capital than other partners and demands interest on

capital at 10% p.a. But Lalit and Charu do not agree with him. (ii) Lalit devotes full time in the business and demands a salary of ` 5,000 p.m. But Ambrish

and Charu do not agree with him.

(iii) Charu demands interest on the loan of ` 50,000 given by her at the market rate of interest, i.e., @ 12% p.a.

(iv) Ambrish has withdrawn ` 10,000 from the firm for his personal use. Lalit and Charu demand that interest on drawings should be charged @ 10% per annum.

(v) Profit before taking into account any of the above claims was ` 50,000 at the end of the first year of the business. Ambrish demands share of profit in the capital ratio.

(vi) Lalit wants to introduce his son Inder as partner. Charu objects to his proposal.

How will be the matters resolved?

Solution:

The partners do not have a Partnership Deed. Therefore, provisions of the Indian Partnership Act, 1932 will apply to resolve the matters: (i) Interest on capital is not payable to partner. Therefore, Ambrish will not get interest on

the capital. (ii) Remuneration is not payable to partner. Therefore, Lalit will not get salary. (iii) Interest on Loan by Partner is payable @ 6% p.a. Therefore, Charu will get interest

` 3,000 (i.e., ` 50,000 × 6/100). (iv) Interest on Ambrish’s Drawings will not be charged. (v) Profit after Interest on Loan by Charu, i.e., ` 47,000 is to be distributed equally. (vi) A person cannot be introduced as partner without the consent of all the partners.

Therefore, Inder cannot be admitted into partnership because Charu objects to it.

Illustration 2 (Oral Agreement). Harry and Garry are partners in a firm. They have not entered into Partnership Deed but had agreed on following: (i) Salary will be paid to Harry @ ` 10,000 per month. (ii) Garry will get commission @ 10% of Net Profit. (iii) Interest will be allowed on capitals @ 10% p.a. (iv) Interest will be charged on drawings @ 10% p.a. (v) Partner cannot be admitted without the consent of both the partners.


How will be the following disputes resolved? 1. Garry demands to be paid salary as Harry is being paid because his commission is lower. 2. Harry demands that his son Sherry be admitted as partner for 25% share to be given

out of his share of profits to which Garry disagrees.

Solution:

Partnership agreement may be written or oral. Therefore, the terms agreed orally between Harry and Garry is a valid agreement. 1. The demand of Garry to be paid salary as is paid to Harry is not valid in view of

agreement of payment of commission. 2. Harry’s demand to admit Sherry into partnership is also not valid as both the partners

had agreed to admit a new partner with the consent of both the partners.

Charge against Profit and Appropriation of Profit

Payment made or due to a partner may be a charge against profit or an appropriation of profit.

Charge against Profit means that it is an expense for the firm and is paid whether the firm earns profit or incurs loss. On the other hand, appropriation of profit means that they are allowed, if the firm earns profit during the year.Interest on Loan by Partner, Rent Payable to a partner and Manager’s Commission, etc., are charge against profit and are payable whether the firm earns profit or incurs loss.

On the other hand, Salary/Commission to partners, interest on capitals and transfer of profit to Reserves are appropriations.

Difference between Charge Against Profit and Appropriation of Profit

INTEREST ON LOAN BY THE PARTNER AND BY THE FIRM TO THE PARTNER

Interest on Loan by the Partner to the Firm

If any partner has given loan to the firm, he shall get interest at the agreed rate as written in the Partnership Deed or as agreed otherwise. In the absence of an agreement, the Indian Partnership Act, 1932 will apply and the lending partner will get interest @ 6% p.a. on loan amount.

Nature of Interest on Loan by Partner

Interest on loan by partner is a charge against profit. It means that a partner will get interest on loan whether the firm earns profit or incurs loss.

Basis

1. Nature

2. Recording

3. Priority

4. Examples

Charge Against Profit

It is an expense hence deducted from revenue to determine net profit or loss for the year.

It is debited to Profit and Loss Account.

It is allowed before Appropriation of Profit.

Rent paid to a partner, interest on loan by partner, etc.

Appropriation of Profit

It means distribution of net profit for the year among partners under different heads as per the Partnership Deed.

It is debited to Profit and Loss Appropriation Account.

It is appropriated after accounting of all charges.

Salary to partners, interest on capital, transfer of profit to General Reserve, etc.


Accounting Treatment

Interest on loan by partner is credited to his Loan Account and not to his Capital Account. Journal entries passed are: (i) To provide Interest on Loan by Partner: Interest on Loan by Partner A/c ...Dr. To Loan by Partner A/c

(ii) To close the Interest on Loan by Partner A/c: Profit and Loss A/c ...Dr. To Interest on Loan by Partner A/c

It is important to distinguish Loan Account and Capital Account of a partner because: 1. As per the Indian Partnership Act, 1932, loan by a partner is repayable on dissolution

before repayment of capital to partners; and 2. In the absence of any agreement, partners get interest @ 6% p.a. on loan advanced

whereas they are not entitled to interest on capital.

Illustration 3. Amit, Bimal and Chaman are partners sharing profits and losses equally. Amit and Chaman gave loans to the firm on 1st October, 2019 of ` 1,00,000 and ` 1,50,000 respectively. It is agreed that interest @ 9% p.a. will be paid on loan. Books of account of the firm are closed on 31st March every year. Interest on loan is yet to be paid as on 31st March, 2020. Pass Journal entries in the books of account of the firm and prepare Loan Accounts of the two partners.Solution: In the Books of Amit, Bimal and Chaman

JOURNAL

Date Particulars L.F. Dr. (`) Cr. (`)

2019Oct. 1 Bank A/c ...Dr. 2,50,000 To Loan by Amit A/c 1,00,000 To Loan by Chaman A/c 1,50,000 (Loan from partners Amit and Chaman)2020March 31 Interest on Loan by Partners A/c ...Dr. 11,250 To Loan by Amit A/c 4,500 To Loan by Chaman A/c 6,750 (Interest on loan by partners provided @ 9% p.a.)

March 31 Profit and Loss A/c ...Dr. 11,250 To Interest on Loan by Partners A/c 11,250 (Interest on Loan by Partners Account transferred to Profit and Loss Account)

Dr. LOAN BY AMIT ACCOUNT Cr.

Date Particulars ` Date Particulars `

2020 2019March 31 To Balance c/d 1,04,500 Oct. 1 By Bank A/c 1,00,000 2020 March 31 By Interest on Loan by Partners A/c 4,500

1,04,500 1,04,500

2020 April 1 By Balance b/d 1,04,500


Dr. LOAN BY CHAMAN ACCOUNT Cr.


2020 2019

March 31 To Balance c/d 1,56,750 Oct. 1 By Bank A/c 1,50,000

2020

March 31 By Interest on Loan by Partners A/c 6,750

1,56,750 1,56,750

2020

April 1 By Balance b/d 1,56,750

Illustration 4.

Akhil and Bharat are partners sharing profits and losses in ratio of 2 : 3 with capitals of

` 2,00,000 and ` 1,00,000 respectively. On 1st October, 2019, Akhil and Bharat gave loans of

` 4,00,000 and ` 2,00,000 respectively to the firm. There is no agreement as to payment of

interest on the loan by partner. Determine the amount of profit or loss for the year ended

31st March, 2020 in each of the following cases to be distributed between the partners:

Case 1. If the Profit before interest for the year amounted to ` 25,000.

Case 2. If the Profit before interest for the year amounted to ` 15,000.

Case 3. If the Loss before interest for the year amounted to ` 25,000.

Solution:

When there is no agreement for payment of interest on loan by partner, as per the Indian

Partnership Act, 1932, interest @ 6% p.a. is allowed on loan by a partner.

Case 1. Distributable Profit/Loss = Profit before Interest – Interest on Loan by Partners

= ` 25,000 – ` 18,000* = ` 7,000.

*Interest on Loan by Akhil ( ̀ 4,00,000 × 6/100 × 6/12) ` 12,000

Interest on Loan by Bharat (` 2,00,000 × 6/100 × 6/12) ` 6,000

Total ` 18,000

Case 2. Distributable Profit/Loss = Profit before Interest – Interest on Loan by Partners

= ` 15,000 – ` 18,000 = ` 3,000 (Loss).

Interest on loan by partner being a charge against profit is paid or credited to Loan by Partners

Account even if profit is less than the amount of interest on loan. The resulting loss is distributed

between partners in the profit-sharing ratio.

Case 3. Distributable Profit/Loss = Loss before Interest + Interest on Loan by Partners

= ` 25,000 + ` 18,000 = ` 43,000 (Loss).


Interest on Loan by the Firm to Partner

A firm may give loan to a partner. It will charge interest on the loan given at the rate agreed among the partners. If the Partnership Deed does not provide for charging interest on loan given or agreement to charge interest does not exist, interest is not charged on the loan given.

If interest is charged on loan by the firm to a partner, interest is transferred to the credit of Profit and Loss Account and debit of Partner’s Capital Account (if Capital Accounts are maintained following Fluctuating Capital Accounts Method) or Partner’s Current Account (if Capital Accounts are maintained following Fixed Capital Accounts Method).

The Journal entries are: (i) For Charging Interest on Loan to Partner:

Partner’s Capital/Current A/c ...Dr. To Interest on Loan to Partner A/c (Given)

(ii) For Transfer of Interest on Loan to Partner Account:

Interest on Loan to Partner A/c ...Dr. To Profit and Loss A/c

Rent Paid or Payable to a Partner

Rent paid or payable to a partner, is also a charge against profit and not an appropriation of profit. It is a charge on profit because rent is payable to a partner for letting the firm use his personal property for business. Rent may be paid (either in cash or by cheque) during the year to the partner or it may have become due but is not yet paid, i.e., is still payable. When it is paid or payable, it is debited to Rent Account and credited to Cash/Bank Account or Rent Payable Account. At the end of the year. Rent Account is transferred or debited to Profit and Loss Account (not to the Profit and Loss Appropriation Account).

Journal entries in this case will be as follows: (i) When rent is paid in cash or by cheque: Rent A/c ...Dr. To Cash/Bank A/c (Rent paid in cash/cheque for ...)

(ii) When rent is payable: Rent A/c ...Dr. To Rent Payable A/c (Rent payable for ...)

(iii) When Rent Account is transferred to Profit and Loss Account: Profit and Loss A/c ...Dr. To Rent A/c (Rent Account transferred to Profit and Loss Account)

Illustration 5 (Rent paid and Rent Payable).

Amrit and Bimal are partners sharing profits equally. Bimal has given his property on rent to the firm on 1st April, 2019 at a monthly rent of ̀ 5,000. The firm paid him rent from April, 2019 to February, 2020 by issuing a cheque on 1st March, 2020. Rent for the month of March was still payble.

Pass the Journal entries for the above transactions.


Solution: JOURNAL

Date Particulars L.F. Dr. Cr. ` `

2020 March 1 Rent A/c ...Dr. 55,000 To Bank A/c 55,000 (Cheque issued for rent for the months April, 2019 to February, 2020)

Rent A/c ...Dr. 5,000 To Rent Payable A/c 5,000 (Rent payable for the month of March, 2020)2021March 31 Profit and Loss A/c ...Dr. 60,000 To Rent A/c 60,000 (Rent Account transferred to Profit and Loss Account)

Manager’s Commission

Manager is an employee of the firm. Therefore, the amount due to him as commission is payable whether the firm earns profit or incurs loss. Stating differently, Manager’s Commission is a charge against profit and transferred to the debit of Profit and Loss Account.

DISTRIBUTION OF PROFIT AMONG PARTNERS:PROFIT AND LOSS APPROPRIATION ACCOUNT

A partnership firm, like a proprietorship firm, prepares Trading Account, Profit and Loss Account and Balance Sheet. In addition, a partnership firm prepares Profit and Loss Appropriation Account to which net profit or net loss as per the Profit and Loss Account is transferred to appropriate it as per the agreement among partners. This account, is an extension of the Profit and Loss Account, and is credited with the amount of Net Profit or debited with the amount of Net Loss (transferred from Profit and Loss Account). It is credited with the amount of interest on drawings of the partners (which is loss to the partners but an income for the firm) and debited with interest on the capitals of the partners, partners’ salaries and commissions, etc., (which are losses for the firm and incomes for the partners).

If the partners decide, an amount is transferred to Reserve and the balance profit (Divisible Profit) is distributed between/among the partners in their profit-sharing ratio.

It should be noted that profit is appropriated up to the amount available for distribution, i.e., Divisible Profit. Thus, if after transfer of net loss and credit of interest charged on drawings to Profit and Loss Appropriation Account, the balance is loss, appropriation is not made. The loss is distributed among the partners in their profit-sharing ratio. But if it results in profit, appropriation is made up to the amount of profit.


Net Profit is the profit earned by an enterprise from its operating and non-operating activities. It is the net effect of operating and non-operating revenues and expenses that are charge against profit. It is determined by preparing Profit and Loss Account.

Divisible or Distributable Profit is the profit that is available for distribution among partners after allowing remuneration (Salary, Commission, etc.) to partners, interest on capitals, transfer to reserve and charging interest on drawings. It is determined by preparing Profit and loss Appropriation Account.

Profit and Loss Appropriation Account is an extension of the Profit and Loss Account. Net profit or loss as per Profit and Loss Account is transferred to Profit and Loss Appropriation Account.

Following are considered as appropriation of profit and therefore are transferred (posted) to the debit of Profit and Loss Appropriation Account: (i) Salary/Commission to Partners; (ii) Interest on Capitals of Partners; and (iii) Transfer to Reserves.Interest on Drawings is transferred (posted) to the credit of Profit and Loss Appropriation Account.

Specimen of the Profit and Loss Appropriation Account

PROFIT AND LOSS APPROPRIATION ACCOUNT

Dr. for the year ended ... Cr.

Particulars ` Particulars `

To Profit and Loss A/c ... By Profit and Loss A/c ... (Net Loss+ transferred from (Net Profit+ transferred from Profit and Loss Account) Profit and Loss Account)To Interest on Capitals: By Interest on Drawings: Abhay ... Abhay ... Bhaskar ... ... Bhaskar ... ...To Partners’ Salaries ... By Loss+ transferred to: To Partners’ Commissions ... *Abhay’s Capital A/c ...To Reserve ... **(or Abhay’s Current A/c) To Profit+ transferred to: *Bhaskar’s Capital A/c ... ... *Abhay’s Capital A/c ... **(or Bhaskar’s Current A/c) **(or Abhay’s Current A/c) *Bhaskar’s Capital A/c ... ... **(or Bhaskar’s Current A/c)

... ...

+Either of the two will exist.

*Under Fluctuating Capital Accounts Method

**Under Fixed Capital Accounts Method

Always remember that amount payable to a partner (except interest on loan and rent) such as interest on capital (if not specified to be a charge), salary, commission, etc., are appropriation of profit.


JOURNAL ENTRIES RELATING TO THE PROFIT AND LOSS APPROPRIATION ACCOUNT

1. Transfer of profit from Profit and Loss Account to Profit and Loss Appropriation Account

2. Transfer of loss from Profit and Loss Account to Profit and Loss Appropriation Account

3. For Partners’ Salaries/Commission

4. For Allowing Interest on Capitals

5. For Charging Interest on Drawings

Profit and Loss A/c ...Dr. To Profit and Loss Appropriation A/c (Profit transferred)

Profit and Loss Appropriation A/c ...Dr. To Profit and Loss A/c (Loss transferred)

(i) Partners’ Salaries/Commission A/c ...Dr. To Partners’ Capital/Current** A/cs (Individually) (Salaries/commission allowed to partners)

(ii) To Close Salaries/Commission Account Profit and Loss Appropriation A/c ...Dr. To Partners’ Salaries/Commissions A/cs (Salaries/commission allowed to partners transferred to Profit and Loss Appropriation Account)

Alternatively, a combined entry may be passed as: Profit and Loss Appropriation A/c ...Dr. To Partners’ Capital/Current** A/cs (Individually) (Salaries/commission allowed to partners transferred to Profit and Loss Appropriation Account)

(i) Interest on Capital A/c ...Dr. To Partners’ Capital/Current** A/cs (Individually) (Interest on capitals allowed to partners @ ….% p.a.)

(ii) To Close Interest on Capital Account Profit and Loss Appropriation A/c ...Dr. To Interest on Capital A/c (Interest on capital allowed transferred to Profit and Loss Appropriation Account)

Alternatively, a combined entry may be passed as: Profit and Loss Appropriation A/c ...Dr. To Partners’ Capital/Current** A/cs (Individually) (Interest on capitals transferred to Profit and Loss

Appropriation Account)

(i) Partners’ Capital/Current** A/cs (Individually) ...Dr. To Interest on Drawings A/c (Interest charged on drawings)

(ii) To Close Interest on Drawings Account Interest on Drawings A/c ...Dr. To Profit and Loss Appropriation A/c (Interest charged on drawings transferred to Profit and Loss Appropriation Account)

Alternatively, a combined entry may be passed as: Partners’ Capital/Current** A/cs (Individually) ...Dr. To Profit and Loss Appropriation A/c (Interest charged on drawings and transferred to Profit and Loss Appropriation Account)


6. For Transfer to Reserve out of Profit*

7. For Transfer of Credit Balance of Profit and Loss Appropriation Account (being Divisible/Distributable Profit)

8. For Transfer of Debit Balance of Profit and Loss Appropriation Account (Loss)

Profit and Loss Appropriation A/c ...Dr. To Reserve A/c (Amount transferred to Reserve)

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

To Partners’ Capital/Current** A/cs (Individually) (Balance profit transferred to Capital/Current** Accounts of partners in their profit-sharing ratio)

Partners’ Capital/Current** A/c ...Dr.

To Profit and Loss Appropriation A/c (Loss transferred to Capital/Current** Accounts of partners in their profit-sharing)

* Reserve is an amount set aside out of profit to strengthen the financial position of the firm or to meet an unforeseen liability. For example, General Reserve is to strengthen the financial position while Workmen Compensation Reserve is set aside to meet a claim of staff, if any.

** Partners’ Current Accounts are used when Capital Accounts are maintained following Fixed Capital Accounts Method.

Features of Profit and Loss Appropriation Account

1. It is an extension of the Profit and Loss Account. 2. It is prepared by the partnership firms. 3. It shows the appropriation of net profit or loss for the accounting period. 4. Entries in this account are passed giving effect to the Partnership Deed.

Difference between Profit and Loss Account and Profit and Loss Appropriation Account

Let us understand complete set of final accounts of a partnership firm with the help of following illustration for better understanding of Profit and Loss Appropriation Account.

Profit and Loss Account

It is prepared after Trading Account. It therefore, starts with Gross Profit (in the credit side) or Gross Loss (in the debit side) as per the Trading Account.

It is prepared to determine net profit earned or net loss incurred during the accounting year.

It is debited with the expenses (charge against profit) and credited with the income, not being operating income to determine net profit or loss for the accounting period.

Preparation of this account is not guided by the Partnership Deed or Agreement.

While preparing this account, Matching Principle (i.e., revenue is matched against expenses) is followed.

Profit and Loss Appropriation Account

It is prepared after Profit and Loss Account. It therefore, starts with Net Profit (in the credit side) or Net Loss (in the debit side) as per the Profit and Loss Account.

It is prepared to show appropriation of net profit, i.e., distribution of Net Profit or Net Loss for the accounting period among the partners.

It is debited with the items of appropriation of profit such as salary/commission to partners, interest on capital and transfer to reserve, etc. It is credited with the items of income being debited to Partners’ Capital Accounts or Patners’ Current Accounts such as interest on drawings.

Preparation of this account is guided by the Partnership Deed or Agreement.

While preparing this account, Matching Principle is not followed being not applicable.

Basis

1. Stage of Preparation

2. Objective

3. Nature of Items

4. Partnership Deed or Agreement

5. Matching Principle


Illustration 6.

Ayub and Amit are partners in M/s Amrit Papers sharing profits and losses equally. Following trial balance is prepared from the books of account as at 31st March, 2020:

Particulars Dr. (`) Particulars Cr. (`)

Opening Stock 45,000 Sales 12,50,000

Purchases 7,60,000 Purchases Return 10,000

Sales Return 25,000 Interest on Loan to Ayub 600

Salary and Wages 1,80,000 Sundry Creditors 70,000

Rent 1,10,000 Loan by Amit 20,000

General Expenses 34,400 Capital Accounts:

Interest on Loan by Amit 1,200 Ayub 4,00,000

Sundry Debtors 2,00,000 Amit 3,85,000

Furniture and Fixtures 50,000

Computers 2,20,000

Machinery 3,00,000

Loan to Ayub 10,000

Cash at Bank 75,000

Cash in Hand 15,000

Drawings: Ayub 60,000

Amit 50,000

21,35,600 21,35,600

Prepare Trading Account, Profit and Loss Account and Profit and Loss Appropriation Account for the year ended 31st March, 2020 and Balance Sheet as at that date after accounting the following adjustments: (i) Stock as at 31st March, 2020 was ` 50,000; (ii) Rent is ` 10,000 per month, payable to Ayub; (iii) Depreciate Furniture and Fixtures and Computers @ 20% p.a., Machinery @ 10% p.a.; (iv) Interest on Capitals is allowed @ 6% p.a.; (v) Manager’s Commission is payable @ 1% of net sales; and (vi) Interest on Loan by Amit was paid on 31st March, 2020.

Solution: M/s Amrit Papers

TRADING ACCOUNTDr. for the year ended 31st March, 2020 Cr.


To Opening Stock 45,000 By Sales 12,50,000

To Purchases 7,60,000 Less: Sales Return 25,000 12,25,000

Less: Purchases Return 10,000 7,50,000 By Closing Stock 50,000

To Gross Profit transferred to

Profit and Loss Account 4,80,000

12,75,000 12,75,000


PROFIT AND LOSS ACCOUNTDr. for the year ended 31st March, 2020 Cr.


To Salary and Wages 1,80,000 By Gross Profit—transferred 4,80,000To Manager’s Commission 12,250 from Trading Account (1% of ` 12,25,000) By Interest on Loan to Ayub 600To Rent 1,10,000 Add: Outstanding Rent 10,000 1,20,000To General Expenses 34,400To Interest on Loan by Amit 1,200To Depreciation on: Furniture and Fixtures 10,000 Computers 44,000 Machinery 30,000 84,000To Net Profit transferred to Profit and Loss Appropriation Account 48,750

4,80,600 4,80,600

PROFIT AND LOSS APPROPRIATION ACCOUNTDr. for the year ended 31st March, 2020 Cr.


To Interest on Capital A/cs: By Profit and Loss A/c (Net Profit) 48,750 Ayub 24,000 Amit 23,100 47,100To Profit transferred to: Ayub’s Capital A/c 825 Amit’s Capital A/c 825 1,650 48,750 48,750

BALANCE SHEET as at 31st March, 2020

Liabilities ` Assets `

Capital A/cs: Furniture and Fixtures 50,000Ayub 4,00,000 Less: Depreciation 10,000 40,000Add: Interest on Capital 24,000 Computers 2,20,000 Share of Profit 825 Less: Depreciation 44,000 1,76,000 4,24,825 Machinery 3,00,000Less: Drawings 60,000 3,64,825 Less: Depreciation 30,000 2,70,000Amit 3,85,000 Sundry Debtors 2,00,000Add: Interest on Capital 23,100 Loan to Ayub 10,000Share of Profit 825 Closing Stock 50,000 4,08,925 Cash at Bank 75,000Less: Drawings 50,000 3,58,925 Cash in Hand 15,000Sundry Creditors 70,000Loan by Amit 20,000Manager’s Commission Payable 12,250Rent Outstanding 10,000

8,36,000 8,36,000

Net Profit

Distributable Profit


Illustration 7. A and B entered into partnership on 1st April, 2019 without any Partnership Deed. They introduced capitals of ` 5,00,000 and ` 3,00,000 respectively. On 31st October, 2019, A gave ` 2,00,000 as loan to the firm without any agreement as to interest.Profit and Loss Account for the year ended 31st March, 2020 showed a profit of ` 4,30,000, but the partners could not agree upon the amount of interest on loan to be charged and the basis of division of profit. Pass a Journal entry for distribution of the profit between the partners and prepare Capital Accounts of both the partners and Loan Account of A. (AI 2011, Dates Modified)

Solution: JOURNAL


2020March 31 Profit and Loss Appropriation A/c ...Dr. 4,25,000 To A’s Capital A/c 2,12,500 To B’s Capital A/c 2,12,500 (Profit distributed between A and B equally) (WN 2)

Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.

Date Particulars A B Date Particulars A B ` ` ` `

2020 2019March 31 To Balance c/d 7,12,500 5,12,500 April 1 By Bank A/c 5,00,000 3,00,000 2020 March 31 By Profit and Loss Appropriation A/c 2,12,500 2,12,500 (Profit)

7,12,500 5,12,500 7,12,500 5,12,500

Dr. LOAN BY A ACCOUNT Cr.


2020 2019March 31 To Balance c/d 2,05,000 Oct. 31 By Bank A/c 2,00,000 2020 March 31 By Interest on Loan by A A/c (WN 1) 5,000

2,05,000 2,05,000

Working Notes:

1. Interest on Loan by A = ` 2,00,000 × ¥5 6*

12 12= ` 5,000

*Interest on Loan is to be paid @ 6% p.a.

Since there is no agreement between partners A and B for interest on loan by partners, the provision of Indian Partnership Act, 1932 will apply. It prescribes that Interest on Loan by Partners is payable @ 6% p.a.

2. Net Profit after Interest on Loan by A = ` 4,30,000 – ` 5,000 = ` 4,25,000, which is shared equally because the profit-sharing ratio is not given.


Illustration 8 (Rent Payable to a Partner and Preparation of Profit and Loss Appropriation Account). Aman and Boman are partners sharing profits equally. Business is being carried from the property owned by Aman on a yearly rent of ̀ 24,000. Aman is to get salary of ̀ 1,20,000 p.a. and Boman is to get commission @ 5% of net sales, which during the year was ` 30,00,000. Profit for the year ended 31st March, 2020 before providing for rent was ̀ 5,00,000.

Prepare Profit and Loss Appropriation Account for the year ended 31st March, 2020.

Solution: PROFIT AND LOSS APPROPRIATION ACCOUNT

Dr. for the year ended 31st March, 2020 Cr.


To Aman’s Capital A/c (Salary) 1,20,000 By Profit and Loss A/c (Net Profit) 4,76,000

To Boman’s Capital A/c (Commission) 1,50,000

To Profit transferred to:

Aman’s Capital A/c 1,03,000

Boman’s Capital A/c 1,03,000 2,06,000

4,76,000 4,76,000

Note: ` 24,000 is the rent which is charge against the profit and hence debited to Profit and Loss Account. Thus, amount of Profit available for appropriation is ` 4,76,000 (i.e., ` 5,00,000 – ` 24,000).

Illustration 9 (Profit and Loss Appropriation Account). Aseem and Nihar started business on 1st April, 2019 with capitals of ` 3,00,000 and ` 2,00,000 respectively. According to the Partnership Deed, Nihar is to get salary of ` 5,000 per month, Aseem is to get 10% commission on Profit after allowing salary to Nihar and interest is to be allowed on capitals @ 6% p.a. Profit-sharing ratio between the two partners is 3 : 2. During the year, the firm earned profit of ` 2,50,000.

Aseem had given loan of ` 1,00,000 to the firm on 1st April, 2019. Interest on loan was allowed @ 8% p.a. Nihar was given loan of ` 2,00,000 on which interest was charged ` 11,000. Manager was to be allowed commission of ` 3,000.

Pass Journal entries for distribution of profit and prepare Profit and Loss Appropriation Account. The firm closes its books of account on 31st March every year.

Solution: JOURNAL


2020

March 31 Profit and Loss A/c ...Dr. 2,50,000

To Profit and Loss Appropriation A/c 2,50,000

(Transfer of net profit to Profit and Loss Appropriation Account)

March 31 Nihar’s Salary A/c ...Dr. 60,000

To Nihar’s Capital A/c 60,000

(Salary due to Nihar @ ` 5,000 per month)


March 31 Aseem‘s Commission A/c ...Dr. 19,000

To Aseem’s Capital A/c 19,000

(Commission due to Aseem)

March 31 Profit and Loss Appropriation A/c ...Dr. 79,000

To Nihar’s Salary A/c 60,000

To Aseem’s Commission A/c 19,000

(Salary and commission to Partners transferred to Profit and Loss


March 31 Interest on Capital A/c ...Dr. 30,000

To Aseem’s Capital A/c 18,000

To Nihar’s Capital A/c 12,000

(Interest on capitals allowed to partners @ 6% p.a.)

March 31 Profit and Loss Appropriation A/c ...Dr. 30,000

To Interest on Capital A/c 30,000

(Interest on capitals transferred to Profit and Loss


March 31 Profit and Loss Appropriation A/c ...Dr. 1,41,000

To Aseem’s Capital A/c (` 1,41,000 × 3/5) 84,600

To Nihar’s Capital A/c (` 1,41,000 × 2/5) 56,400

(Distribution of profit among the partners)




To Salary—Nihar’s Capital A/c 60,000 By Profit and Loss A/c (Net Profit) 2,50,000

To Commission—Aseem’s Capital A/c 19,000 (` 2,50,000 – ` 8,000 + ` 11,000 – ` 3,000)

To Interest on Capital—Aseem’s Capital A/c 18,000

To Interest on Capital— Nihar’s Capital A/c 12,000


Aseem’s Capital A/c (3/5) 84,600

Nihar’s Capital A/c (2/5) 56,400 1,41,000

2,50,000 2,50,000

Illustration 10 (Profit and Loss Appropriation Account).

X and Y started business on 1st April, 2019 with capitals of ` 5,00,000 each. As per the

Partnership Deed, both X and Y are to get monthly salary of ` 10,000 each and interest on

capitals is ` 50,000 each. Interest on Drawings are: X— ` 3,000 and Y—` 5,000.

During the year, the firm incurred a loss of ` 2,00,000.

Pass Journal entries for the above and prepare Profit and Loss Appropriation Account. The

firm closes its accounts on 31st March, every year.


Solution: JOURNAL


2020

March 31 Profit and Loss Appropriation A/c ...Dr. 2,00,000

To Profit and Loss A/c 2,00,000

(Transfer of net loss)

March 31 X’s Capital A/c ...Dr. 3,000

Y’s Capital A/c ...Dr. 5,000

To Interest on Drawings A/c 8,000

(Interest charged on drawings)

March 31 Interest on Drawings A/c ...Dr. 8,000

To Profit and Loss Appropriation A/c 8,000

(Interest on drawings transferred to Profit and Loss Appropriation A/c)

March 31 X’s Capital A/c ...Dr. 96,000

Y’s Capital A/c ...Dr. 96,000

To Profit and Loss Appropriation A/c 1,92,000

(Loss transferred to Partners’ Capital Accounts)




To Profit and Loss A/c (Net Loss) 2,00,000 By Interest on Drawings A/cs:

X 3,000

Y 5,000 8,000

By Loss transferred to:

X’s Capital A/c 96,000

Y’s Capital A/c 96,000 1,92,000

2,00,000 2,00,000

Note: Salary to partners and interest on capitals are not allowed because the firm has incurred loss.

Appropriations are more than Available Profit

It is also a possibility that total amount of appropriation as per the Deed is more than the amount of profit available for appropriation. In this situation, profit available for distribution among partners is distributed in the ratio of appropriation to be made. The ratio of appropriation is determined as follows: (i) Determine the amount payable as appropriation to each partner as per the Partnership

Deed (ignoring the profit available for distribution among partners). For example, salary payable, commission payable and interest on capital, etc., payable to each partner is determined.


(ii) Total the amount of appropriation (as per Step (i) above) for each partner separately. (iii) Ratio of the Appropriations (as per Step (ii) above) is the ratio in which profit is appropriated.

It should be kept in mind that no particular item like salary, commission, interest on capital, etc., has priority over other items of appropriation.

Let us take an example for more clarity. Atul and Amit are partners in a firm. As per the Partnership Deed the partners are to get salary of ` 1,00,000 and ` 1,20,000 p.a. respectively and interest on capital @ 10% p.a. which is ` 20,000 and ` 40,000 respectively. Net profit for the year ` 2,10,000 will be appropriated in the ratio of 3 : 4 calculated as follows:

Atul (`) Amit (`)Salary 1,00,000 1,20,000Interest on Capital 20,000 40,000Total Amount of Appropriation 1,20,000 1,60,000

Therefore, the Ratio of Appropriation is ` 1,20,000 : ` 1,60,000

Or 3 : 4

Thus, ` 90,000 (i.e., 3/7 of ` 2,10,000) and ` 1,20,000 (i.e., 4/7 of ` 2,10,000) being the total of appropriations for Atul and Amit respectively.

Illustration 11 (Appropriations are more than Available Profit). Ajay and Vijay are partners sharing profits in the ratio of 3 : 2. Ajay is a non-working partner and contributes ̀ 20,00,000 as his capital. Vijay is a working partner of the firm. The Partnership Deed provides for interest on capital @ 8% p.a. and salary to every working partner @ ` 8,000 per month. Profit before providing for interest on capital and partner’s salary for the year ended 31st March, 2020 was ̀ 80,000. Show the distribution of profit.




To Ajay’s Capital A/c (Interest on capital) 50,000 By Profit and Loss A/c (Net Profit) 80,000

To Vijay’s Capital A/c (Salary) 30,000

80,000 80,000

Note: Interest on Ajay’s Capital = ` 20,00,000 × 8/100 = ` 1,60,000; Salary to Vijay = ` 8,000 × 12 = ` 96,000;

Thus, Interest on Ajay’s Capital + Salary to Vijay = ` 1,60,000 + ` 96,000 = ` 2,56,000.

Since both interest on capital and salary to partners are appropriations and the profit available for

distribution is ` 80,000, i.e., less than the amount of appropriations to be made, the available profit is

distributed in the ratio of appropriations to be made to Ajay and Vijay, i.e.,

` 1,60,000 (interest on capital): ` 96,000 (salary), or 5 : 3.


Special Aspects of Partnership Accounts

In Partnership Accounts, there are some aspects that require discussion. They are:

1. Partners’ Capital Accounts;

2. Remuneration (Salary or Commission) to Partners;

3. Interest on Partners’ Capitals;

4. Interest on Partners’ Drawings;

5. Adjustments for Incorrect Appropriations of Profits in the Past (Past Adjustments); and

6. Guarantee of Profit.Let us discuss each of these aspects in detail.

1. PARTNERS’ CAPITAL ACCOUNTS

A partnership firm has more than one owners (partners) and Capital Account is maintained for each partner separately. It is so because each partner has separate transactions with the firm. For example, if Atul, Amit and Akhil are three partners in a firm, there shall be three Capital Accounts, one each for Atul, Amit and Akhil.

The Partners’ Capital Accounts may be maintained by following either:

(i) Fixed Capital Accounts Method; or

(ii) Fluctuating Capital Accounts Method.

Fixed Capital Accounts Method

Fixed Capital means capital invested by each partner in the firm remains fixed or unaltered, unless a partner introduces additional capital or withdraws out of his or her capital. When Fixed Capital Accounts Method is followed, two accounts, i.e., a Capital Account and a Current Account for each partner are maintained.

Capital Account: Capital Account of each partner continues to show same balance year after year and changes only if additional capital is introduced, which is credited to Capital Account, withdrawal is made out of capital, which is debited to the Capital Account.

Current Account: Current Account is maintained to record transactions other than transactions of capital such as drawings against profit, interest allowed on capital, interest charged on drawings, salary or commission payable to a partner, share of profits/losses. As a result, the balance of Current Account fluctuates with every transaction with the partner.

Current Account of each partner is debited by the amount of: (i) his drawings against profit; (ii) interest on drawings; (iii) share of loss; and (iv) transfer of amount to Capital Account.Note: Please note that Drawings against Capital is debited to Partner’s Capital Account.


Similarly, Current Account of each partner is credited by the amount of: (i) interest on Capital; (ii) remuneration (Salary or commission); (iii) share of Profit; and (iv) transfer of amount from Capital Account.

It should be kept in mind that Partner’s Current Account may have a credit or debit balance.

The balances of Partners’ Capital Accounts are shown in the liabilities side of the Balance Sheet, as that much amount is due to them. Credit balance in Current Account is shown in the liabilities side and debit balance in the assets side of the Balance Sheet.Outline of the two accounts maintained under the Fixed Capital Accounts Method are:


Particulars X (`) Y (`) Z (`) Particulars X (`) Y (`) Z (`)

To Cash/Bank A/c ... ... ... By Balance b/d ... ... ... (Drawings against Capital) By Cash/Bank A/c ... ... ...To Balance c/d ... ... ... (Additional capital)

... ... ... ... ... ...

Dr. PARTNERS’ CURRENT ACCOUNTS Cr.


To Balance b/d ... ... ... By Balance b/d ... ... ... (In case of debit (In case of credit opening balance) opening balance)To Drawings A/c ... ... ... By Interest on Capital A/c ... ... ... (Drawings against Profit) By Commission A/c ... ... ...To Interest on Drawings A/c ... ... ... By Partner’s Salary A/c ... ... ...To Profit and Loss A/c ... ... ... By Profit and Loss App. A/c ... ... ... (Loss) (Profit)To Balance c/d * ... ... ...

... ... ... ... ... ...

*The balance may be on the opposite (credit) side if the amount is overdrawn.

Fluctuating Capital Accounts Method

Under Fluctuating Capital Accounts Method only one account namely ‘Capital Account’ is maintained for each partner.

All transactions of a partner (e.g., capital introduced or withdrawn), salary or commission allowed, interest allowed on capital, drawings (against profit), interest charged on drawings, share of profit or loss, etc., are transferred to his Capital Account. As a result, balance in the Capital Account fluctuates with every transaction.

Capital Accounts having credit balances are shown in the liabilities side while Capital Accounts having debit balances are shown in the assets side of the Balance Sheet.

Fluctuating Capital Accounts Method is normally followed for maintaining Capital Accounts.

In the absence of any instruction or information, it is assumed that Fluctuating Capital Accounts Method is followed for maintaining the Partners’ Capital Accounts.


Outline of the Capital Account under Fluctuating Capital Accounts Method is as follows:



To Balance b/d (In case of ... ... ... By Balance b/d (In case of ... ... ...

debit opening balance) credit opening balance)

To Cash/Bank A/c (Drawings ... ... ... By Cash/Bank A/c ... ... ...

against Capital) (Additional Capital)

To Drawings A/c (Drawings ... ... ... By Interest on Capital A/c ... ... ...

against Profit) By Commission A/c ... ... ...

To Interest on Drawings A/c ... ... ... By Partner’s Salary A/c ... ... ...

To Profit and Loss A/c ... ... ... By Profit and Loss App. A/c ... ... ...

(Loss) (Profit)

To Balance c/d * ... ... ...

... ... ... ... ... ...

*The balance may be on the opposite (credit) side also.

Maintained Following

Partners’ Capital Accounts

Debit with ● Drawings against Capital ● Drawings (Against

Profit) ● Interest on

Drawings ● Share of Loss

Credit with ● Further Capital Introduced ● Remuneration (Salary, Commission) ● Interest on Capital ● Share of Profit

Capital Account

Credit withFurther CapitalIntroduced

Debit withDrawings againstCapital

Credit with ● Remuneration (Salary,

Commission) ● Interest on Capital ● Share of Profit

Debit with ● Drawings (Against

Profit) ● Interest on Drawings ● Share of Loss

Capital Account Current Account

Fixed Capital Accounts Method Fluctuating Capital Accounts Method

Pictorial Depiction of Methods of Maintaining Partners’ Capital Accounts with Items Debited and Credited


Difference between Fixed Capital Account and Fluctuating Capital Account

Difference between Fixed and Fluctuating Capital Accounts

Difference between Capital Account and Current Account

Basis Capital Account Current Account

1. Need Capital Account is maintained in all the cases, Current Account is maintained when whether following Fixed Capital Accounts Fixed Capital Accounts method is followed. Method or Fluctuating Capital Accounts Method.

2. Balance of Account Capital Account will always have a credit balance Balance of a Current Account may have when Fixed Capital Accounts Method is followed. a credit or debit balance.

In Fluctuating Capital Accounts Method, it may have either credit or debit balance.

3. Nature In case of fixed capital, Capital Account balance Balance of Current Account does not generally remains unchanged from year to year. change when capital is introduced or It changes when further capital is introduced withdrawn by a partner. or capital is withdrawn by a partner.

4. Transactions Capital Account records the amount invested Current Account records the transactions by a partner in the firm. such as drawings, interest on capital, interest on drawings, salary, commission, profit or loss, etc.

Illustration 12The Partnership Deed provided that Sonu was to be paid a salary of ` 20,000 per month and Rajat a commission of 5% on turnover. It also provided that interest on capital be allowed @ 8% p.a. Sonu withdrew ` 20,000 on 1st December, 2017 and Rajat withdrew ` 5,000 at the end of each month. Interest on drawings was charged @ 6% p.a. The net profit as per Profit and Loss Account for the year ended 31st March, 2018 was ` 4,89,950. The turnover of the firm for the year ended 31st March, 2018 amounted to ` 20,00,000.

Pass necessary Journal entries for the above transactions in the books of Sonu and Rajat. (CBSE 2019)

Basis

1. No. of Accounts Maintained

2. Frequency of Change

3. Transferring the Transactions

4. Balance

Fixed Capital Account

Two accounts are maintained for each partner, i.e., Fixed Capital Account and Current Account.

Balance in Fixed Capital Account does not change except when further capital is introduced or capital is withdrawn.

Transactions relating to Capitals are transferred to Fixed Capital Accounts and transactions for drawings, interest on drawings, interest on capital, salary, commission, share of profit or loss are transferred to Current Account.

Capital Account has credit balance.

Fluctuating Capital Account

One account (i.e., Capital Account) is maintained for each partner.

Balance changes with every transaction of the partner with the firm.

All transactions whether for capital, drawings, interest on drawings, interest on capital, salary, commission, share of profit or loss are transferred to Capital Account.

Fluctuating Capital Account may have credit or debit balance.


Solution: JOURNAL


(i ) Profit and Loss A/c ...Dr. 4,89,950 To Profit and Loss Appropriation A/c 4,89,950 (Profit transferred from Profit and Loss Account to Profit and Loss Appropriation Account)

(ii) Partner’s Salary A/c ...Dr. 2,40,000 To Sonu’s Capital A/c 2,40,000 (Salary credited to Sonu’s Capital Account)

(iii) Profit and Loss Appropriation A/c ...Dr. 2,40,000 To Partner’s Salary A/c 2,40,000 (Salary transferred to Profit and Loss Appropriation Account)

(iv) Partner’s Commission A/c ...Dr. 1,00,000 To Rajat’s Capital A/c 1,00,000 (Commission credited to Rajat’s Capital Account)

(v) Profit and Loss Appropriation A/c ...Dr. 1,00,000 To Partner’s Commission A/c 1,00,000 (Commission transferred to Profit and Loss Appropriation Account)

(vi) Interest on Capital A/c ...Dr. 1,12,000 To Sonu’s Capital A/c 64,000 To Rajat’s Capital A/c 48,000 (Interest on capital credited to Partners’ Capital Accounts)

(vii) Profit and Loss Appropriation A/c ...Dr. 1,12,000 To Interest on Capital A/c 1,12,000 (Interest on Capital transferred to Profit and Loss Appropriation Account)

(viii) Sonu’s Capital A/c ...Dr. 400 Rajat’s Capital A/c ...Dr. 1,650 To Interest on Drawings A/c 2,050 (Interest on drawings charged) (Note 1)

(ix) Interest on Drawings A/c ...Dr. 2,050 To Profit and Loss Appropriation A/c 2,050 (Interest on drawings transferred to Profit and Loss Appropriation Account)

(x) Profit and Loss Appropriation A/c ...Dr. 40,000 To Sonu’s Capital A/c 24,000 To Rajat’s Capital A/c 16,000 (Profit credited to Partners’ Capital Accounts) (Note 2)

Notes: 1. Calculation of Interest on Drawings: Interest on Sonu’s Drawings = ` 20,000 × 6/100 × 4/12 = ` 400 Total Drawings of Rajat = ` 5,000 × 12 = ` 60,000 Interest on Rajat’s Drawings = ` 60,000 × 6/100 × 5.5/12 = ` 1,650. 2. Calculation of Distributable Profit from Profit and Loss Appropriation Account: = ` 4,89,950 + ` 2,050 – ` 2,40,000 – ` 1,00,000 – ` 1,12,000 = ` 40,000.

Illustration 13 (When Capitals are Fixed and Fluctuating). A and B are partners with capitals of ` 60,000 and ` 20,000 respectively on 1st April, 2019. Net profit (before giving effect to the Partnership Deed) for the year ended 31st March, 2020 was ` 24,000. The Partnership Deed provides for the following: (a) B is to get salary of ` 6,000 p.a. (b) Interest on capitals is to be allowed @ 6% p.a. (c) Interest on drawings is to be charged @ 5% p.a.


Drawings of the partners A and B were ̀ 6,000 and ̀ 4,000 respectively and interest on drawings for A being ` 200 and for B ` 100.Show how profit will be distributed between A and B and also prepare the Capital Accounts of the partners along with their Drawings Accounts:(i) if they are fixed, and (ii) if they are fluctuating.

Solution: PROFIT AND LOSS APPROPRIATION ACCOUNTDr. for the year ended 31st March, 2020 Cr.


To Interest on Capital A/cs: By Profit and Loss A/c (Net Profit) 24,000 A (6% on ` 60,000) 3,600 By Interest on Drawings A/cs: B (6% on ` 20,000) 1,200 4,800 A 200 To B’s Salary A/c 6,000 B 100 300To Profit transferred to: (Equal share of profit)* A’s Capital/Current** A/c 6,750 B ’s Capital/Current** A/c 6,750 13,500

24,300 24,300

* Profit is to be shared equally because profit-sharing ratio is not given. **In case of fixed capitals.

(i) Fixed Capitals

Dr. A’S CAPITAL ACCOUNT Cr.


2020 2019 March 31 To Balance c/d 60,000 April 1 By Balance b/d 60,000

Dr. B’S CAPITAL ACCOUNT Cr.


2020 2019 March 31 To Balance c/d 20,000 April 1 By Balance b/d 20,000

Dr. A’S CURRENT ACCOUNT Cr.


2020 2020March 31 To A’s Drawings A/c 6,000 March 31 By Interest on Capital A/c 3,600March 31 To Interest on Drawings A/c 200 March 31 By Profit and Loss App. A/c 6,750March 31 To Balance c/d 4,150 —Profit (1/2)

10,350 10,350

Dr. B’S CURRENT ACCOUNT Cr.


2020 2020March 31 To B’s Drawings A/c 4,000 March 31 By Interest on Capital A/c 1,200March 31 To Interest on Drawings A/c 100 March 31 By B’s Salary A/c 6,000 March 31 To Balance c/d 9,850 March 31 By Profit and Loss App. A/c 6,750 —Profit (1/2)

13,950 13,950


Dr. A’S DRAWINGS ACCOUNT Cr.


2020 2020March 31 To Cash/Bank A/c 6,000 March 31 By A’s Current A/c 6,000

Dr. B’S DRAWINGS ACCOUNT Cr.


2020 2020March 31 To Cash/Bank A/c 4,000 March 31 By B’s Current A/c 4,000

(ii ) Fluctuating Capitals

Dr. A’S CAPITAL ACCOUNT Cr.


2020 2019March 31 To A’s Drawings A/c 6,000 April 1 By Balance b/d 60,000March 31 To Interest on Drawings A/c 200 2020March 31 To Balance c/d 64,150 March 31 By Interest on Capital A/c 3,600 March 31 By Profit and Loss App. A/c 6,750 —Profit (1/2)

70,350 70,350

Dr. B’S CAPITAL ACCOUNT Cr.


2020 2019March 31 To B’s Drawings A/c 4,000 April 1 By Balance b/d 20,000March 31 To Interest on Drawings A/c 100 2020March 31 To Balance c/d 29,850 March 31 By Interest on Capital A/c 1,200 March 31 By B’s Salary A/c 6,000 March 31 By Profit and Loss App. A/c 6,750 —Profit (1/2)

33,950 33,950

Dr. A’S DRAWINGS ACCOUNT Cr.


2020 2020March 31 To Cash/Bank A/c 6,000 March 31 By A’s Capital A/c 6,000

Dr. B’S DRAWINGS ACCOUNT Cr.


2020 2020March 31 To Cash/Bank A/c 4,000 March 31 By B’s Capital A/c 4,000


2. REMUNERATION (SALARY OR COMMISSION) TO PARTNERS

Remuneration (Salary or Commission) is allowed to the partners for looking after the business of the firm. It is allowed only if the Partnership Deed provides to allow it. Stating differently, if the Partnership Deed does not exist or if it exists but does not provide for allowing salary and commission, it is not allowed.

Nature

Salary or commission to partners is allowed only if the Partnership Deed allows it and also if the firm earns profit during the year. Salary or commission to a partner is an appropriation of profit, and not a charge against profit.

Salary payable to each partner is normally stated as an amount. But, Commission payable to a partner is stated as percentage of profit, which may be allowed to the partners either: (i) as a percentage of net profit or distributable profit before charging commission; or (ii) as a percentage of net profit or distributable profit after charging commission.

Commission, under the two methods, is computed as follows:

(i) Percentage of Net Profit or Distributable Profit before charging Commission:

Net Profit or Distributable Profit (before Commission) × Rate of Commission

100 (ii) Percentage of Net Profit or Distributable Profit after charging Commission:

Net Profit or Distributable Profit (before Commission) × Rate of Commission

100 + Rate of Commission

Accounting Treatment

Remuneration (Salary or Commission) to partners, being an appropriation of profit, is transferred to Profit and Loss Appro priation Account. Journal entries passed are:

(i) On Allowing Remuneration (Salaries or Commission) to Partners: Partners’ Salaries/Commission A/c ...Dr. To Partners’ Current A/cs [When Capitals are fixed]

To Partners’ Capital A/cs [When Capitals are fluctuating]

(ii) On Closure of Remuneration (Salaries or Commission) A/cs: Profit and Loss Appropriation A/c ...Dr. To Partners’ Salaries/Commission A/c

Illustration 14 (Commission to Partners and Distribution of Profit). X and Y are partners in a firm. X is to get commission of 10% of net profit before charging any commission. Y is to get a commission of 10% on net profit after charging all commissions. Net Profit for the year ended 31st March, 2020 was ` 55,000.

Find the commission of X and Y. Also, show the distribution of profit.


Solution: PROFIT AND LOSS APPROPRIATION ACCOUNT Dr. for the year ended 31st March, 2020 Cr.


To X ’s Commission A/c (` 55,000 × 10/100) 5,500 By Profit and Loss Account (Net Profit) 55,000To Y ’s Commission A/c (Note) 4,500 [(` 55,000 – ` 5,500) × 10/110] To Profit transferred to Capital A/cs: X 22,500 Y 22,500 45,000

55,000 55,000

Note: The above stated amount of Y’s Commission can be verified. After charging all commissions, net profit comes to ` 45,000 [i.e., ` 55,000 – (` 5,500 + ` 4,500)]. Thereafter, calculate Y’s Commission @ 10% of ` 45,000.

3. INTEREST ON PARTNERS’ CAPITALS

Interest on Capital is allowed to compensate a partner for contributing capital to the firm in excess of the profit-sharing ratio. Like interest on drawings, it is also calculated at the agreed rate with reference to the time capital has been used in the business. Thus, interest on capital is allowed on the opening balance of the partner’s capital.Additional Capital: If additional capital is introduced during the year, interest is allowed on it from the date additional capital is introduced till the end of the accounting year. Withdrawal of Capital: If capital is withdrawn by a partner during the year and interest is allowed on capital, interest is not allowed on the amount withdrawn from the date of withdrawal of capital till the end of the accounting year.ExampleAlok, a partner had capital of ` 5,00,000 as on 1st April, 2019. He introduced additional capital of ` 2,00,000 on 1st October, 2019 and withdrew ` 1,00,000 on 1st January, 2020. If interest on capital is allowed @ 10% p.a., interest on capital will be ` 57,500, calculated as follows: `

Interest on ` 5,00,000 @ 10% p.a. for 6 months (1st April, 2019 to 30th September, 2019) 25,000Interest on ` 7,00,000 @ 10% p.a. for 3 months (` 5,00,000 + ` 2,00,000)(1st October, 2019 to 31st December, 2019) 17,500Interest on ` 6,00,000 @ 10% p.a. for 3 months (` 7,00,000 – ` 1,00,000)(1st January, 2020 to 31st March, 2020) 15,000Total Interest 57,500Reasons or justification for allowing interest on capital are: (i) When Capitals of partners are different but profit share is equal. If a partner invests

more capital as compared to other partners and profit share is equal, interest paid on capital compensates him or her for more investment. In case interest on capital is not paid, share in profit of a partner investing more capital will be equal to share of profit of partners investing less capital.


(ii) When Capitals of partners are not same and profit share is also not equal. In this case, partners investing less capital may get more share of profit and partners investing more capital may get less share of profit.

(iii) Capital increases the earning capacity of the firm. Capital is the most important component of business. Capital helps in efficient conduct of business activities and therefore earning more profits. It is because of this reason that interest on capital is allowed.

At the same time, where profit is shared by the partners in the proportion of their capitals, interest on capital should not be allowed because partner investing more capital gets more share of profit.The provisions relating to interest on capital are given below:

PROVISION RELATING TO INTEREST ON CAPITAL

Case Provision

1. When the Partnership Deed does not exist or 1. Interest on capital is not allowed. Partnership Deed does not provide for interest on capital.

2. When the Partnership Deed provides for 2. Interest on capital is accounted as appropriation of profit. interest on capital but is silent on whether Interest on capital is allowed only if there is profit. interest is a charge or appropriation. There are three possible situations as follows: (i) Situation 1: Loss — Interest on capital is incurred is not allowed. (ii) Situation 2: Profit — Interest on capital is before interest is allowed at the agreed equal to or more rate. than the interest. (iii) Situation 3: Profit — Interest is allowed only before interest is to the extent of profit less than the in the ratio of interest on interest. capital of each partner.

3. When the Partnership Deed provides for 3. Interest on capital is allowed whether the firm has earned interest on capital as a charge (i.e., to be allowed profit or has incurred loss. whether there are profits or losses).

Journal entries to record interest on capital are:

If Partners’ Capital Accounts are fixed. If Partners’ Capital Accounts are fluctuating.

(i) Interest on Capital A/c ...Dr. (i) Interest on Capital A/c ...Dr. To Partners’ Current A/cs To Partners’ Capital A/cs (Interest on capital allowed to partners) (Interest allowed on partners’ capitals)

(ii) Profit and Loss Appropriation A/c ...Dr. (ii) Profit and Loss Appropriation A/c ...Dr. To Interest on Capital A/cs To Interest on Capital A/cs (Interest on capital transferred to Profit and (Interest on capital transferred to Profit and Loss Appropriation Account) Loss Appropriation Account)

Illustration 15. X and Y are partners sharing profits and losses in the ratio of 2 : 3 with capitals of ` 2,00,000 and ` 1,00,000 respectively. Pass the necessary Journal entry or entries for distribution of profit/loss for the year ended 31st March, 2020 in each of the alternative cases:Case 1. If Partnership Deed does not provide for interest on capital and the profit for the year

is ` 20,000.


Case 2. If Partnership Deed provides for interest on capital @ 6% p.a. and loss for the year is ̀ 15,000.Case 3. If Partnership Deed provides for interest on capital @ 6% p.a. and the profit for the

year is ` 21,000.Case 4. If Partnership Deed provides for interest on capital @ 6% p.a. as a charge on profit and

the profit for the year is ` 20,000.Case 5. If Partnership Deed provides for interest on capital @ 6% p.a. as a charge on profit and

the profit for the year is ` 2,000.Case 6. If Partnership Deed provides for interest on capital @ 6% p.a. as a charge on profit and

the profit for the year is ` 18,000.

Solution: JOURNAL


2020 Case 1March 31 Profit and Loss A/c ...Dr. 20,000 To Profit and Loss Appropriation A/c 20,000 (Net profit transferred to Profit and Loss Appropriation Account)

Profit and Loss Appropriation A/c ...Dr. 20,000 To X’s Capital A/c 8,000 To Y’s Capital A/c 12,000 (Profit distributed between X and Y in the ratio of 2 : 3)

Case 2 X’s Capital A/c ...Dr. 6,000 Y’s Capital A/c ...Dr. 9,000 To Profit and Loss A/c 15,000 (Loss distributed between X and Y in the ratio of 2 : 3) Note: Due to loss, interest on capital is not allowed.

Case 3 Profit and Loss A/c ...Dr. 21,000 To Profit and Loss Appropriation A/c 21,000 (Net profit transferred to Profit and Loss Appropriation Account)

Interest on Capital A/c ...Dr. 18,000 To X’s Capital A/c 12,000 To Y’s Capital A/c 6,000 (Interest on capital allowed to Partners @ 6% p.a.)

Profit and Loss Appropriation A/c ...Dr. 18,000 To Interest on Capital A/c 18,000 (Interest on capital transferred)

Profit and Loss Appropriation A/c ...Dr. 3,000 To X’s Capital A/c 1,200 To Y’s Capital A/c 1,800 (Profit distributed between X and Y in the ratio of 2 : 3)

Case 4 Interest on Capital A/c ...Dr. 18,000 To X’s Capital A/c 12,000 To Y’s Capital A/c 6,000 (Interest on capital allowed @ 6% p.a.)


Profit and Loss A/c ...Dr. 18,000 To Interest on Capital A/c 18,000 (Interest on capital transferred to Profit and Loss Account)

Profit and Loss A/c ...Dr. 2,000 To Profit and Loss Appropriation A/c 2,000 (Net profit transferred to Profit and Loss Appropriation Account)

Profit and Loss Appropriation A/c ...Dr. 2,000 To X’s Capital A/c 800 To Y’s Capital A/c 1,200 (Profit distributed between X and Y in the ratio of 2 : 3)

Case 5 Interest on Capital A/c ...Dr. 18,000 To X’s Capital A/c 12,000 To Y’s Capital A/c 6,000 (Interest on capital allowed @ 6% p.a.)

Profit and Loss A/c ...Dr. 18,000 To Interest on Capital A/c 18,000 (Interest on capital transferred to Profit and Loss Account being a charge)

X’s Capital A/c ...Dr. 6,400 Y’s Capital A/c ...Dr. 9,600 To Profit and Loss A/c (` 18,000 – ` 2,000) 16,000 (Net loss transferred to Capital Accounts of X and Y in their profit-sharing ratio)

Case 6 Interest on Capital A/c ...Dr. 18,000 To X’s Capital A/c 12,000 To Y’s Capital A/c 6,000 (Interest on capital allowed as a charge on profit @ 6% p.a.) (Note)

Profit and Loss A/c ...Dr. 18,000 To Interest on Capital A/c 18,000 (Interest on capital transferred to Profit and Loss Account)

Note: Case 6: Profit and Loss Appropriation Account will not be prepared because interest on capital is a charge against profit and hence is debited to Profit and Loss Account. After allowing interest on capital, it results in neither profit nor loss.

Interest on Capital when Profit Available for Appropriation is Inadequate

Profit of the firm may be less than the amount of interest on capitals allowable to the partners and interest on capital is an appropriation. In this situation, interest on capitals of the partners is calculated and the profit is distributed among the partners in the ratio of interest on capital.

In case, along with interest on capital, appropriation is to be made for salary, commission, etc., to partners, total amount of appropriations for each partner is determined and amount of profit is distributed among the partners in the ratio of the appropriations to be made to each partner. Following illustration will bring more clarity.


Illustration 16 (Interest on Capital when Profit is Inadequate).A and B have capitals of ` 4,00,000 and ` 2,00,000 respectively and interest on capital is to be allowed @ 6% p.a. Their profit-sharing ratio is 2 : 3 and profit (before interest) for the year is ` 30,000. Prepare Profit and Loss Appropriation Account to distribute the profit.

Solution:

Dr. PROFIT AND LOSS APPROPRIATION ACCOUNT for the year ended... Cr.


To Interest on Capital A/cs: By Profit and Loss A/c 30,000 A 20,000 (Net Profit) B 10,000 30,000

30,000 30,000

Working Note: The interest on A’s Capital and B’s Capital is ` 24,000 and ` 12,000 respectively. Thus, total interest

on capital is ` 36,000. Profit before interest is ` 30,000. The interest on capital will be allowed as follows:

A = ¥ 30,000 24,000

, 36 000

` `

` = ` 20,000; B =

¥ 30,000 12,000

, 36 000

` `

` = ` 10,000.

Remember: Interest on capital is allowed to the extent of available profit only, since interest on capital is an appropriation of profit.

In case, interest on capital is a charge, i.e., it is to be allowed whether the firm earns profit or incurs loss. Net profit is determined after allowing interest on capital, which is transferred to Profit and Loss Appropriation Account to be distributed among partners in their profit-sharing ratio. Following illustration explains it further.

Illustration 17.Atul and Bhaskar are partners sharing profits in the ratio of 2 : 3. Their capitals are ` 4,00,000 and ` 2,00,000 respectively. Interest is to be allowed on capitals @ 6% p.a. Profit before allowing interest on capitals is ` 30,000.Prepare Profit and Loss Appropriation Account to distribute profit or loss, if interest on capitals is a charge.

Solution:

Dr. PROFIT AND LOSS ACCOUNT for the year ended ... Cr.


To Interest on Capital A/cs: By Profit (Before Interest) 30,000 Atul 24,000 By Net Loss transferred to Bhaskar 12,000 36,000 Profit and Loss Appropriation A/c 6,000

36,000 36,000

Dr. PROFIT AND LOSS APPROPRIATION ACCOUNT for the year ended ... Cr.


To Profit and Loss A/c 6,000 By Loss transferred to Capital A/cs: Atul 2,400 Bhaskar 3,600 6,000

6,000 6,000


Alternatively: PROFIT AND LOSS APPROPRIATION ACCOUNTDr. for the year ended ... Cr.


To Net Loss transferred from By Loss transferred to Capital A/cs: Profit and Loss A/c 6,000 Atul 2,400 (` 30,000 – ` 24,000 – ` 12,000) Bhaskar 3,600

6,000 6,000

Note: The syllabus prescribes preparation of Profit and Loss Appropriation Account and not Profit and Loss Account. Also the question prescribed to prepare Profit and Loss Appropriation Account. Net Profit may be determined by preparing a Working Note or may be determined as above.

Opening Capital: Interest on capital is allowed on Opening Capital of the partner. If a partner has neither introduced additional capital nor withdrawn it during the year, closing balance of the Capital Account of the previous year is the opening balance in the Capital Account of the Current Year. In case opening capital is not given, it needs to be determined to calculate interest on capital. It is determined by adding the items which have already been deducted (e.g., Share of Loss, Drawings, Interest on Drawings) and by deducting the items which have already been added to the capital (e.g., Additional Capital, Interest on Capital, Profit already credited). It is calculated as follows:

(a) When Capitals are fixed:CALCULATION OF OPENING CAPITAL

`Capital at the end of the year ...Add: Withdrawal of Capital ... ...Less: Additional Capital introduced during the year ...

Capital in the beginning of the year ...

(b) When Capitals are fluctuating:CALCULATION OF OPENING CAPITAL

`Capital at the end of the year ...Add: Drawings Against Capital (Withdrawal of Capital) ... Drawings Against Profit ... Interest on Drawings ... Share of Loss for the year* ... ...Less: Additional Capital introduced during the year ... Partner’s Salary/Remuneration ... Interest on Capital ... Share of Profit for the year* ... ...Capital in the beginning of the year ...

*Either loss or profit will appear at a time.


Alternatively, Opening Capital can be calculated as Balancing Figure by preparing Capital Account of each partner as follows:Dr. PARTNER’S CAPITAL ACCOUNT Cr.


To Cash/Bank A/c ... By Balance b/d ... (Drawings Against Capital) (Balancing Figure)To Drawings A/c ... By Cash/Bank A/c ... (Drawings Against Profit) (Capital Introduced)To Interest on Drawings A/c ... By Interest on Capital A/c ...To Profit and Loss Appropriation A/c ... By Partner’s Salary/Commission A/c ... (Loss for the year) By Profit and Loss Appropriation A/c ...To Balance c/d (Given) ... (Share of Profit) ... ...

Illustration 18 (Calculation of Opening Capital).A and B are partners in a business and their capitals at the end of the year were ` 7,00,000 and ` 6,00,000 respectively. Calculate their opening capitals on the basis of the following information: (a) Drawings of A and B for the year were ` 75,000 and ` 50,000 respectively. (b) B introduced capital of ` 1,00,000 during the year. (c) Interest on capital credited to the Capital Accounts of A and B were ` 15,000 and

` 10,000 respectively. (d) Interest on drawings debited to the Capital Accounts of A and B were ` 7,500 and

` 5,000 respectively. (e) Share of profit credited to Capital Accounts was ` 1,00,000 each.

Solution: CALCULATION OF OPENING CAPITAL

Particulars A (`) B (`)

Capitals at the end 7,00,000 6,00,000Add: Drawings during the year 75,000 50,000 Interest on Drawings 7,500 5,000 7,82,500 6,55,000Less: Capital Introduced during the year ... 1,00,000 Interest on Capital 15,000 10,000 Share of Profit for the year 1,00,000 1,15,000 1,00,000 2,10,000

Capitals in the beginning 6,67,500 4,45,000

Alternatively, Capital Account of each partner may be prepared as follows:


Particulars A (`) B (`) Particulars A (`) B (`)

To Drawings A/c 75,000 50,000 By Balance b/d 6,67,500 4,45,000To Interest on Drawings A/c 7,500 5,000 (Balancing Figure) To Balance c/d (Given) 7,00,000 6,00,000 By Cash/Bank A/c ... 1,00,000 (Addl. Capital Introduced) By Interest on Capital A/c 15,000 10,000 By Profit and Loss Approp. A/c 1,00,000 1,00,000 (Share of Profit) 7,82,500 6,55,000 7,82,500 6,55,000


Illustration 19 (Calculation of Opening Capital).A and B are partners in a business and their capitals at the end of the year were ` 7,00,000 and ` 6,00,000 respectively. Calculate their opening capitals from the following information: (a) Drawings of A and B for the year were ` 75,000 and ` 50,000 respectively. (b) B introduced capital of ` 1,00,000 during the year. (c) Interest on capital credited to the Capital Accounts of A and B were ` 15,000 and

` 10,000 respectively. (d) Interest on drawings debited to the Capital Accounts of A and B were ` 7,500 and ` 5,000

respectively. (e) Share of loss debited to Capital Account of each Partner was ` 20,000.

Solution: CALCULATION OF OPENING CAPITAL


Capitals at the end 7,00,000 6,00,000Add: Drawings during the year 75,000 50,000 Interest on Drawings 7,500 5,000 Share of Loss for the year 20,000 20,000 8,02,500 6,75,000Less: Capital Introduced during the year ... 1,00,000 Interest on Capital 15,000 15,000 10,000 1,10,000

Capitals in the beginning 7,87,500 5,65,000

Illustration 20 (Calculation of Interest on Capital).A and B started business on 1st April, 2019 with capitals of ̀ 6,00,000 and ̀ 4,00,000 respectively. During the year, A introduced ` 1,00,000 as additional capital on 1st October, 2019. They withdrew ` 50,000 per month against profits. Interest on capital is to be allowed @ 10% per annum.Calculate interest payable to A and B for the year ended 31st March, 2020.

Solution: Interest on A’s Capital: `

Interest on ` 6,00,000 for one year: ` 6,00,000 × 10/100 60,000Interest on ` 1,00,000 for 6 months: ` 1,00,000 × 6/12 × 10/100 5,000(from 1st October, 2019 to 31st March, 2020)

65,000Interest on B’s Capital: Interest on ` 4,00,000 for one year: ` 4,00,000 × 10/100 ` 40,000

Illustration 21.

Ramesh and Naresh are partners in a firm. Their capitals as on 1st April, 2019 were ` 2,50,000 and ` 1,50,000 respectively. They share profits equally. On 1st July, 2019, they decided that their capitals should be ` 2,00,000 each. The necessary adjustment in the capitals were made by introducing or withdrawing capital. Interest on capital is allowed @ 8% p.a. Compute interest on capital for both the partners for the year ended 31st March, 2020.


Solution: Calculation of interest on capital: (i) Interest on Ramesh’s Capital: `

From 1st April, 2019 to 30th June, 2019 (` 2,50,000 × 8/100 × 3/12) 5,000 From 1st July, 2019 to 31st March, 2020 (` 2,00,000 × 8/100 × 9/12) 12,000 17,000 (ii) Interest on Naresh’s Capital: From 1st April, 2019 to 30th June, 2019 (` 1,50,000 × 8/100 × 3/12) 3,000 From 1st July, 2019 to 31st March, 2020 (` 2,00,000 × 8/100 × 9/12) 12,000 15,000Illustration 22.From the following Balance Sheet of X and Y, calculate interest on capital @ 5% p.a. for the year ended 31st March, 2020:



X ’s Capital A/c 90,000 Sundry Assets 2,10,000Y’s Capital A/c 80,000 General Reserve 40,000 2,10,000 2,10,000

During the year ended 31st March, 2020, X’s drawings were ` 10,000 and Y’s drawings were ` 30,000. Profit for the year ended 31st March, 2020 was ` 60,000, out of which ` 40,000 is transferred to General Reserve.Solution:Calculation of Interest on X’s Capital: `X ’s Capital as at 31st March, 2020 90,000Add: Drawings during the year 10,000 1,00,000Less: Profit (added or credited) [1/2 (` 60,000 – ` 40,000)] 10,000Capital as at 1st April, 2019 90,000Interest on capital @ 5% p.a. = ` 90,000 × 5/100 = ` 4,500.Calculation of Interest on Y ’s Capital: `Y’s Capital as at 31st March, 2020 80,000Add: Drawings during the year 30,000 1,10,000Less: Profit (added or credited) [1/2 (` 60,000 – ` 40,000)] 10,000Capital as at 1st April, 2019 1,00,000Interest on Capital @ 5% p.a. = ` 1,00,000 × 5/100 = ` 5,000.

Notes: 1. Capital in the beginning is calculated by adding drawings and deducting profit distributed. 2. Profit during the year was ̀ 60,000 out of which ̀ 40,000 is transferred to Reserve and is shown in the Balance

Sheet. Thus, in effect, only ` 20,000 were distributed which have been deducted. 3. In the absence of any profit-sharing ratio being given, partners will share profit and loss equally.


Illustration 23 (Calculation of Interest on Capital, Drawings Against Profits and Drawings Against Capital).X and Y are partners sharing profits in the ratio of 3 : 2. On 31st March, 2020 after closing the books of account, their capitals are ` 10,00,000 and ` 12,50,000 respectively. On 1st May, 2019, X had introduced an additional capital of ` 2,50,000 and Y withdrew ` 1,25,000 from his capital. On 1st October, 2019, X withdrew ` 5,00,000 from his capital and Y introduced ` 6,25,000. After closing the accounts, it was noticed that Interest on Capital @ 6% p.a. has been omitted. During the year ended 31st March, 2020, X’s drawings and Y’s drawings were ` 2,50,000 and ` 1,25,000. Profits (before interest on Capital) during the year were ` 5,00,000.Calculate Interest on Capital if the capitals are (a) fixed and (b) fluctuating.

Solution:

(a) When Capitals are Fixed:CALCULATION OF OPENING CAPITAL

Particulars X Y ` `

Closing Capital 10,00,000 12,50,000Add: Withdrawal of Capital 5,00,000 1,25,000 15,00,000 13,75,000Less: Additional Capital Introduced 2,50,000 6,25,000

Opening Capital 12,50,000 7,50,000

CALCULATION OF INTEREST ON CAPITAL

X ` Y `

Interest on Opening Capital 75,000 Interest on Opening Capital 45,000(` 12,50,000 × 6/100) (` 7,50,000 × 6/100) Add: Interest on Additional Capital 13,750 Add: Interest on Additional Capital 18,750 (` 2,50,000 × 6/100 × 11/12) (` 6,25,000 × 6/12 × 6/100)

88,750 63,750Less: Interest on Capital Withdrawn 15,000 Less: Interest on Capital Withdrawn 6,875 (` 5,00,000 × 6/100 × 6/12) (` 1,25,000 × 11/12 × 6/100)

73,750 56,875

(b) When Capitals are Fluctuating:CALCULATION OF OPENING CAPITAL

Particulars X Y ` `

Closing Capital 10,00,000 12,50,000Add: Withdrawal of Capital 5,00,000 1,25,000 Drawings 2,50,000 1,25,000 17,50,000 15,00,000Less: Additional Capital Introduced 2,50,000 6,25,000 15,00,000 8,75,000Less: Share of Profit 3,00,000 2,00,000

Opening Capital 12,00,000 6,75,000


CALCULATION OF INTEREST ON CAPITAL

X ` Y `

Interest on Opening Capital 72,000 Interest on Opening Capital 40,500(` 12,00,000 × 6/100) (` 6,75,000 × 6/100) Add: Interest on Additional Capital 13,750 Add: Interest on Additional Capital 18,750 (` 2,50,000 × 6/100 × 11/12) (` 6,25,000 × 6/100 × 6/12)

85,750 59,250Less: Interest on Capital Withdrawn 15,000 Less: Interest on Capital Withdrawn 6,875 (` 5,00,000 × 6/100 × 6/12) (` 1,25,000 × 6/100 × 11/12)

70,750 52,375

Illustration 24 (Transfer of Net Profit to General Reserve).X and Y are partners sharing profits and losses in the ratio of 7 : 3. Their Capital Accounts as at 1st April, 2019 stood at X—` 5,00,000; Y—` 4,00,000. Partners are allowed interest on capital @ 5% p.a. Drawings of the partners during the year ended 31st March, 2020 were ` 72,000 and ` 50,000 respectively. Profit for the year before allowing interest on capital and salary to Y @ ` 5,000 per month was ` 8,00,000. 10% of the net profit is to be set aside as General Reserve.Prepare Profit and Loss Appropriation Account for the year ended 31st March, 2020, and Capital and Current Accounts of the partners.Solution: Dr. PROFIT AND LOSS APPROPRIATION ACCOUNT for the year ended 31st March, 2020 Cr.


To Interest on Capital A/cs: By Profit and Loss A/c 8,00,000 X’s Current A/c 25,000 (Net Profit) Y’s Current A/c 20,000 45,000To Y’s Salary A/c (Y’s Current A/c) 60,000To General Reserve A/c 80,000 (10% of ` 8,00,000)To Profit transferred to: X’s Current A/c (7/10) 4,30,500 Y’s Current A/c (3/10) 1,84,500 6,15,000

8,00,000 8,00,000


Date Particulars X Y Date Particulars X Y ` ` ` `

2020 2019March 31 To Balance c/d 5,00,000 4,00,000 April 1 By Balance b/d 5,00,000 4,00,000


Date Particulars X Y Date Particulars X Y ` ` ` `2020 2020March 31 To Drawings A/c 72,000 50,000 March 31 By Interest on Capital A/c 25,000 20,000March 31 To Balance c/d 3,83,500 2,14,500 March 31 By Y’s Salary A/c ... 60,000 March 31 By Profit and Loss Appropriation A/c (Profit) 4,30,500 1,84,500

4,55,500 2,64,500 4,55,500 2,64,500


Illustration 25 (Transfer of Divisible Profit to General Reserve). X and Y are partners sharing profits and losses in the ratio of 7 : 3. Their Capital Accounts as at 1st April, 2019 stood at X—` 5,00,000; Y—` 4,00,000. Partners are allowed interest on capital @ 5% p.a. Drawings of X and Y during the year ended 31st March, 2020 were ` 72,000 and ` 50,000 respectively. Profit for the year before allowing interest on capital and salary to Y @ ` 5,000 per month was ` 8,00,000. 10% of the divisible profit is to be set aside as General Reserve.Prepare Profit and Loss Appropriation Account.



To Interest on Capital A/cs: By Profit and Loss A/c 8,00,000 X 25,000 (Net Profit) Y 20,000 45,000 To Y’s Salary A/c (Y’s Current A/c) 60,000To General Reserve A/c* 69,500To Profit transferred to: X’s Current A/c 4,37,850 Y’s Current A/c 1,87,650 6,25,500

8,00,000 8,00,000

*Amount transferred to General Reserve = 10% of Divisible Profit

= 10% of ` 6,95,000 (i.e., ` 8,00,000 – ` 25,000 – ` 20,000 – ` 60,000)

= ` 69,500.

4. INTEREST ON PARTNERS’ DRAWINGS

Drawings mean the amount withdrawn, in cash or in kind, by partners for their personal use. Drawings may be out of capital or against profit. Both are discussed below:

Drawings against Capital

Drawings against capital is withdrawal of amount out of his or her capital in the firm. Drawings against capital is debited to his or her Capital Account. It means that the capital is reduced by the amount withdrawn.Interest on capital is allowed on capital for the period it is used in business. As a result of drawings against capital, interest on capital is not allowed to a partner on withdrawn amount.For example, Anmol (partner) has capital of ` 5,00,000 on 1st April, 2019. He withdraws ` 1,00,000 on 1st October, 2019 out of his capital. If the Partnership Deed allows interest on capital @ 10% p.a., Anmol will get interest of ` 45,000 on capital for the year ended 31st March, 2020, calculated as follows:On ` 5,00,000 @ 10 p.a. for 6 months (1st April, 2019 to 30th September, 2019) ` 25,000On ` 4,00,000 (i.e., ` 5,00,000 – ` 1,00,000) @ 10% p.a. for 6 months(1st October, 2019 to 31st March, 2020) ` 20,000Total Interest ` 45,000


Drawings against Profit

Drawings against profit means drawings by a partner against his or her expected share of profit for the year. Drawings against profit is debited to Drawings Account and not to the Capital Account of the partner. Actual share of profit of a partner is known at the end of the year and is the date when it becomes due to the partner. Since, withdrawal is earlier than it is due, the firm charges interest for the period amount is withdrawn by the partner.

Difference between Drawings Against Capital and Drawings Against Profit

Basis Drawings Against Capital Drawings Against Profit

1. Where Debited It is debited to Capital Account. It is debited to Drawings Account.

2. Part It is against capital. It is against expected profit.

3. Effect It reduces capital. It does not reduce capital.

4. Interest on Drawings It is not considered for calculating It is considered for calculating interest on interest on drawings. drawings.

5. Interest on Capital It is considered for calculating interest It is not considered for calculating interest on capital. on capital.

Interest is charged on drawings against expected profit if the Partnership Deed provides for charging interest on drawings. Interest charged on drawings is transferred to Profit and Loss Appropriation Account and debited to Partners’ Capital Accounts (in case of Fluctuating Capital Accounts Method) or Partners’ Current Accounts (in case of Fixed Capital Accounts Method).

Journal entries passed for interest on drawings are:.

Partner’s Capital/Current A/c ...Dr. To Interest on Drawings A/c (Interest charged on drawings)

Interest on Drawings A/c ...Dr. To Profit and Loss Appropriation A/c (Interest on Drawings transferred)

Illustration 26.

Chhavi and Neha were partners in a firm sharing profits and losses equally. Chhavi withdrew a fixed amount at the beginning of each quarter. Interest on drawings is charged @ 6% p.a. At the end of the year, interest on Chhavi’s drawings amounted to ` 900.

Pass necessary Journal entry for charging interest on drawings. (CBSE 2019)

Solution:JOURNAL


Chhavi’s Capital/Current* A/c ...Dr. 900 To Interest on Drawings A/c 900 (Interest on drawings charged)

*In case of Fixed Capitals.


Interest on amount of drawings is charged on the amount of drawings from the date of withdrawal (drawing) till the end of the financial year. Calculation of Interest on DrawingsDrawings by a partner may be broadly divided into: (i) Irregular Drawings: It means drawings of same amount or different amounts at irregular

intervals; and (ii) Regular Drawings: It means drawings of same amount at regular intervals.Interest on Drawings when drawings are made at irregular period or of different amounts, Product Method of calculating interest is followed. And when drawings are made of same amount at regular intervals, interest on drawings is calculated using Average Period Method.The two methods of calculating interest on drawings are: I. Product Method; and II. Average Period Method.Both the methods are discussed below: I. Product Method: When unequal amount is withdrawn at different dates or when there is

irregular drawings, interest on drawings is calculated with the help of Simple Method or Product Method.

Simple Method: Under this method, interest on drawings is calculated for the period the amount is drawn. The interest is calculated with reference to each drawing.

Product Method: Under this method, the amount of drawings is multiplied with the number of months or number of days (as the case is) it is drawn. The product so obtained is totalled and interest is calculated thereon for one month, if the period taken is in months and for one day, if the period taken is in days.

Formula: Interest on Drawings = Total of Product × ¥ ◊Rate of Interest 1 1or

100 12 365

Illustration 27 (Calculation of Interest on Drawings by Simple Method and Product Method).In a partnership, partners are charged interest on drawings @ 15% p.a. During the year ended 31st March, 2020, a partner withdrew as follows:

Date 1st May, 2019 1st August, 2019 30th September, 2019 31st January, 2020 31st March, 2020

Amount (` ) 2,000 5,000 2,000 6,000 2,000

What is the interest chargeable from the partner? Solution: (i) Simple Method

Date Amount (`) No. of Months up to 31st March, 2020 Interest @ 15% (`)

1st May, 2019 2,000 11 275 * 1st August, 2019 5,000 8 500 30th September, 2019 2,000 6 150 31st January, 2020 6,000 2 150 31st March, 2020 2,000 0 0 17,000 1,075

*Interest = ` 2,000 × 15/100 × 11/12 = ` 275.


(ii) Product Method When drawings are made in unequal amounts at different dates, interest on drawings is calculated by Product Method as follows:

A B C D = B × C Date Amount (`) No. of Months up to 31st March, 2020 Product (`)

1st May, 2019 2,000 11 22,000 1st August, 2019 5,000 8 40,000 30th September, 2019 2,000 6 12,000 31st January, 2020 6,000 2 12,000 31st March, 2020 2,000 0 0

17,000 86,000

Interest on ` 86,000 @ 15% p.a. for one month is 86,000 15 1100 12

¥ ¥¥

` = ` 1,075.

II. Average Period Method: This method is used when there is regular drawings or when: (a) the amount of drawings is uniform; and (b) the time interval between the two drawings is also uniform. The formula for calculating interest on drawings under this method is:

Interest on Drawings = Total Drawings × Rate of Interest Average Period*

100 12¥

*Average Period = +Months Left after First Drawing Months Left after Last Drawing2

Let us take Different situations for calculating interest on drawings under this method.Situation 1. If a partner withdraws fixed amount in the beginning of every month, interest

is charged on the whole amount for 6½ months*.

Interest on Drawings = Total Drawings Rate of Interest 6½

100 12¥

¥

*This is the average of months = (12 + 11 + 10 + ... + 1) ÷ 12 = 78 ÷ 12 = 6½ Months.Or

Average Period = 12 Months + 1 Month

2 = 6½ Months.

Situation 2. If a partner withdraws fixed amount at the end of every month, interest is charged for 5½ months (i.e., average period) on the total amount.


100 12¥

¥

Average Period = 11 Months + 0 Month

5½ Months2

= .

Situation 3. If a partner withdraws fixed amount in the middle of every month, interest is charged for 6 months on the total amount.

Interest on Drawings = Total Drawings Rate of Interest 6

100 12¥

¥

Average Period = 11½ Months + ½ Month

6 Months2

= .


Illustration 28 (Interest on Drawings). A partner draws ` 10,000 per month. Under the Partnership Deed, interest on drawings is to be charged @ 15% p.a. Calculate interest if the drawings are made regularly: (i) in the beginning of the month, (ii) in the middle of the month, or (iii) at the end of the month.Solution: Interest in the three situations will be: (i) Total Drawings in the year = ` 1,20,000, Rate of Interest = 15% p.a.

Interest on Drawings = 1

2* 1,20,000 15 6100 12

¥¥

` = ` 9,750.

*Average Period = 12 Months + 1 Month

6½ Months2

= .

(ii) Total Drawings in the year = ` 1,20,000, Rate of Interest = 15% p.a.

Interest on Drawings = 1,20,000 15 6*

100 12¥

¥`

= ` 9,000.

*Average Period = 11½ Months + ½ Month

6 Months2

= .

(iii) Total Drawings in the year = ` 1,20,000, Rate of Interest = 15% p.a.

Interest on Drawings = 1

2*1,20,000 15 5100 12

¥¥

` = ` 8,250.


5½ Months2

= .

Situation 4. If fixed amount is withdrawn in the beginning of each quarter during the year, interest is charged on the whole amount for a period of 7½ months*.


100 12¥

¥

*Average Period = 12 Months 3 Months

2+

= 15 Months

2 = 7½ Months.

Situation 5. If fixed amount is withdrawn in the middle of each quarter during the year, interest is charged on the whole amount for a period of 6 months*.

Interest on Drawings = Total Drawings Rate of Interest 6

100 12¥

¥

*Average Period = +10.5 Months 1.5 Months2

= 12 Months2

= 6 Months.

Situation 6. If fixed amount is withdrawn at the end of each quarter during the year, interest is charged on the whole amount for a period of 4½ months*.


100 12¥

¥


2 =

9 Months2

= 4½ Months.


Interest onDrawings

Illustration 29 (When there is regular Drawings at Quarterly Intervals).

Calculate interest on drawings of Siddhant @ 10% p.a. for the year ended 31st March, 2020 in each of the following alternative cases:

Case 1. If he withdrew ` 60,000 in the beginning of each quarter.

Case 2. If he withdrew ` 60,000 at the end of each quarter.

Case 3. If he withdrew ` 90,000 in the middle of each quarter.

Solution: Total Drawings in Cases 1 and 2 = ` 60,000 × 4 = ` 2,40,000;

Total Drawings in Case 3 = ` 90,000 × 4 = ` 3,60,000.

Case 1 Case 2 Case 3

Average Period = (12 + 3) Months

2 = 7.5 Months =

(9 + 0) Months

2 = 4.5 Months =

(10.5 + 1.5) Months

2 = 6 Months

= ` 2,40,000 × ¥7.5 10

12 100 = ` 2,40,000 × ¥

4.5 10

12 100 = ` 3,60,000 × ¥

6 10

12 100 = ` 15,000 = ` 9,000 = ` 18,000

Situation 7. If fixed amount is withdrawn during 6 months:

(i) In the beginning of each month:

Interest on Drawings = Total Drawings × Rate 3½100 12

¥

(ii) In the middle of each month:

Interest on Drawings = Total Drawings × Rate 3100 12

¥

(iii) At the end of each month:

Interest on Drawings = Total Drawings × Rate 2½100 12

¥

Illustration 30 (When drawings are made only for last 6 months).

A, B and C started a firm on 1st October, 2019 sharing profits equally. A drew regularly ` 4,000 in the beginning of every month for the six months ended 31st March, 2020. B drew regularly ` 4,000 at the end of every month for the six months ended 31st March, 2020. C drew regularly ` 4,000 in the middle of every month for the six months ended 31st March, 2020.

Calculate interest on drawings @ 5% p.a. for the period ended 31st March, 2020.

Solution: Total Drawings of each partner = ` 4,000 × 6 = ` 24,000.

Case 1 Case 2 Case 3

Average Period = (6 + 1) Months

2 = 3.5 Months =

(5 + 0) Months

2 = 2.5 Months =

(5.5 + 0.5) Months

2 = 3 Months

= ` 24,000 × ¥5 3.5

100 12= ` 350 = ` 24,000 × ¥

5 2.5

100 12= ` 250 = ` 24,000 × ¥

5 3

100 12= ` 300

Interest onDrawings


Situation 8. If the date of withdrawal is not given, interest on total drawings for the year is calculated for six months on the average basis.

Illustration 31. Calculate interest on drawings of Rakesh @ 10% p.a. for the year ended 31st March, 2020 in each of the following alternative cases:Case 1. If his drawings during the year were ` 30,000. Case 2. If he withdraws ` 2,500 per month during the year.

Solution:Case 1. Assuming that drawings were made evenly throughout the year, interest on drawings

has been calculated for an average period of 6 months. Interest on Drawings = ` 30,000 × 10/100 × 6/12 = ` 1,500.Case 2. Total Drawings = ` 2,500 × 12 = ` 30,000 Interest on Drawings = ` 30,000 × 10/100 × 6/12 = ` 1,500.

Important Note: If the date of drawings is not given and Accounting period is less than

6 months, then the Interest on Total Drawings is calculated for half of the accounting period.

Situation 9. When the rate of interest is given without the word ‘per annum’ (p.a.), interest is charged without considering the time factor.

Illustration 32. Calculate interest on A’s drawings @ 10% if he withdrew ` 2,50,000 during the year.Solution: Interest on drawings = ` 2,50,000 × 10/100 = ` 25,000.

Normally, interest is calculated on the basis of time amount is used.

Remember: Interest on drawings is an income for the firm and hence is credited to Profit and Loss

Appropriation Account. On the other hand, interest on drawings is a loss to the partner and is debited

to his Capital Account (in case of Fluctuating Capitals) or Current Account (in case of Fixed Capitals).

The Journal entries to record interest on drawings are:

If Partners’ Capital Accounts are fixed. If Partners’ Capital Accounts are fluctuating.

(i) Partners’ Current A/cs ...Dr. (i) Partners’ Capital A/cs ...Dr.

To Interest on Drawings A/c To Interest on Drawings A/c

(Interest charged on partners’ drawings) (Interest charged on partners’ drawings)

(ii) Interest on Drawings A/c ...Dr. (ii) Interest on Drawings A/c ...Dr.

To Profit and Loss Appropriation A/c To Profit and Loss Appropriation A/c

(Interest on drawings transferred to (Interest on drawings transferred to

Profit and Loss Appropriation A/c) Profit and Loss Appropriation A/c)

Alternatively: In place of above two entries, only single Alternatively: In place of above two entries, only single

entry may be passed as follows: entry may be passed as follows:

Partners’ Current A/cs ...Dr. Partners’ Capital A/cs ...Dr.

To Profit and Loss Appropriation A/c To Profit and Loss Appropriation A/c

(Interest charged on drawings of partners) (Interest charged on drawings of partners)


Illustration 33.Arun and Arora were partners in a firm sharing profits in the ratio of 5 : 3. Their fixed capitals on 1st April, 2010 were: Arun ` 60,000 and Arora ` 80,000. They agreed to allow interest on capital @ 12% p.a. and to charge on drawings @ 15% p.a. Profit of the firm for the year ended 31st March, 2011 before all above adjustments was ` 12,600. Drawings made by Arun were ` 2,000 and by Arora ` 4,000 during the year. Prepare Profit and Loss Appropriation Account of Arun and Arora. Show your calculations clearly. The interest on capital will be allowed even if the firm incurs a loss. (CBSE 2012)



To Profit and Loss A/c (Net Loss) (WN 1) 4,200 By Interest on Drawings A/c: Arun’s Current A/c 150 Arora’s Current A/c 300 450 By Net Loss transferred to: Arun’s Current A/c 2,344 Arora’s Current A/c 1,406 3,750 4,200 4,200

Working Notes:

1. Interest on Capitals: Arun Arora

Opening Capital ` 60,000 ` 80,000

Rate of Interest 12% p.a. 12% p.a.

Interest on Capital ` 7,200 ` 9,600

Total Interest on Capital = ` 16,800.

Interest on Capital is a charge against profit and is debited to Profit and Loss Account. Thus, the loss of ` 4,200 (i.e., ` 16,800 – ` 12,600) is transferred to Profit and Loss Appropriation Account.

2. Interest on Drawings: Arun Arora

Amount of Drawings ` 2,000 ` 4,000

Rate of Interest 15% p.a. 15% p.a.

Interest on Drawings (for 6 Months) ` 150 ` 300

Since the dates of drawings are not given, interest will be charged for average period of 6 months.

Illustration 34.A, B, and C are partners in a firm. According to the Partnership Deed, the partners are entitled to draw up to ` 7,000 per month. On the first day of every month A, B and C drew ` 7,000; ` 6,000 and ` 5,000 respectively. Interest on capitals and interest on drawings are fixed @ 8% p.a. and 10% p.a. respectively. Profit for the year ended 31st March, 2020 was ̀ 7,55,000 out of which ̀ 2,00,000 are to be transferred to General Reserve. B and C are to get salary of ̀ 30,000 and ` 45,000 p.a. respectively and A is to receive commission @ 10% on distributable profits after charging such commission. On 1st April, 2019, balances of their Capital Accounts were ` 5,00,000, ` 4,00,000 and ` 3,50,000 respectively.

Prepare Profit and Loss Appropriation Account for the year ended 31st March, 2020 and Capital Accounts of Partners in the books of the firm.




To General Reserve A/c 2,00,000 By Profit and Loss A/c (Net Profit) 7,55,000

To Interest on Capital A/cs: By Interest on Drawings A/cs (WN 1):

A (` 5,00,000 × 8/100) 40,000 A (` 84,000 × 10/100 × 13/24) 4,550

B (` 4,00,000 × 8/100) 32,000 B (` 72,000 × 10/100 × 13/24) 3,900

C (` 3,50,000 × 8/100) 28,000 1,00,000 C (` 60,000 × 10/100 × 13/24) 3,250 11,700

To Partners’ Salaries A/cs:

B 30,000

C 45,000 75,000

To A’s Commission A/c (WN 2) 35,609


A’s Capital A/c 1,18,697

B’s Capital A/c 1,18,697

C’s Capital A/c 1,18,697 3,56,091

7,66,700 7,66,700


Particulars A (`) B (`) C (`) Particulars A (`) B (`) C (`)

To Drawings A/c 84,000 72,000 60,000 By Balance b/d 5,00,000 4,00,000 3,50,000To Interest on Drawings A/c 4,550 3,900 3,250 By Interest on Capital A/c 40,000 32,000 28,000To Balance c/d 6,05,756 5,04,797 4,78,447 By Partners’ Salaries A/c ... 30,000 45,000 By A’s Commission A/c 35,609 ... ... By Profit and Loss Appropriation A/c 1,18,697 1,18,697 1,18,697

6,94,306 5,80,697 5,41,697 6,94,306 5,80,697 5,41,697

Working Notes:

1. When partners withdraw uniform amount in the beginning of every month, interest is charged on the total amount of drawings at an agreed rate for 6½ months.

2. A’s Commission = 10/110 × (` 7,55,000 + ` 11,700 – ` 2,00,000 – ` 1,00,000 – ` 75,000) = ` 35,609.

3. Unless otherwise stated in the Deed, profit of the year is divided equally among partners.

Illustration 35. On 1st April, 2019, Precious, Noble and Perfect entered into partnership with capitals of ` 60,000, ` 50,000 and ` 30,000 respectively.Perfect advanced ` 10,000 as loan to the partnership firm on 1st October, 2019. The Partnership Deed has the following clauses: (i) Interest on capital is to be allowed @ 6% p.a. (ii) Interest on drawings is to be charged @ 6% p.a. Each partner withdrew ` 4,000 at the end

of each quarter commencing from 30th June, 2019. (iii) Working partners Precious and Noble to get salary of ` 200 and ` 300 per month

respectively. (iv) Interest on loan was allowed to Perfect @ 6% p.a.


(v) Noble is to get rent of ` 2,000 per month for use of his building by the firm. It is paid to him by cheque at the end of every month.

(vi) Profits are shared in the ratio of 4 : 2 : 1 up to ` 70,000 and above ` 70,000 equally.Profit of the firm for the year ended 31st March, 2020 (before the above adjustments) was ̀ 1,35,000.Prepare Profit and Loss Appropriation Account and Capital Accounts of Partners if capitals are fixed.Solution: PROFIT AND LOSS APPROPRIATION ACCOUNTDr. for the year ended 31st March, 2020 Cr.


To Interest on Capital A/cs: By Profit and Loss A/c (Net Profit) 1,10,700 Precious 3,600 [` 1,35,000 – ` 24,000 (rent) – Noble 3,000 ` 300 (Interest on Loan)] Perfect 1,800 8,400 By Interest on Drawings A/cs (Note): To Partner’s Salaries A/c: Precious 360 Precious 2,400 Noble 360 Noble 3,600 6,000 Perfect 360 1,080To Profit* transferred to Current A/cs: Precious 49,127 Noble 29,127 Perfect 19,126 97,380

1,11,780 1,11,780

*Appropriation of Divisible Profit: Precious (`) Noble (`) Perfect (`)Profit of ` 70,000 in the ratio of 4 : 2 : 1 40,000 20,000 10,000Balance Profit ` 27,380 in the ratio of 1 : 1 : 1 9,127 9,127 9,126 49,127 29,127 19,126


Particulars Precious Noble Perfect Particulars Precious Noble Perfect ` ` ` ` ` `

To Balance c/d 60,000 50,000 30,000 By Bank A/c 60,000 50,000 30,000


Particulars Precious Noble Perfect Particulars Precious Noble Perfect

` ` ` ` ` `

To Drawings A/c 16,000 16,000 16,000 By Interest on Capital A/c 3,600 3,000 1,800To Interest on Drawings A/c 360 360 360 By Partner’s Salaries A/c 2,400 3,600 ... (Note) By P & L App. A/c (Profit) 49,127 29,127 19,126To Balance c/d 38,767 19,367 4,566

55,127 35,727 20,926 55,127 35,727 20,926

Notes: 1. When fixed amount is withdrawn at the end of each quarter during the year, interest will be charged on the

whole amount for average period of 4½ months. Thus, interest on drawings to be charged from each partner will be:

Total Drawings × Rate of Interest 4½

×100 12

= ` 16,000 × 9/2 × 1/12 × 6/100 = ` 360.

2. Interest on Loan from Perfect and rent payable to Noble are charges against profit.


At the time of calculating interest on drawings, remember the following: 1. When a partner withdraws fixed amount in the beginning of every month, interest is

charged on the total amount of drawings for 6½ months at an agreed rate per annum. 2. When a partner withdraws fixed sum in the middle of every month, interest is charged on

the total amount of drawings for 6 months at an agreed rate per annum. 3. When a partner withdraws fixed sum at the end of every month, interest is charged on

the total amount of drawings for 5½ months at an agreed rate per annum. 4. When a partner withdraws fixed sum in the beginning of each quarter, interest is charged

on the total amount of drawings for a period of 7½ months at an agreed rate per annum. 5. When a partner withdraws fixed sum in the middle of each quarter, interest is charged on

the total amount of drawings for a period of 6 months at an agreed rate per annum. 6. When a partner withdraws fixed sum at the end of each quarter, interest is charged on the

total amount of drawings for a period of 4½ months at an agreed rate per annum. 7. When a partner withdraws unequal amount on different dates, interest is calculated using

Simple Method or Product Method. 8. When dates of drawings are given and the interest is to be charged at an agreed rate per

annum, interest is calculated on the basis of time. 9. If date of withdrawal is not given, the interest on total drawings for the year is calculated

for six months on the average basis. 10. When rate of interest is given without the word ‘per annum’, interest is charged without

considering the time factor.

5. PAST ADJUSTMENTS (ADJUSTMENTS FOR INCORRECT APPROPRIATIONS OF PROFITS IN PAST) AFTER CLOSING THE BOOKS

Sometimes after closing the accounts of a partnership firm, i.e., preparing the financial statements, some errors or omissions in the accounts of the earlier years are noticed. For example, interest on capital or drawings is omitted, allowed or charged at higher or lower rate, profits or losses are distributed among the partners in a wrong ratio and so on. These errors and omissions are rectified by adjusting the Capital Accounts of the affected partners by passing (a) an adjustment entry, or (b) adjustment entries.(A) When an Adjustment Entry (Single Adjustment Entry) is passed: In this case, net effect

of the errors is determined and an adjustment entry is passed by debiting and crediting the Partners’ Capital/Current Accounts.

Let us take an example to understand it better. Following is the Profit and Loss Appropriation Account of a firm in which A, B and C are equal partners:



To Profit transferred to: By Profit and Loss A/c—Net Profit 3,00,000 A’s Capital A/c 1,00,000 B’s Capital A/c 1,00,000 C’s Capital A/c 1,00,000 3,00,000

3,00,000 3,00,000

After preparing the financial statements, it was noticed that interest on capital was not allowed to A—` 12,000, B —` 9,600 and C—` 10,500 and also interest was not charged on drawings of A and B amounting to ` 1,200 and ` 900 respectively.


Correct Profit and Loss Appropriation Account giving effect to the above omissions would have been as follows:



To Interest on Capital A/cs: By Profit and Loss A/c—Net Profit 3,00,000 A 12,000 By Interest on Drawings A/cs: B 9,600 A 1,200 C 10,500 32,100 B 900 2,100To Profit transferred to: A’s Capital A/c 90,000 B’s Capital A/c 90,000 C’s Capital A/c 90,000 2,70,000

3,02,100 3,02,100

From the corrected Profit and Loss Appropriation Account, following is observed:

A’s Capital A/c B’s Capital A/c C’s Capital A/c

I. Credited Short for Interest on Capitals ` 12,000 ` 9,600 ` 10,500

II. Debited Short for Interest on Drawings (` 1,200) (` 900) —

III. Credited Excess as Share of Profit (` 10,000) (` 10,000) (` 10,000) [` 32,100 (Interest on Capital) – ` 2,100 (Interest on Drawings) Equally]

Net Effect ` 800 (` 1,300) ` 500

Short Credited Excess Credited Short Credited

An adjustment entry rectifying the above errors can be passed as follows:


2020 March 31 B’s Capital A/c ...Dr. 1,300 To A’s Capital A/c 800 To C’s Capital A/c 500 (Interest on capital not allowed and Interest on drawings not charged, now adjusted)

Alternatively, a table can be prepared by following the below specified procedure for determining the net effect of the past adjustments and passing the adjustment entry:Step 1: Prepare an analytical table with one column for particulars, one for each partner

separately and one for the firm. The columns for the partners and the firm are divided into two parts—debit and credit. An outlay of the Analytical Table is as follows:

Particulars A’s Capital/Current* A/c B’s Capital/Current* A/c C’s Capital/Current* A/c Firm (Profit and Loss Adjustment Account)

Dr. (`) Cr. (`) Dr. (`) Cr. (`) Dr. (`) Cr. (`) Dr. (`) Cr. (`)

Interest on Capital ... ... ... ...Interest on Drawings ... ... ... ...

*In case of fixed capitals.


Step 2: Calculate interest on capital earlier omitted. Place interest due to individual Partners in their respective credit columns and total interest so omitted in the debit column of the firm (as it is an expense for the firm).

Step 3: Calculate interest on drawings earlier omitted to be considered. Place interest due from individual partners in their respective debit columns and total interest so omitted in the credit column of the firm (as it is an income for the firm).

Step 4: Repeat the process for any other expense or income omitted.Step 5: Find out balance of the columns designed for the firm. This will disclose net profit

or net loss.Step 6: Divide profit or loss (as per Step 5 above) among the partners in their profit-sharing ratio.Step 7: Find the balance of each partner separately. In case one partner has debit balance,

the other partner must have credit balance of the same amount.Step 8: Pass Adjustment Journal entry with the amounts determined as per Step 7.Note: If adjustments are to be made for more than one year, then ascertain the consolidated position and

then pass the required Journal entry.

Illustration 36.P and Q were partners in a firm sharing profits equally. Their fixed capitals were ` 1,00,000 and ` 50,000 respectively. The Partnership Deed provided for Interest on Capital at the rate of 10% per annum. For the year ended 31st March, 2016, the profits of the firm were distributed without providing Interest on Capital.Pass necessary adjustment entry to rectify the error. (Delhi 2017)

Solution: ADJUSTMENT ENTRY


2016March 31 Q’s Current A/c ...Dr. 2,500 To P’s Current A/c 2,500

(Adjustment of omission of Interest on Capital)

Working Notes:

1. Calculation of Interest on Capital:

P = ` 1,00,000 × 10/100 = ` 10,000; Q = ` 50,000 × 10/100 = ` 5,000.

Total Interest on Capital = ` 10,000 + ` 5,000 = ` 15,000.

The above interest on capital has not been credited to the partners. It is to be credited to the Partners’ Current Accounts resulting in a loss of ̀ 15,000 to the firm, which is to be debited to the partners in their profit-sharing ratio, i.e., equally.

2. Statement Showing the Adjustment for Interest on Capital and its effect:

Particulars P’s Current A/c Q’s Current A/c Firm

Dr. (`) Cr. (`) Dr. (`) Cr. (`) Dr. (`) Cr. (`)

I. Interest on Capital (WN 1) ... 10,000 ... 5,000 15,000 ... II. For Sharing the above loss (Equally) 7,500 ... 7,500 ... ... 15,000 7,500 10,000 7,500 5,000 15,000 15,000

Balance to be adjusted (Net effect) 2,500 (Cr.) 2,500 (Dr.) Nil


Illustration 37. A and B are partners in a firm sharing profits and losses in the ratio of 3 : 2. Following was the Balance Sheet of the firm as at 31st March, 2020:Liabilities ` Assets `

Capital A/cs: Sundry Assets 80,000A 60,000B 20,000

80,000 80,000

Profit ` 30,000 for the year ended 31st March, 2020 was divided between the partners without allowing interest on capitals @ 12% p.a. and salary to A @ ` 1,000 per month. During the year, A withdrew ` 10,000 and B ` 20,000. Pass necessary adjustment Journal entry and show your working clearly. (Delhi 2011, Modified)



2020March 31 B ’s Capital A/c ...Dr. 5,280 To A’s Capital A/c 5,280 (Interest on capitals and salary to A not allowed, now adjusted) (WN)

Working Notes:

1. Calculation of Opening Capital:


Closing Capital 60,000 20,000Less: Profit already credited (3 : 2) 18,000 12,000 42,000 8,000Add: Drawings already debited 10,000 20,000

Capital in the beginning 52,000 28,000

2. TABLE SHOWING ADJUSTMENT TO BE MADE

Particulars A’s Capital A/c B ’s Capital A/c Firm Dr. (`) Cr. (`) Dr. (`) Cr. (`) Dr. (`) Cr. (`)

I. Interest on Capital ... 6,240 ... 3,360 9,600 ... II. Salary to A ... 12,000 ... ... 12,000 ... III. Loss to be Debited (3 : 2) 12,960 ... 8,640 ... ... 21,600

12,960 18,240 8,640 3,360 21,600 21,600

Net Balance (Effect) 5,280 (Cr.) 5,280 (Dr.) Nil

Illustration 38 (Profits Apportioned without Providing for Interest on Capital and Interest on Drawings). Mannu and Shristhi are partners in a firm sharing profits in the ratio of 3 : 2. Following is the Balance Sheet of the firm as on 31st March, 2020: BALANCE SHEET as at 31st March, 2020


Mannu’s Capital 30,000 Drawings:Shristhi’s Capital 10,000 40,000 Mannu 4,000 Shristhi 2,000 6,000 Other Assets 34,000 40,000 40,000


Profit for the year ended 31st March, 2020 was ` 5,000 which was divided in the agreed ratio, but interest @ 5% p.a. on capital and 6% p.a. on drawings was inadvertently omitted. Adjust interest on drawings on an average basis for 6 months. Give the adjustment entry. (NCERT, Modified Years)



2020March 31 Shristhi’s Capital A/c ...Dr. 288 To Mannu’s Capital A/c 288 (Adjustment entry passed for omission of interest on capital and drawings)

Working Notes:

1. For the calculation of Interest on Capital, opening capital is calculated.

CALCULATION OF OPENING CAPITAL AND INTEREST THEREON

Particulars Mannu Shristhi ` `

Closing Capital 30,000 10,000Add: Drawings already debited* ... ... 30,000 10,000Less: Profit of ` 5,000 already credited in 3 : 2 3,000 2,000Opening Capital 27,000 8,000

Interest on Capital @ 5% per annum ` 27,000 × 5/100 = ` 1,350 ` 8,000 × 5/100 = ` 400

* For calculating opening capital, drawings are added. However, drawings of Mannu and Shristhi appear in the Balance Sheet. It means that their Capital Accounts have not been adjusted for their drawings. Therefore, their drawings have not been added back.

2. Calculation of Interest on Drawings: Dates of drawings are not given. Therefore, interest on drawings will be charged for the average period, i.e., 6 months.

Interest on Drawings: Mannu = ` 4,000 × 6/12 × 6/100 = ` 120; Shristhi = ` 2,000 × 6/12 × 6/100 = ` 60.

3. ADJUSTMENT TABLE

Particulars Mannu’s Capital A/c Shristhi’s Capital A/c Firm Dr. (`) Cr. (`) Dr. (`) Cr. (`) Dr. (`) Cr. (`)

I. Interest on Capital not yet credited ... 1,350 ... 400 1,750 ... II. Interest on Drawings not yet debited 120 ... 60 ... ... 180 III. Profit after Interest on Capital and Interest on Drawings ` 3,430 (i.e., ` 5,000 – ` 1,750 + ` 180) to be credited in the ratio of 3 : 2 ... 2,058 ... 1,372 3,430 ... IV. Profit of ` 5,000 already distributed now taken back (debited) 3,000 ... 2,000 ... ... 5,000 3,120 3,408 2,060 1,772 5,180 5,180

Net Effect 288 (Cr.) 288 (Dr.) Nil

Illustration 39. On 31st March, 2014, balances in the Capital Accounts of Eleen, Monu and Ahmad after making adjustments for profits and drawings were ` 1,60,000, ` 1,20,000 and ` 80,000 respectively. Subsequently, it was discovered that the interest on capital and drawings had been omitted. (i) Profit for the year ended 31st March, 2014 was ` 40,000.


(ii) During the year, Eleen and Monu each withdrew a total sum of ̀ 24,000 in equal instalments in the beginning of each month and Ahmad withdrew a total sum of ` 48,000 in equal instalments at the end of each month.

(iii) The interest on drawings was to be charged @ 5% p.a. and interest on capital was to be allowed @ 10% p.a.

(iv) The profit-sharing ratio among the partners was 2 : 1 : 1.

Showing your working notes clearly, pass the necessary rectifying entry. (Delhi 2015 C)

Solution: RECTIFYING ENTRY


2014 Eleen’s Capital A/c ...Dr. 3,850March 31 To Monu’s Capital A/c 2,950 To Ahmad’s Capital A/c 900 (Rectifying entry passed for correct profits)

Working Notes:

1. Calculation of Opening Capital and Interest thereon:

Particulars Eleen (`) Monu (`) Ahmad (`)

A. Closing Capital 1,60,000 1,20,000 80,000B. Add: Drawings already Debited 24,000 24,000 48,000 1,84,000 1,44,000 1,28,000C. Less: Profit already Credited 20,000 10,000 10,000D. Opening Capital 1,64,000 1,34,000 1,18,000

E. Interest on Capital ` 1,64,000 × 10/100 ` 1,34,000 × 10/100 ` 1,18,000 × 10/100 = ` 16,400 = ` 13,400 = ` 11,800

Total Interest on Capital = ` 16,400 + ` 13,400 + ` 11,800 = ` 41,600.

2. Interest on Drawings (For Eleen and Monu 6.5 Months and for Ahmad 5.5 Months):

Eleen = ` 24,000 × ¥5 13

100 24= ` 650

Monu = ` 24,000 × ¥5 13

100 24 = ` 650

Ahmad = ` 48,000 × ¥5 11

100 24 = ` 1,100

Total Interest on Drawings = ` 2,400

3. STATEMENT SHOWING ADJUSTMENT TO BE MADE

Particulars Eleen’s Capital A/c Monu’s Capital A/c Ahmad’s Capital A/c Firm Dr. (`) Cr. (`) Dr. (`) Cr. (`) Dr. (`) Cr. (`) Dr. (`) Cr. (`)

I. For Interest on Capital ... 16,400 ... 13,400 ... 11,800 41,600 – II. For Interest on Drawings 650 ... 650 ... 1,100 ... ... 2,400 III. For Profit to be Shared ` 800 (i.e., ` 40,000 – ` 41,600 + ` 2,400) in the ratio of 2 : 1 : 1 ... 400 ... 200 ... 200 800 ... IV. Profit of ` 40,000 already distributed in the ratio of 2 : 1 : 1, now reversed 20,000 ... 10,000 ... 10,000 ... ... 40,000 20,650 16,800 10,650 13,600 11,100 12,000 42,400 42,400

Net Effect 3,850 (Dr.) 2,950 (Cr.) 900 (Cr.) ...


Illustration 40 (Omission of Interest on Capital when Fixed Capitals are given). X, Y and Z are partners. They have omitted interest on capital @ 10% p.a. for three years ended 31st March, 2020. Their fixed capitals on which interest was to be calculated throughout were: X—` 10,000; Y—` 8,000 and Z—` 7,000. Their profit-sharing ratios for the years ended 31st March, were: 2018—1 : 2 : 2; 2019—5 : 3 : 2; 2020—4 : 5 : 1. The firm earned profit of ` 2,500 in each year. Pass necessary adjustment Journal entry.



2020March 31 Y’s Current A/c ...Dr. 600 To X’s Current A/c 250 To Z’s Current A/c 350 (Interest on capital omitted to be provided, now adjusted)

Working Notes:

1. Interest on capital @ 10% p.a: X—` 1,000; Y—` 800 and Z—` 700.

The above interest on capital ` 2,500 (i.e., ` 1,000 + ` 800 + ` 700) has not been credited to the partners. Now, it is to be credited to the Partners’ Current Accounts resulting in a loss of ` 2,500 to the firm which is to be debited to the partners in their profit-sharing ratio.

2. STATEMENT SHOWING THE ADJUSTMENT TO BE MADE

Particulars X Y Z ` ` `

I. Amount already credited as Share of Profit: for the year ended 31st March, 2018 500 1,000 1,000 for the year ended 31st March, 2019 1,250 750 500 for the year ended 31st March, 2020 1,000 1,250 250

...Dr. 2,750 3,000 1,750

II. Amount which should have been credited as Interest on Capital: for the year ended 31st March, 2018 1,000 800 700 for the year ended 31st March, 2019 1,000 800 700 for the year ended 31st March, 2020 1,000 800 700

...Cr. 3,000 2,400 2,100

III. Difference (I – II) 250 (Cr.) 600 (Dr.) 350 (Cr.)

Note: Since capitals of the partners are fixed, adjustment entry will be passed through Partners’ Current Accounts.

Illustration 41 (Interest on Capital Provided at a Higher Rate).X, Y and Z are partners in a firm sharing profits and losses in the ratio of 5 : 3 : 2. Their fixed capitals were ` 3,00,000; ` 2,00,000 and ` 1,00,000 respectively. For the year ended 31st March, 2020, interest on capital was credited to them @ 10% p.a. instead of 8% p.a.Showing your working notes clearly, pass necessary adjustment Journal entry.



2020 April 1 Y’s Current A/c ...Dr. 400 To Z’s Current A/c 400 (Interest on capital excessive charged, now rectified)


Working Note: TABLE SHOWING THE ADJUSTMENT TO BE MADE

Particulars X’s Current A/c Y’s Current A/c Z’s Current A/c Firm


I. Interest on Capital wrongly credited @ 10% p.a., now reversed 30,000 ... 20,000 ... 10,000 ... ... 60,000

II. Interest on Capital credited @ 8% p.a. ... 24,000 ... 16,000 ... 8,000 48,000 ...

III. Profit* credited to partners in 5 : 3: 2 ... 6,000 ... 3,600 ... 2,400 12,000 ...

Total 30,000 30,000 20,000 19,600 10,000 10,400 60,000 60,000

Net Balance (Effect) ... 400 Dr. 400 Cr. ...

*Low rate of interest on capital will increase the profit of the firm by ` 12,000 (i.e., ` 60,000 – ` 48,000) which is divisible

among partners.

Illustration 42 (Rectification of Interest on Capital less Allowed). A, B and C are partners in a firm sharing profits in the ratio of 2 : 2 : 1. Their capitals (fixed) are ` 1,00,000; ` 80,000 and ` 70,000 respectively. For the year ended 31st March, 2020, interest on capital was credited to them @ 9% p.a. instead of 12%. Give the adjustment Journal entry.



2020April 1 B’s Current A/c ...Dr. 600 To C’s Current A/c 600 (Interest less charged on capital, now rectified)

Working Note:

Interest on capital has been credited @ 9% instead of 12%. So, interest @ 3% should be credited to partners and the total of this should be debited to partners in their profit-sharing ratio because firm’s profit is reduced up to that extent.

TABLE SHOWING ADJUSTMENT TO BE MADE

Partners Amount that should be credited (Cr.) Amount that should be debited (Dr.) Net Effect

A (` 1,00,000 × 3/100) = ` 3,000 (` 7,500 × 2/5) = ` 3,000 ... B (` 80,000 × 3/100) = ` 2,400 (` 7,500 × 2/5) = ` 3,000 ` 600 Dr. C (` 70,000 × 3/100) = ` 2,100 (` 7,500 × 1/5) = ` 1,500 ` 600 Cr.

` 7,500 ` 7,500

Illustration 43 (Interest on Capital Wrongly Provided in the Accounts). A, B and C are partners in a firm. Partnership Deed does not provide for interest on capital, still it was credited to Partners’ Capital Accounts @ 5% p.a. for the two years ended 31st March, 2019 and 31st March, 2020. Their fixed capitals on which interest was calculated throughout were: A—` 50,000; B—` 40,000 and C—` 30,000.During the two years ended 31st March, they shared profits as follows: 2019—5 : 3 : 2; and 2020—2 : 2 : 1.You are required to pass an adjustment entry as at 1st April, 2020.




2020April 1 C’s Current A/c ...Dr. 600 To A’s Current A/c 400 To B’s Current A/c 200 (Interest on capital wrongly provided in the accounts for two years, now adjusted)

Working Note: STATEMENT SHOWING THE ADJUSTMENT TO BE MADE

Partners 31st March, 2019 31st March, 2020 (c + f )

(a) (b) (c = a + b) (d) (e) (f = d + e) Net

Interest Profit Adjustment Interest Profit Adjustment Adjustments on on Capital (`) ` ` Capital (`) ` ` `

A – 2,500 + 3,000 (5/10) + 500 – 2,500 + 2,400 (2/5) – 100 + 400 (Cr.) B – 2,000 + 1,800 (3/10) – 200 – 2,000 + 2,400 (2/5) + 400 + 200 (Cr.) C – 1,500 + 1,200 (2/10) – 300 – 1,500 + 1,200 (1/5) – 300 – 600 (Dr.) – 6,000 6,000 ... – 6,000 6,000 ... ...

Note: Since interest on capital was allowed, profit decreased by the total amount of interest. Interest allowed was taken by the partners in their profit-sharing ratio. Therefore, interest on capital should be written back and profit (i.e., total amount of interest) should be credited to partners in their profit-sharing ratio.

Illustration 44. A, B and C were partners in a firm. On 1st April, 2018, their capitals stood at ` 4,00,000, ` 3,00,000 and ` 2,00,000 respectively. As per the provisions of the Partnership Deed: (i) A was entitled to a salary of ` 5,000 per month. (ii) Partners were entitled to interest on capital @ 10% p.a.The net profit for the year ended 31st March, 2019, ` 3,00,000 was divided among the partners without providing for the above items. Showing your working clearly, pass an adjustment entry to rectify the above error. (CBSE 2019 C)Solution: ADJUSTMENT ENTRY


2019 March 31 B’s Capital A/c ...Dr. 20,000 C’s Capital A/c ...Dr. 30,000 To A’s Capital A/c 50,000 (Omission of interest on capital and salary, now rectified)

Working Note: TABLE SHOWING THE ADJUSTMENT TO BE MADEParticulars A’s Capital A/c B’s Capital A/c C’s Capital A/c Firm Dr. (`) Cr. (`) Dr. (`) Cr. (`) Dr. (`) Cr. (`) Dr. (`) Cr. (`) 1. Profit already distributed, now taken back (1 : 1 : 1) 1,00,000 ... 1,00,000 ... 1,00,000 ... ... 3,00,000 2. Profit as should be distributed: —Salary ... 60,000 ... ... ... ... 60,000 ... —Interest on Capital ... 40,000 ... 30,000 ... 20,000 90,000 ... —Profit of ` 1,50,000 (i.e., ` 3,00,000 – ` 60,000 – ` 90,000) in 1 : 1 : 1 ... 50,000 ... 50,000 ... 50,000 1,50,000 ... 1,00,000 1,50,000 1,00,000 80,000 1,00,000 70,000 3,00,000 3,00,000

3. Net Effect (Dr./Cr.) 50,000 (Cr.) 20,000 (Dr.) 30,000 (Dr.) ...


Illustration 45 (Interest on Capitals and Salary/Commission not Allowed to Partners, Profit Distributed in Wrong Ratio).A, B and C were partners. Their capitals were A—` 30,000; B—` 20,000 and C—` 10,000 respectively. According to the Partnership Deed, they were entitled to an interest on capital at 5% p.a. In addition, B was also entitled to draw a salary of ` 500 per month. C was entitled to a commission of 5% on the profits after charging interest on capital, but before charging salary payable to B. Net profit for the year was ` 30,000 distributed in the ratio of capitals without providing for any of the above adjustments. The profits were to be shared in the ratio of 5 : 2 : 3. Pass necessary adjustment entry showing the workings clearly. (Delhi 2010)



A’s Current A/c ...Dr. 3,675 To B ’s Current A/c 930 To C’s Current A/c 2,745 (Adjustment entry passed for wrong appropriation)

Working Notes:

1. It is presumed that capitals of the partners are fixed. As a result, interest on capitals has been calculated on given balances of capitals.

` 2. Net Profit 30,000 Less: Interest on Capital (` 1,500 + ` 1,000 + ` 500) 3,000

Profit after Charging Interest on Capital 27,000

C’s Commission = 5/100 × ` 27,000 = ` 1,350.

3. TABLE SHOWING ADJUSTMENT TO BE MADE

Particulars A B C ` ` `

I. Profit wrongly credited, now reversed (Dr.) 15,000 10,000 5,000

II. Amount which should have been credited: Interest on Capital 1,500 1,000 500 Salary ... 6,000 ... Commission (WN 2) ... ... 1,350 Net Divisible Profit* Distributed (5 : 2 : 3) 9,825 3,930 5,895

(Cr.) 11,325 10,930 7,745

III. Net Effect (I – II) 3,675 (Dr.) 930 (Cr.) 2,745 (Cr.)

*Divisible Profit = ` 30,000 – ` 3,000 (interest on capitals) – ` 6,000 (B’s Salary) – ` 1,350 (C’s Commission) = ` 19,650.

Illustration 46 (Interest on Capitals Allowed at Lower Rate When the Capitals are Fluctuating and Distribution of Profit in Wrong Ratio). The capitals of X,Y and Z as on 31st March, 2020 amounted to ` 1,50,000, ` 5,50,000 and ` 11,00,000 respectively. Divisible profit amounting to ` 3,00,000 for the year ended 31st March, 2020 was distributed in the ratio of 4 : 1 : 1 after allowing interest on capital @ 10% p.a. During the year, each partner withdrew ` 50,000 per month in the beginning of each month. The Partnership Deed was silent as to profit-sharing ratio and interest on drawings but provided for interest on capital @ 12% p.a. Showing your workings, pass the necessary adjustment entry to rectify the above error.




2020March 31 X’s Capital A/c ...Dr. 1,10,000 To Y’s Capital A/c 50,000 To Z’s Capital A/c 60,000 (Interest on capital allowed at lower rate and profits distributed in wrong ratio, now rectified)

Working Notes:

1. Calculation of Interest on Capital already provided and Opening Capital:

Particulars X (`) Y (`) Z (`)

A. Closing Capital 1,50,000 5,50,000 11,00,000B. Add: Drawings already debited (` 50,000 × 12) 6,00,000 6,00,000 6,00,000 7,50,000 11,50,000 17,00,000C. Less: Profit already credited (4 : 1 : 1) 2,00,000 50,000 50,000D. Opening Capital Plus Interest on Capital 5,50,000 11,00,000 16,50,000E. Less: Interest on Capital (D × 10/110) 50,000 1,00,000 1,50,000F. Opening Capital (D – E) 5,00,000 10,00,000 15,00,000

2. ADJUSTMENT TABLE

Particulars X’s Capital A/c Y’s Capital A/c Z’s Capital A/c Firm


I. Amount already credited, now taken back: • Interest on Capital @ 10% p.a. 50,000 ... 1,00,000 ... 1,50,000 ... ... 3,00,000 • Share of Profit (4 : 1 : 1) 2,00,000 ... 50,000 ... 50,000 ... ... 3,00,000

II. Amount which should have been credited: • Interest on Capital @ 12% p.a. ... 60,000 ... 1,20,000 ... 1,80,000 3,60,000 ... • Share of Profit* Credited to Partners In the ratio of 1 : 1 : 1 ... 80,000 ... 80,000 ... 80,000 2,40,000 ...

2,50,000 1,40,000 1,50,000 2,00,000 2,00,000 2,60,000 6,00,000 6,00,000III. Net Effect (Dr. – Cr.) 1,10,000 (Dr.) 50,000 (Cr.) 60,000 (Cr.) Nil

*` 2,40,000 (i.e., ` 3,00,000 + ` 3,00,000 – ` 3,60,000).

(B) When Adjustment Journal Entries (in Place of one Adjustment Entry) are passed: In this situation, analytical table to determine the net effect of all the adjustments is not prepared instead Journal entries are passed for each error or omission by debiting or crediting Profit and Loss Adjustment Account. After passing the entries for adjustment of errors and omissions, Profit and Loss Adjustment Account is closed by debiting or crediting (as the situation is) with the corresponding credit or debit to the Partners’ Current Accounts, if Fixed Capital Accounts Method is followed or Partners’ Capital Accounts, if Fluctuating Capital Accounts Method is followed.


Accounting EntriesFollowing Journal entries shall be passed through Profit and Loss Adjustment Account: (i) Adjustment entries for the items which are to be credited to the Partners’ Capital/Current Accounts: Profit and Loss Adjustment A/c ...Dr. To Partners’ Capital/Current A/cs (Adjustment made for previously omitted, now recorded)

(ii) Adjustment entries for the items which are to be debited to the Partners’ Capital/Current Accounts: Partners’ Capital/Current A/cs ...Dr. To Profit and Loss Adjustment A/c (Adjustment made for previously omitted, now recorded)

(iii) For Net Profit/Loss due to above adjustments: (a) For Profit Profit and Loss Adjustment A/c ...Dr. To Partners’ Capital/Current A/cs (Profit on adjustment credited to Partners’ Capital/Current Accounts)

(b) For Loss Partners’ Capital/Current A/cs ...Dr. To Profit and Loss Adjustment A/c (Loss on adjustment transferred to Partners’ Capital/Current Accounts)

Note: If capitals of the partners are fixed, adjustment entries are passed through Partners’ Current Accounts.

Illustration 47. P, Q and R are partners in a firm. Their Capital Accounts stood at ` 3,00,000; ` 1,50,000 and ` 1,50,000 respectively on 1st April, 2020.As per the provisions of the Deed: (i) R was to be allowed a remuneration of ` 36,000 per annum, (ii) Interest @ 5% p.a. was to be provided on capitals and (iii) Profits were to be distributed in the ratio of 2 : 2 : 1. Ignoring the above terms, net profit of ` 1,80,000 for the year ended 31st March, 2020 was distributed among the three partners equally.

Pass the Journal entries to rectify the above errors.

Solution: JOURNAL


2020April 1 P’s Capital A/c ...Dr. 60,000 Q’s Capital A/c ...Dr. 60,000 R’s Capital A/c ...Dr. 60,000 To Profit and Loss Adjustment A/c 1,80,000 (Share of profit wrongly credited to partners, now reversed)

Profit and Loss Adjustment A/c ...Dr. 36,000 To R’s Capital A/c 36,000 (Remuneration credited to R’s Capital Account)

Profit and Loss Adjustment A/c ...Dr. 30,000 To P’s Capital A/c 15,000 To Q’s Capital A/c 7,500 To R’s Capital A/c 7,500 (Interest on capitals @ 5% p.a. credited to Capital Accounts of respective partners)


Profit and Loss Adjustment A/c ...Dr. 1,14,000 To P’s Capital A/c 45,600 To Q’s Capital A/c 45,600 To R’s Capital A/c 22,800 (Divisible profit credited to Partners’ Capital Accounts in the ratio of 2: 2: 1)

6. GUARANTEE OF PROFIT

A new partner (or partners) may be admitted in the firm with minimum guaranteed profit from the business. The profit may be guaranteed to an existing or incoming (new) partner by: (a) all the remaining partners in an agreed ratio; or (b) one or more of the existing or old partners.When the guaranteed partner’s or new partner’s share of profit is more than the guaranteed amount, his actual share of profit is given to him instead of the guaranteed amount of profit. (a) Guarantee of Profit by all the Remaining PartnersWhen all the remaining partners (i.e., other than the guaranteed partner), guarantee that the guaranteed partner (or partners) shall be given a minimum amount of profit, following steps are followed: Step 1: Share of profit as per profit-sharing ratio is determined, andStep 2: Minimum guaranteed profit is determined.The higher of the above two amounts (amounts calculated as per Step 1 and Step 2) is given to the guaranteed partner. If the share of profit is less than the guaranteed amount, the difference in the amount of profit, i.e., minimum guaranteed profit minus share of profit of the guaranteed partner (called ‘deficit’) is borne by the remaining partners in the agreed ratio and where the agreed ratio is not given the deficit is borne by them in their profit-sharing ratio.Accounting Entries 1. On Distributing the Profit as if there is no Guarantee Agreement: Profit and Loss Appropriation A/c ...Dr. To All Partners’ Capital A/cs 2. On Charging Deficiency to Guaranteeing Partner(s): Guaranteeing Partners’ Capital A/cs ...Dr. To Guaranteed Partner’s Capital A/cIllustration 48.Maanika, Bhavi and Komal are partners sharing profits in the ratio of 6 : 4 : 1. Komal is guaranteed a minimum profit of ` 2,00,000. The firm incurred a loss of ` 22,00,000 for the year ended 31st March, 2018. Pass necessary Journal entry regarding deficiency borne by Maanika and Bhavi and prepare Profit and Loss Appropriation Account. (CBSE Sample Paper 2019)Solution: JOURNAL


2018 March 31 Maanika’s Capital A/c ...Dr. 2,40,000 Bhavi’s Capital A/c ...Dr. 1,60,000 To Komal’s Capital A/c 4,00,000 (Deficiency of Komal met by Maanika and Bhavi) (WN)


Dr. PROFIT AND LOSS APPROPRIATION ACCOUNT for the year ended 31st March, 2018 Cr.


To Net Loss (Profit and Loss A/c) 22,00,000 By Loss transferred to: Maanika’s Capital A/c 12,00,000 Bhavi’s Capital A/c 8,00,000 Komal’s Capital A/c 2,00,000 22,00,000 22,00,000

Working Note: Loss of the firm = ` 22,00,000 Komal’s share of loss = ` 22,00,000 × 1/11 = ` 2,00,000 Guaranteed minimum profit = ` 2,00,000

Therefore, Komal’s Capital Account is to be credited by the amount of deficiency ` 4,00,000 (i.e., ` 2,00,000: Share of Loss + ` 2,00,000 : Guaranteed Profit) which will be borne by Maanika and Bhavi in their profit-sharing ratio, i.e., 6 : 4 or 3 : 2.

Illustration 49. A, B and C are partners in a firm sharing profits in the ratio of 4 : 2 : 1. It is provided that C’s share in profit would not be less than ` 37,500. Profit for the year ended 31st March, 2020 was ` 1,57,500. Prepare Profit and Loss Appropriation Account.



To A’s Capital A/c 90,000 By Profit and Loss A/c 1,57,500 Less: C’s Share of Deficiency 10,000 80,000 —Net ProfitTo B’s Capital A/c 45,000 Less: C’s Share of Deficiency 5,000 40,000To C’s Capital A/c 22,500 Add: Deficiency met by: A 10,000 B 5,000 37,500 1,57,500 1,57,500

Working Notes:

1. DISTRIBUTION OF PROFIT

Particulars A B C

Divide Net Profit of ` 1,57,500 ` 1,57,500 × 4/7 = ` 90,000 ` 1,57,500 × 2/7 = ` 45,000 ` 1,57,500 × 1/7 = ` 22,500

in 4 : 2 : 1.

However, C’s Minimum Guaranteed Profit = ` 37,500. Thus, deficiency is of ` 37,500 – ` 22,500 = ` 15,000.

Deficiency met by A and B ` 15,000 × 2/3 = ` 10,000 ` 15,000 × 1/3 = ` 5,000 ...in 4 : 2 or 2 : 1

Share of Profit ` 90,000 – ` 10,000 ` 45,000 – ` 5,000 ` 22,500 + ` 10,000 (A) = ` 80,000 = ` 40,000 + ` 5,000 (B) = ` 37,500

2. Since no specific ratio is given in which the deficiency is to be met, it means A and C shall meet the deficiency in their profit-sharing ratio, i.e., 4 : 2 or 2 : 1.


Illustration 50.

P and Q were partners in a firm sharing profits in the ratio of 5 : 3. On 1st April, 2014 they admitted R as a new partner for 1/8th share in the profits with a guaranteed profit of ` 75,000. The new profit-sharing ratio between P and Q will remain the same but they agreed to bear any deficiency on account of guarantee to R in the ratio 3 : 2. The profit of the firm for the year ended 31st March, 2015 was ` 4,00,000. Prepare Profit and Loss Appropriation Account of P, Q and R for the year ended 31st March, 2015. (Delhi 2016)



To Net Profit transferred to: By Profit and Loss A/c (Net Profit) 4,00,000 P’s Capital A/c 2,18,750 Less: Deficiency in R’s Share 15,000 2,03,750 Q’s Capital A/c 1,31,250 Less: Deficiency in R’s Share 10,000 1,21,250 R’s Capital A/c 50,000 Add: Deficiency met by: P 15,000 Q 10,000 75,000 4,00,000 4,00,000

Working Notes:

1. Calculation of New Profit-sharing Ratio of P, Q and R:

Let the total share be 1

Share of incoming partner R = 1/8

Remaining Share = 1 – 1/8 = 7/8

P’s New Share = 7/8 × 5/8 = 35/64

Q’s New Share = 7/8 × 3/8 = 21/64

R’s Share = 1/8 or 8/64

Thus, New Profit-sharing Ratio of P, Q and R = 35/64 : 21/64 : 8/64, i.e., 35 : 21 : 8.

2. R’s Share of Profit = 1/8 of ` 4,00,000 = ` 50,000; whereas, R’s guaranteed profit = ` 75,000.

Deficiency in R’s share (` 25,000) is to be met by P and Q in the ratio of 3 : 2. Thus, P and Q will meet the deficiency of ` 15,000 and ` 10,000 respectively.

Illustration 51.

Moli, Bhola and Raj were partners in a firm sharing profits and losses in the ratio of 3 : 3 : 4. Their Partnership Deed provided for the following: (i) Interest on capitals @ 5% p.a. (ii) Interest on drawings @ 12% p.a. (iii) Interest on partners’ loan @ 6% p.a. (iv) Moli was allowed an annual salary of ` 4,000; Bhola was allowed a commission of 10%

of net profit as shown by Profit and Loss Account and Raj was guaranteed a profit of ` 1,50,000 after making all the adjustments as provided in the partnership agreement.


Their fixed capitals were Moli: ` 5,00,000; Bhola: ` 8,00,000 and Raj: ` 4,00,000. On 1st April, 2016 Bhola extended a loan of ̀ 1,00,000 to the firm. The net profit of the firm for the year ended 31st March, 2017 before interest on Bhola’s loan was ` 3,06,000.

Prepare Profit and Loss Appropriation Account of Moli, Bhola and Raj for the year ended 31st March, 2017 and their Current Accounts assuming that Bhola withdrew ` 5,000 at the end of each month, Moli withdrew ` 10,000 at the end of each quarter and Raj withdrew ` 40,000 at the end of each half year. (Delhi 2018)



To Interest on Capital A/cs: By Profit and Loss A/c 3,06,000 Moli’s Current A/c 25,000 (Profit as per Profit and Loss A/c) (` 5,00,000 × 5/100) Less: Interest on Bhola’s Loan 6,000 3,00,000 Bhola’s Current A/c 40,000 By Interest on Drawings: (WN 1) (` 8,00,000 × 5/100) Moli’s Current A/c 1,800 Raj’s Current A/c 20,000 85,000 Bhola’s Current A/c 3,300 (` 4,00,000 × 5/100) Raj’s Current A/c 2,400 7,500To Moli’s Current A/c (Salary) 4,000To Bhola’s Current A/c (Commission) 30,000 (` 3,00,000 × 10/100)To Profit transferred to: (WN 2) Moli’s Current A/c 56,550 (` 1,88,500 × 3/10) Less: Given to Raj 37,300 19,250 Bhola’s Current A/c 56,550 (` 1,88,500 × 3/100) Less: Given to Raj 37,300 19,250 Raj’s Current A/c 75,400 (` 1,88,500 × 4/10) Add: From Moli 37,300 From Bhola 37,300 1,50,000 3,07,500 3,07,500


Particulars Moli Bhola Raj Particulars Moli Bhola Raj ` ` ` ` ` `

To Drawings A/c 40,000 60,000 80,000 By Interest on Capital A/c 25,000 40,000 20,000To Interest on By Salary A/c 4,000 ... ... Drawings A/c 1,800 3,300 2,400 By Commission A/c ... 30,000 ...To Balance c/d 6,450 25,950 87,600 By Profit and Loss Appropriation A/c 19,250 19,250 1,50,000 (Profit)

48,250 89,250 1,70,000 48,250 89,250 1,70,000


Working Notes:

1. Calculation of Interest on Drawings:

(a) Interest on Moli’s Drawings: ` 40,000 (i.e., ` 10,000 × 4 Instalments) × 4.5/12 months* × 12/100 = ` 1,800.

(b) Interest on Bhola’s Drawings: ` 60,000 (i.e., ` 5,000 × 12 months) × 5.5/12 months* × 12/100 = ` 3,300.

(c) Interest on Raj’s Drawings: ` 80,000 (i.e., ` 40,000 × 2 instalments) × 3/12 months* × 12/100 = ` 2,400.

*Average period = Months Left after First Drawing + Months Left after Last Drawing

2

(a) Average period in case of Moli = 9 + 0

2 = 4.5 Months.

(b) Average period in case of Bhola = 11 + 0

2 = 5.5 Months.

(c) Average period in case of Raj = 6 0

2

+ = 3 Months.

We apply average period for the calculation of interest on drawings when a uniform amount is withdrawn at regular interval.

2. Distribution of Profit: Profit after adjustments (` 3,00,000 + ` 7,500 – ` 85,000 – ` 4,000 – ` 30,000) = ` 1,88,500 will be distributed

among Moli, Bhola and Raj in the ratio of 3 : 3 : 4.

Moli’s share of profit = ` 56,550, Bhola’s share of profit = ` 56,550, and Raj’s share of profit = ` 75,400.

However, Raj’s minimum guaranteed profit is ` 1,50,000. So there is a deficiency of ` 74,600 (i.e., ` 1,56,000 – ` 75,400). Deficiency to be borne by Moli and Bhola equally, i.e., ` 37,300 each.

(b) Guarantee of Profit by one or more of the Existing or Old PartnersWhen one of the existing or old partners (in some cases more than one partner) guarantee minimum profit, the adjustment is made through the Partners’ Capital Accounts. Following steps are to be followed:Step 1: Distribute the profit among the partners as per their profit-sharing ratio.Step 2: If share of profit of the guaranteed partner is less than the minimum guaranteed profit

the difference is deducted from the share of profit of the partner (or partners) who has guaranteed and it is added to the share of profit of the guaranteed partner.

When two or more partners guarantee, the shortfall (deficiency) is shared by them in the agreed ratio or in their profit-sharing ratio as the case may be.

Illustration 52. P, Q and R are partners sharing profits in the ratio of 5 : 4 : 1 respectively. R is guaranteed that his share of profit in any year will be at least ` 50,000. Profit for the year ended 31st March, 2020 is ` 3,50,000. Amount of shortfall in the profits of R is to be met by P and Q in the ratio of 3 : 2. Pass necessary Journal entry regarding deficiency met by P and Q. Solution: In the Books of the Firm

JOURNAL


2020March 31 P’s Capital A/c ...Dr. 9,000 Q’s Capital A/c ...Dr. 6,000 To R’s Capital A/c 15,000 (Shortfall in the share of profit of R, met by P and Q in the ratio of 3 : 2)


Working Note:

When the net profit of ` 3,50,000 is distributed amongst the partners in the ratio of 5 : 4 : 1, R gets ` 35,000

(i.e., ` 3,50,000 × 1/10). But his guaranteed profit is ` 50,000. The shortfall, ` 15,000 (i.e., ` 50,000 – ` 35,000) is to

be met by P and Q in the ratio of 3 : 2 respectively. In effect, shortfall met by P is ` 9,000 (i.e., ` 15,000 × 3/5) and

shortfall met by Q is ` 6,000 (i.e., ` 15,000 × 2/5).

Illustration 53 (Guarantee of Profits by one of the Partners).

X, Y and Z are partners in a firm. Their profit-sharing ratio is 5 : 3 : 2. Z is guaranteed a minimum profit of ` 10,000 every year. Any deficiency arising is to be met by Y. Profits for the two years ended 31st March, 2019 and 2020 were ` 40,000 and ` 60,000 respectively.

Prepare Profit and Loss Appropriation Account for the two years.




To Profit transferred to: By Profit and Loss A/c 40,000

X’s Capital A/c (5/10) 20,000 (Net Profit)

Y’s Capital A/c (3/10) 12,000

Less: Deficiency in Z’s Share 2,000 10,000

Z’s Capital A/c (2/10) 8,000

Add: Deficiency met by Y 2,000 10,000

40,000 40,000



To Profit transferred to: By Profit and Loss A/c 60,000

X’s Capital A/c (5/10) 30,000 (Net Profit)

Y’s Capital A/c (3/10) 18,000

Z’s Capital A/c (2/10) 12,000

60,000 60,000

Note: Z’s share in profits is more than the minimum guaranteed amount, so there is no need for any adjustment.

Illustration 54. Anwar, Biswas and Divya are partners in a firm. Their Capital Accounts stood at ` 8,00,000; ` 6,00,000 and ` 4,00,000 respectively on 1st April, 2013. They shared profits and losses in the ratio of 3 : 2 : 1 respectively. Partners are entitled to interest on capital @ 6% per annum and salary to Biswas and Divya @ ` 4,000 per month and ` 6,000 per quarter respectively as per the provisions of Partnership Deed.Biswas’s share of profit including interest on capital but excluding salary is guaranteed at a minimum of ` 82,000 p.a. Any deficiency arising on that account shall be met by Divya. Profit for the year ended 31st March, 2014 amounted to ` 3,12,000. Prepare Profit and Loss Appropriation Account for the year ended 31st March, 2014. (Delhi 2013)




To Interest on Capital A/cs: By Profit and Loss A/c 3,12,000 Anwar 48,000 (Net Profit) Biswas 36,000 Divya 24,000 1,08,000To Partners’ Salary A/c: Biswas (` 4,000 × 12) 48,000 Divya (` 6,000 × 4) 24,000 72,000To Profit transferred to: Anwar’s Capital A/c (` 1,32,000 × 3/6) 66,000 Biswas’ Capital A/c ( ̀1,32,000 × 2/6) 44,000 Add: From Divya (Note) 2,000 46,000 Divya’s Capital A/c ( ̀1,32,000 × 1/6) 22,000 Less: Deficiency borne 2,000 20,000 3,12,000 3,12,000

Note: A. Biswas’s Share of Profit ` 44,000 Add: Interest on Capital ` 36,000 ` 80,000

B. Guaranteed Profit = ` 82,000 C. Deficiency to be borne by Divya (B – A) = ` 82,000 – ` 80,000 = ` 2,000.

Illustration 55 (Guarantee of Profit when partnership starts during the year).X, Y and Z entered into partnership on 1st July, 2019 to share Profit and Losses in the ratio of 3 : 2 : 1. X guaranteed that Z’s share of profit after charging interest on capitals @ 6% per annum would not be less than ` 36,000 p.a. The capital contributed by X—` 2,00,000; Y—` 1,00,000 and Z—` 1,00,000. Profit for the year ended 31st March, 2020 was ` 1,38,000. Prepare Profit and Loss Appropriation Account.


Particulars ` Particulars `To Interest on Capital A/cs (WN 1): By Profit and Loss A/c 1,38,000 X 9,000 (Net Profit) Y 4,500 Z 4,500 18,000To Profit transferred to (WN 2): X’s Capital A/c 53,000 Y’s Capital A/c 40,000 Z’s Capital A/c 27,000 1,20,000 1,38,000 1,38,000

Working Notes:

1. Calculation of Interest on Capital on:

X’s Capital = ` 9,000 (i.e., ` 2,00,000 × 6/100 × 9/12); Y’s Capital = ` 4,500 (i.e., ` 1,00,000 × 6/100 × 9/12); Z’s Capital = ` 4,500 (i.e., ` 1,00,000 × 6/100 × 9/12).

2. (i) Profit after interest on Capital = ` 1,38,000 – ` 18,000 = ` 1,20,000

Profit of ` 1,20,000 will be distributed between X, Y and Z in the ratio 3 : 2 : 1, i.e.,

X’s Share of Profit = ` 60,000; Y’s Share of Profit = ` 40,000; and Z’s Share of Profit = ` 20,000.


(ii) Z’s Share of Profit = ̀20,000. However, due to guarantee, Z has to get minimum ̀27,000* (i.e., ̀36,000 × 9/12) of profit for 9 months. So, deficiency of ` 7,000 (i.e., ` 27,000 – ` 20,000) will be paid by X. After adjusting the deficiency of profit by X, X’s Share of profit will be ` 53,000 (i.e., ` 60,000 – ` 7,000) and Z’s Share of Profit = ` 20,000 + ` 7,000 = ` 27,000.

* Guaranteed amount is calculated on proportionate basis from the date of admission of Guaranteed partner to the closing date of accounting year.

Accounting treatment of Guarantee of minimum profit to a partner in case of LossIt is possible that the firm has incurred loss but minimum guaranteed profit is to be paid to the partner who has been guaranteed minimum profit. In such case, adjustment is made through Partners’ Capital Accounts in the following manner: (i) Distribute loss among the partners in their profit-sharing ratio. (ii) Capital account of the guaranteed partner is credited with guaranteed minimum

profit plus the amount of loss. This amount is debited to remaining partners in their profit-sharing ratio or to the debit of the partner who has guaranteed minimum profit.

Illustration 56 (Guarantee of Profit to a Partner in Case of Loss). A, B and C are partners having capitals of ` 10,00,000; ` 8,00,000 and ` 6,00,000 respectively in a firm and sharing profits and losses equally. C is guaranteed a minimum profit of ` 1,00,000 as share of profit every year. The firm incurred a loss of ` 3,00,000 for the year ended 31st March, 2020. You are required to show the necessary accounts for division of loss and giving effect to minimum guaranteed profit to C.


Particulars ` Particulars `To Profit and Loss A/c (Net Loss) 3,00,000 By Loss transferred to: A’s Capital A/c 1,00,000 B’s Capital A/c 1,00,000 C’s Capital A/c 1,00,000 3,00,000 3,00,000

Dr. PARTN1ERS’ CAPITAL ACCOUNTS Cr.


To Profit and Loss By Balance b/d 10,00,000 8,00,000 6,00,000 Appropriation A/c 1,00,000 1,00,000 1,00,000 By A’s Capital A/c ... ... 1,00,000To C’s Capital A/c 1,00,000 1,00,000 ... By B’s Capital A/c ... ... 1,00,000 (Guaranteed Profit) To Balance c/d 8,00,000 6,00,000 7,00,000

10,00,000 8,00,000 8,00,000 10,00,000 8,00,000 8,00,000

By Balance b/d 8,00,000 6,00,000 7,00,000

Note: C is guaranteed a profit of ̀ 1,00,000 p.a. Loss incurred by the firm is ̀ 3,00,000. Out of which ̀ 1,00,000 is debited to C’s Capital Account. Therefore, C’s Capital Account is to be credited by the amount of deficiency ̀2,00,000 (` 1,00,000 share of loss debited plus ` 1,00,000 guaranteed profit) which is met equally by A and B.

Alternative Method:Particulars Total (`) A (`) B (`) C (`)

I. Loss for the year as per Profit and Loss Account to be debited to A and B

equally as C is guaranteed minimum profit (3,00,000) (1,50,000) (1,50,000) ...

II. Guaranteed profit of C to be shared by A and B equally ... (50,000) (50,000) 1,00,000

III. Net Effect (3,00,000) (2,00,000) (2,00,000) 1,00,000




To Profit and Loss App. A/c 1,50,000 1,50,000 ... By Balance b/d 10,00,000 8,00,000 6,00,000To C’s Capital A/c 50,000 50,000 ... By A’s Capital A/c ... ... 50,000 (Guaranteed Profit) By B’s Capital A/c ... ... 50,000To Balance c/d 8,00,000 6,00,000 7,00,000 10,00,000 8,00,000 7,00,000 10,00,000 8,00,000 7,00,000

Illustration 57 (Guarantee of Profit by the Firm).A, B and C are partners in a firm sharing profits and losses in the ratio of 12 : 8 : 5. Partner C is guaranteed a minimum profit of ` 50,000 p.a. by the firm. The profits and losses for the years ended 31st March, were: 2018—Profit ` 2,00,000; 2019—Profit ` 3,00,000, and 2020—Loss ` 2,00,000.Pass necessary Journal entries in the books of the firm.Solution:Particulars 31st March, 2018 (`) 31st March, 2019 (`) 31st March, 2020 (`)

(i) Guaranteed Profit to C 50,000 50,000 50,000 (ii) C’s Actual Share of Profit as per profit-sharing ratio 12 : 8 : 5 40,000 60,000 (40,000) Loss

(i.e., ` 2,00,000 × 5/25) (i.e., ` 3,00,000 × 5/25) (i.e., ` 2,00,000 × 5/25) (iii) Deficiency [(i) – (ii)] 10,000 ... 90,000

The deficiency in C’s share of profit is to be borne by the firm. Thus, out of the profit of the firm C’s Capital Account will be credited with minimum guaranteed profit or his share of profit, which ever is higher and thereafter, balance will be distributed to A and B in their profit-sharing ratio.In case of loss, loss will be debited to Partners’ Capital Accounts and thereafter, deficiency in guaranteed partner’s share will be debited to remaining Partners’ Capital Accounts.

JOURNAL


2018March 31 Profit and Loss A/c ...Dr. 2,00,000 To Profit and Loss Appropriation A/c 2,00,000 (Net profit transferred to Profit and Loss Appropriation Account)

Profit and Loss Appropriation A/c ...Dr. 2,00,000 To A’s Capital A/c 90,000 To B’s Capital A/c 60,000 To C’s Capital A/c 50,000 (Distribution of profit among partners and C credited with his guaranteed profit)2019March 31 Profit and Loss A/c ...Dr. 3,00,000 To Profit and Loss Appropriation A/c 3,00,000 (Profit transferred to Profit and Loss Appropriation Account)

Profit and Loss Appropriation A/c ...Dr. 3,00,000 To A’s Capital A/c (` 3,00,000 × 12/25) 1,44,000 To B’s Capital A/c (` 3,00,000 × 8/25) 96,000 To C’s Capital A/c (` 3,00,000 × 5/25) 60,000 (Net profit distributed among the partners in the ratio of 12 : 8 : 5)


2020March 31 A’s Capital A/c ...Dr. 96,000 B’s Capital A/c ...Dr. 64,000 C’s Capital A/c ...Dr. 40,000 To Profit and Loss A/c 2,00,000 (Distribution of loss as if there is no guarantee)

A’s Capital A/c ...Dr. 54,000 B’s Capital A/c ...Dr. 36,000 To C’s Capital A/c 90,000 (Deficiency of C, met by A and B in the ratio of 3 : 2)

Minimum Earnings Guaranteed by a PartnerA partner may guarantee minimum fee or specified amount that the firm shall earn by his efforts. Shortfall, if any is borne by the partner guaranteeing the fee or amount specfied. For example, Rohit, a partner guarantees the firm that he shall bring only additional fee of ` 1,00,000 in a year but is able to bring only ` 90,000 as fee. The shortfall of ` 10,000 will be debited to his Capital Account (in case of fixed capitals) or Current Account (in case of fluctuating capitals).

Illustration 58.

Jay, Vijay and Karan were partners of an architect firm sharing profits in the ratio of 2 : 2 : 1. Their Partnership Deed provided the following: (i) A monthly salary of ` 15,000 each to Jay and Vijay. (ii) Karan was guaranteed a profit of ̀ 5,00,000 and Jay guaranteed that he will earn an annual

fee of ` 2,00,000. Any deficiency arising because of guarantee to Karan will be borne by Jay and Vijay in the ratio of 3 : 2.

During the year ended 31st March, 2018 Jay earned fee of ` 1,75,000 and the profits of the firm amounted to ` 15,00,000.Showing your workings clearly prepare Profit and Loss Appropriation Account and the Capital Accounts of Jay, Vijay and Karan for the year ended 31st March, 2018. (CBSE 2019)


Particulars ` Particulars ̀

To Partners’ Salary: By Profit and Loss A/c (Net Profit) 15,00,000 Jay’s Capital A/c 1,80,000 By Jay’s Capital A/c (` 2,00,000 – ` 1,75,000) 25,000 Vijay’s Capital A/c 1,80,000 3,60,000 (Deficiency in Guaranteed Fees) To Profit transferred to: Jay’s Capital A/c 4,66,000 Less: Guaranteed (Profit to Karan) 1,60,200 3,05,800 Vijay’s Capital A/c 4,66,000 Less: Guaranteed (Profit to Karan) 1,06,800 3,59,200 Karan’s Capital A/c 2,33,000 Add: Deficiency met by Jay and Vijay 2,67,000 5,00,000

15,25,000 15,25,000



Particulars Jay Vijay Karan Particulars Jay Vijay Karan

` ` ` ` ` `

To Profit and Loss By Partners’ Salary A/c 1,80,000 1,80,000 ...

Appropriation A/c 25,000 ... ... By Profit and Loss Appro-

To Balance c/d 4,60,800 5,39,200 5,00,000 priation A/c—Profit 3,05,800 3,59,200 5,00,000

4,85,800 5,39,200 5,00,000 4,85,800 5,39,200 5,00,000

Working Note: Calculation of Deficiency in Karan’s share and its recovery:

Profit to be Distributed = ` 15,00,000 – ` 3,60,000 + ` 25,000 = ` 11,65,000.

Division of Profit: Jay’s Share of Profit = ` 11,65,000 × 2/5 = ` 4,66,000;

Vijay’s Share of Profit = ` 11,65,000 × 2/5 = ` 4,66,000;

Karan’s Share of Profit = ` 11,65,000 × 1/5 = ` 2,33,000.

Karan’s Deficiency = Guaranteed profit – Karan’s Share of Profit

= ` 5,00,000 – ` 2,33,000 = ` 2,67,000, which will be met by Jay and Vijay in the ratio

of 3 : 2

Deficiency borne by: Jay = ` 2,67,000 × 3/5 = ` 1,60,200; Vijay = ` 2,67,000 × 2/5 = ` 1,06,800.

QUESTIONS

Objective Type Questions

1. State whether the following statements are True or False:

(i) If the Partnership Deed does not exist or where it exists, it does not provide for interest on loan by the partner, partners will get interest @ 6% on the loan given by them to the firm.

(ii) In the absence of an agreement, profits and losses are distributed among the partners equally.

(iii) A partner who devotes more time to a business than others is entitled to get salary, even if the partnership is without Partnership Deed.

(iv) A partner who has invested more capital in the firm will get interest on excess capital.

(v) When a partner draws a fixed amount for his personal use at the end of each month for 12 months, interest will be charged at an agreed rate per annum on total amount of drawings for 5½ months.

(vi) When a partner draws a fixed amount for his personal use in the middle of each month for 12 months, interest will be charged at an agreed rate per annum on total amount of drawings for 6 months.

(vii) If the Partnership Deed is silent, interest @ 6% p.a. will be charged on the drawings made by the partner.

(viii) Interest on loan by a partner to the firm is allowed @ 10% p.a. if the Partnership Deed does not exist or is silent about the rate of interest.

(ix) Valid partnership can be set up even without a written agreement between the partners.

(x) Partners are mutual agents of each other so far as the business of the firm is concerned.

(xi) A partnership should have at least two partners but the number of partners should not exceed fifty.

(xii) Partnership is a business entity which is not separate from its partners in any circumstances.

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(xiii) The Partnership Deed provides to pay salary/commission to partners @ 2% of Net Sales. It will be paid even

if the firm incurs loss.

(xiv) In the absence of Partnership Deed or agreement, profits and losses are shared equally by the partners.

(xv) A partner can retire from the partnership with the consent of all the partners, even if the partnership is at will.

(xvi) Amrish, a partner, has taken loan from the firm without an agreement. The firm shall charge interest

@ 6% p.a. from Amrish.

(xvii) Rent paid to a partner for use of his personal property for business is debited to Profit and Loss Account.

(xviii) The Partnership Deed allows salary/commission to the partners. The firm incurs loss during the year but has

accumulated profits. Salary/Commission will be paid out of accumulated profits.

(xix) A firm is started on 1st October, 2019 and the partners draw fixed amount at the end of each month. Interest

will be charged at the agreed rate of interest for 2.5 months.

(xx) Partners draw fixed amount at the end of each month from 1st April, 2019 for six months. Interest will be

charged at the agreed rate of interest for 3.5 months for the year ended 31st March, 2020.

2. Fill-in-the blanks with appropriate words:

(i) Current Accounts of the Partners should be opened when the capitals are _______________.

(ii) In the absence of an agreement, interest on loan by partner is allowed @ _______________.

(iii) If the Partnership Deed does not exist or where it exists does not provide for salary to partners, partners shall

not be allowed salaries, if the firm does not earn _______________ during the year.

(iv) When there is no agreement among the partners, the profit or loss of the firm will be shared _______________

by the partners.

(v) The extension of Profit and Loss Account is _______________.

(vi) Minimum number of persons required to start partnership business is _______________.

(vii) Number of partners which should not exceed for partnership business is _______________.

(viii) Salary or Commission to a partner is an _______________ of profit.

(ix) Interest on Capital is allowed only if the firm earns _______________ during the year.

(x) Having a written Partnership Deed is _______________.

(xi) Remuneration to Partners is an appropriation of profit and therefore it is debited to _______________.

(xii) Every partner is bound to attend diligently to his _______________ in the conduct of the business.

(xiii) Interest on drawings is charged if the Partnership Deed provides for it, whether the firm earns ____________

or incurs _______________.

(xiv) Interest on Loan taken by a partner is credited to _______________.

(xv) _______________ can override the provisions of Indian Partnership Act, 1932.

(xvi) In case of guarantee of minimum profit to a partner deficiency of guaranteed partner is met by remaining

partners in their _______________.

(xvii) Manager’s Commission is a _______________ against profit.

(xviii) Current Accounts of the Partners are not opened when the Capitals are _______________.

(xix) If a fixed amount is withdrawn by a partner on the last day of every month for a year, interest on the total

amount of drawings is charged for _______________ months.

(xx) In case of partnership, the act of any partner is binding on _______________ partners.


3. Match the following:

1. (i) According to Companies Act, 2013 maximum (a) 50

numbers of partners in a firm can be

(b) 100

2. (i) Item which may be debited to Partner’s Capital Account (a) Interest on Capital

(ii) Item which may be credited to Partner’s Capital Account (b) Interest on Drawings

3. (i) Rent paid to partner (a) Charge against profit

(ii) Salary paid to partner (b) Appropriation of Profit

(c) Both

4. (i) Remuneration to partner (a) Not paid to any partner in the absence of

Partnership Deed

(ii) Interest on Loan by Partner (b) Paid @ 6% p.a..

(c) Not charged from partners

5. (i) When drawings are made at the end of each quarter (a) 6 months

(ii) When drawings are made in middle of each quarter (b) 7.5 months

(c) 4.5 months

6. (i) Guaranteed profit is allowed even in case of (a) loss

(b) profit

(c) both

7. (i) Partners’ Current Accounts are opened when their (a) fixed

Capital Accounts are

(ii) Partners’ Capital Accounts are opened when their (b) fluctuating

Capital Accounts are

(c) both

(d) none

8. (i) Product method is used when (a) amount of drawing and period is uniform

(b) there is irregular drawings

(c) time intervals between the two drawings is

also uniform

Multiple Choice Questions (MCQs)

Select the correct alternative:

1. The written agreement among the partners is called

(a) Partnership Deed. (b) Partnership buy laws.

(c) Partnership Constitution. (d) a contract.

2. The liability of the partners in a partnership firm under Indian Partnership Act, 1932 is

(a) Limited. (b) Unlimited.

(c) No Liability. (d) Depending on the situation.

3. Interest on Capital is allowed on

(a) the opening capital. (b) the capital at the year end.

(c) average capital of the year. (d) the capital in the middle of the year.

4. In the absence of the Partnership Deed, Interest on Capital

(a) is allowed @ 6% per annum. (b) is allowed @ 10% per annum.

(c) is allowed at the borrowing rate. (d) is not allowed.


5. In case of fixed capitals, partners will have

(a) credit balances in their Capital Accounts.

(b) debit balances in their Capital Accounts.

(c) may have credit or debit balances in their Capital Accounts.

(d) credit balance or nil balance in their Capital Accounts.

6. In case of fixed capitals, interest on capital

(a) is credited to Partner’s Capital Account.

(b) is credited to Partner’s Current Account.

(c) may be credited to Partner’s Capital or Current Account.

(d) is debited to Partner’s Capital Account.

7. In case of fluctuating capitals, interest on capital

(a) is credited to Partner’s Capital Account.

(b) is credited to Partner’s Current Account.

(c) may be credited to Partner’s Capital or Current Account.

(d) Interest Payable Account.

8. Current Accounts of partners are maintained if

(a) capitals are fixed. (b) capitals are fluctuating.

(c) whether capitals are fixed or fluctuating. (d) as is decided by the Partners.

9. In the absence of Partnership Deed, profit of a firm is divided among the partners

(a) in the ratio of capital.

(b) Equally.

(c) in the ratio of time devoted for the firm’s business.

(d) According to the managerial abilities of the partners. (CBSE 2015)

10. Interest on Capitals of Partners under the Fluctuating Capital Accounts Method is credited to

(a) Interest Payable Account. (b) Profit and Loss Account.

(c) Partners’ Capital Accounts. (d) Partners’ Current Accounts.

11. When guarantee is given to partner by some partners, deficiency on such guarantee will be borne by

(a) All of the other partners. (b) Partnership firm.

(c) Partner who gave the guarantee. (d) None of the partners.

12. In the absence of an agreement to the contrary, the partners are

(a) entitled to 6% interest on their capitals, only when there are profits.

(b) entitled to 9% interest on their capitals, only when there are profits.

(c) entitled to interest on their capitals at the bank rate, only when there are profits.

(d) not entitled to interest on their capitals.

13. Which of the following items will not be shown in Profit and Loss Appropriation Account?

(a) Interest on Capital (b) Commission to a partner

(c) Interest on Drawings (d) Interest on Partner’s Loan

14. Which of the following items will not be shown in the debit of Profit and Loss Appropriation Account?

(a) Interest on Capital (b) Commission to a partner

(c) Interest on Drawings (d) Salary to partners


15. Which of the following is not an essential feature of partnership?

(a) An agreement, oral or written, should exist among the partners.

(b) Agreement should be to carry on lawful business.

(c) All the partners should contribute capital in the firm.

(d) There should be at least two partners.

16. A manager gets 5% commission on net profit after charging such commission, gross profit ` 5,80,000

and expenses of indirect nature other than manager’s commission are ` 1,60,000. Commission amount

will be

(a) ` 21,000. (b) ` 20,000.

(c) ` 15,000. (d) ` 22,000.

17. If the Partnership Deed provides for payment of interest on capital of the partners, then interest can be

paid only out of

(a) Accumulated Profits. (b) Past Profits.

(c) Current Profits. (d) Total Profits.

18. As per Indian Partnership Act, 1932 if Partnership Deed does not exist partners are entitled to

(a) Salary. (b) Interest on Capital.

(c) Equal Profit Share. (d) Commission.

19. Relationship between the partners is of

(a) Close relatives. (b) Agent and principal.

(c) Junior-senior relationship. (d) Senior-subordinate Relationship.

20. There are two partners in a firm P and Q. R is admitted into the firm for 1/3rd share of profit with the

guaranteed profit of ` 18,000 p.a. The firm’s total profit is ` 42,000. If P stood as guarantor of guaranteed

profit to R, how much profit would be given to P?

(a) ` 20,000 (b) ` 15,000

(c) ` 10,000 (d) ` 18,000

21. In the absence of Partnership Agreement, interest on drawings of a partner is charged

(a) @ 8% per annum (b) @ 9% per annum

(c) @ 12% per annum (d) No interest is charged (CBSE, Foreign 2015)

22. In the absence of Partnership; interest on loan of a partner is allowed

(a) @ 8% per annum (b) @ 6% per annum

(c) No interest is allowed (d) @ 12% per annum (CBSE, AI 2015)

Very Short Answer Type Questions

1. Define Partnership.

2. State any two essential features or characteristics of partnership other than minimum number of partners

and profit sharing.

3. Does partnership firm has a separate legal entity? Give reason in support of your answer. (Delhi 2017)

4. What is the maximum number of partners that a partnership firm can have? Name the Act that provides

for the maximum number of partners in a partnership firm. (Delhi and Foreign 2016)

5. Ritesh and Hitesh are childhood friends. Ritesh is a consultant whereas Hitesh is an architect. They

contributed equal amounts and purchased a building for ` 2 crores. After a year, they sold it for ` 3 crores

and shared the profits equally. Are they doing the business in partnership ? Give reason in support of

your answer. (Delhi 2018)


6. A group of 40 people want to form a partnership firm. They want your advice regarding the maximum number of

persons that can be there in a partnership firm and name of the Act under whose provision it is given. (AI 2016)

7. Is there any restriction on maximum number of partners? If yes, name the Act under which it is prescribed.

8. Does a partner has right not to allow admission of a new partner, if the Partnership Deed does not exist?

9. State any two rights of a partner besides profits of business, participating in business and right to be

consulted about affairs of the business.

10. What is a Partnership Deed? (Foreign 2004, Delhi 2010)

11. Why is it considered better to make a partnership agreement in writing? (NCERT)

12. X and Y are partners. Y wants to admit his son K into business. Can K become the partner of the firm? Give

reason. (Delhi 2014 C)

13. Pratibha, partner of a firm, has advanced loan to the firm of ` 1,00,000. The firm does not have a Partnership

Deed. Will Pratibha get interest on the loan? If yes, at which rate and why?

14. Neha, a partner, owns a building in which the firm carries its business. The firm pays her ` 10,000 as rent of

the building. To which account rent will be debited?

15. What is meant by ‘Fixed Capital’ of a Partner? (Delhi 2016 C)

16. What is meant by ‘Fluctuating Capital’ of a Partner? (AI 2016 C)

17. Distinguish between ‘Fixed Capital Account’ and ‘Fluctuating Capital Account’ on the basis of

credit balance. (AI 2017, CBSE 2019)

18. A firm maintains a Capital Account and a Current Account for each partner. What is the term used when

this method of maintaining Capital Accounts is followed?

19. Give two items which may appear in the debit side of a Partner’s Current Account. (Delhi 2018 C)

20. State the two methods of maintaining Capital Accounts of partners.

21. State the two situations under which interest on capital is generally provided. (CBSE 2019)

22. Interest on capital is credited to Partner’s Current Account. Name the method of maintaining Capital Account.

23. Under which Capital Account Method, Current Accounts of partners are maintained?

24. Under which Capital Account Method, Current Accounts of partners are not maintained?

25. Give four items that may appear in the credit side of the Partner’s Current Account.

26. Give three items that may appear in the debit side of the Partner‘s Current Account.

27. M/s RSA maintains Partners’ Capital Accounts under Fixed Capital Accounts Method. Accountant of the firm

has credited their salary and interest on capital to their Capital Accounts. Do you agree with the treatment?

Give reasons for your answer.

28. Give two circumstances in which the Fixed Capitals of partners may change. (AI, Delhi and Foreign 2009)

29. List the item that may appear in the debit side of a Partner’s Fixed Capital Account.

30. ABC, a partnership firm, does not have a Partnership Deed. The firm wants to pay remuneration to the

partners. How can it do so?

31. If the Partnership Deed does not specify the profit-sharing ratio, in what ratio is the profit or loss shared by

the partners?

32. What share of profit would a sleeping partner who has contributed 75% of the total capital get in the

absence of a deed? (Delhi 2011 C)

33. If the Partnership Deed does not specify the rate of interest payable on loan by a partner, at what rate will

the interest be paid? If not, why?


34. State the provisions of Indian Partnership Act regarding the payment of remuneration to a partner for the

services rendered. (Delhi 2012, AI 2012 C)

35. If the Partnership Deed does not specify the rate of interest chargeable on drawings, will the interest still

be charged? If yes, at what rate? If not, why?

36. State the provisions of Partnership Act, 1932, in the absence of a Partnership Deed regarding (i) Interest on

Partner’s Drawings, and (ii) Interest on Advances other than capital. (Foreign 2011)

37. Can a partner be exempted from sharing losses in a firm? If yes, under what circumstances? (Delhi 2009)

38. A and B are partners in a firm without a Partnership Deed. A is an active partner and claims a salary of

`18,000 per month. State with reason whether the claim is valid or not. (Delhi 2008)

39. Raj and Seema started a partnership firm on 1st July, 2018. They agreed that Seema was entitled to a

commission of 10% of the net profit after charging Raj’s salary of ̀ 2,500 per quarter and Seema’s commission.

The net profit before charging Raj’s salary and Seema’s commission for the year ended 31st March, 2019

was ` 2,27,500. Calculate Seema’s commission. (CBSE 2019 C)

40. State the provisions of Indian Partnership Act,1932 regarding interest on partner’s capital and interest on

partner’s loan when there is no Partnership Deed. (AI 2010 C)

41. What is Profit and Loss Appropriation Account?

42. Under what circumstances Average Method of calculating interest on drawings is applied?

43. If a fixed amount is withdrawn on 15th day of every month of a calendar year, for what period will the

interest on total amount withdrawn be calculated? (Foreign 2012)

44. If A draws ` 15,000 every month at the end of the month, what will be the interest @ 5% p.a.?

45. Amit, a partner in a partnership firm, withdrew ` 7,000 in the beginning of each quarter. For how many

months would interest on drawings be charged? (CBSE Sample Paper 2019)

46. How will you calculate interest on the drawings of equal amount made on the last day of every month of

a calendar year? (Outside Delhi 2009)

47. Explain briefly the meaning of guarantee of minimum profit.

48. State one difference between Fixed Capital Account and Fluctuating Capital Account of partners.

(AI 2008 C, 2014)

49. Why is it that the Capital Account of a partner does not show a ‘Debit Balance’ in spite of regular and

consistent losses year after year? (Foreign 2009)

50. A Partnership Deed provides for the payment of interest on capital but there was a loss instead of profit

during the year 2010–11. At what rate will the interest on capital be allowed? (AI 2012)

51. What is meant by ‘unlimited liability of a partner’? (Delhi 2010)

52. When the partners’ capitals are fixed, where will the drawings made by a partner be recorded? (Delhi 2013)

53. If the partners’ capitals are fixed, where will you record interest charged on drawings? (AI 2013)

54. Name the method of calculating Interest on Drawings of the partner if different amounts are withdrawn

on different dates. (Delhi 2012 C)

55. In the absence of provision in the partnership deed, in which ratio is the deficiency arising out of guarantee

of profit to a partner borne by the other partners. (CBSE 2019)


Short Answer Type Questions

1. Mention the items that may appear in the credit side of the Capital Account of a Partner when the capitals

are fluctuating. (Delhi 1996)

2. Mention the items that may appear in the debit side of the Capital Account of a Partner when the capitals

are fluctuating.

3. List any four items appearing on the Profit and Loss Appropriation Account. (Delhi 2001)

4. State any four features of a Partnership. (Foreign 2005)

5. List any four contents of a Partnership Deed. (Delhi 2004, AI 2009)

6. Discuss the main provisions of the Indian Partnership Act, 1932 that are relevant to partnership accounts

if there is no Partnership Deed. (NCERT)

7. Distinguish between Fixed and Fluctuating Capitals. (Delhi 1994, 1995, 2001 C, AI 2005)

8. State the two situations in which interest on Partners’ Capital is generally provided. (Foreign 2017)

EXERCISE

Partnership Deed

1. In the absence of Partnership Deed, how are the following matters resolved:

(a) Salaries of partners, (b) Interest on partners’ capitals,

(c) Interest on partner’s loan, (d) Division of profit,

(e) Interest on partners’ drawings, (f ) Interest on loan by partner(s), and

(g) Interest on Loan to partners?

2. Following differences have arisen among P, Q and R. State who is correct in each case:

(a) P used ` 20,000 belonging to the firm and earned a profit of ` 5,000. Q and R want the amount to be

given to the firm.

(b) Q used ` 5,000 belonging to the firm and incurred a loss of ` 1,000. He wants the firm to bear the loss.

(c) P and Q want to purchase goods from A Ltd., R does not agree.

(d) Q and R want to admit C as partner, P does not agree.

(e) R had given loan of ` 1,00,000 to the firm and demands interest @ 10% p.a. P and Q do not want to pay

the interest.

3. A, B and C are partners in a firm. They do not have a Partnership Deed. At the end of the first year of the

business, they faced the following problems:

(a) A wants that interest on capital should be allowed to the partners but B and C do not agree.

(b) B wants that the partners should be allowed to draw salary but A and C do not agree.

(c) A and B want that C should pay interest on loan given to him by the firm but C does not agree.

(d) A and B having contributed larger amounts of capital, desire that the profits should be distributed in

the ratio of their capital contribution but C does not agree.

State how you will settle these disputes if the partners approach you for the purpose.

4. Bose, Sarkar and Chatterjee are partners in a firm and do not have a Partnership Deed Bose introduced

further capital of ` 2,00,000 on 1st October, 2019. Whereas Chatterjee took a loan of ` 50,000 from the firm

on 1st October, 2019. Disputes have arisen among them on the following issues:

(a) Bose demands interest @ 10% p.a. on ` 2,00,000 being his extra capital.

(b) Sarkar desires that his son Deep should be admitted as partner and he will give him half of his share.

Bose and Chatterjee do not agree.

(c) Bose and Sarkar are of the view that Chatterjee should be charged interest on loan from the firm at

the lending rate of the banks, which is 12% p.a.


(d) Sarkar has withdrawn ` 50,000 from the firm for his personal use. Bose and Chatterjee are of the view

that Sarkar should be charged interest @ 10% p.a.

You are required to give solution to each issue of dispute.

5. Harshad and Dhiman are in partnership since 1st April, 2019. No partnership agreement was made. They

contributed ` 4,00,000 and ` 1,00,000 respectively as capitals. In addition, Harshad had given loan of

` 1,00,000 to the firm on 1st October, 2019. Due to long illness, Harshad could not participate in business

activities from 1st August, 2019 to 30th September, 2019. Profit for the year ended 31st March, 2020 was

` 1,80,000. Dispute has arisen between Harshad and Dhiman.

Harshad Claims:

(i) He should be given interest @ 10% per annum on capital and loan;

(ii) Profit should be distributed in the ratio of capital;

Dhiman Claims:

(i) Profits should be distributed equally;

(ii) He should be allowed ` 2,000 p.m. as remuneration for the period he managed the business in the

absence of Harshad;

(iii) Interest on Capital and loan should be allowed @ 6% p.a.

You are required to settle the dispute between Harshad and Dhiman. Also prepare Profit and Loss

Appropriation Account. (NCERT, Modified)

6. A and B are partners since 1st April, 2019, without a Partnership Deed and they introduced capitals of

` 35,000 and ` 20,000 respectively. On 1st October, 2019, A gave loan of ` 8,000 to the firm without any

agreement as to interest. Profit and Loss Account for the year ended 31st March, 2020 shows a profit of

` 15,000 but the partners cannot agree on payment of interest and on the basis of division of profit.

You are required to divide the profits between them giving reasons for your method.

Interest on Partner’s Loan to the Firm

7. A and B are partners in a firm sharing profits in the ratio of 3 : 2. They had given loan to the firm of ` 30,000

in their profit-sharing ratio on 1st October, 2019. The Partnership Deed is silent on interest on loans from

partners. Compute interest payable by the firm to the partners, assuming the firm closes its books every

year on 31st March.

8. X and Y are partners sharing profits and losses in the ratio of 2 : 3 with capitals of ` 2,00,000 and

` 3,00,000 respectively. On 1st October, 2019, X and Y gave loans of ̀ 80,000 and ̀ 40,000 respectively to the

firm. Show distribution of profits/losses for the year ended 31st March, 2020 in each of the following

alternative cases:

Case 1. If the profits before interest for the year amounted to ` 21,000.



Case 4. If the loss before interest for the year amounted to ` 1,400.

9. Bat and Ball are partners sharing the profits in the ratio of 2 : 3 with capitals of ` 1,20,000 and ` 60,000

respectively. On 1st October, 2019, Bat and Ball gave loans of ` 2,40,000 and ` 1,20,000 respectively to

the firm. Bat had allowed the firm to use his property for business for a monthly rent of ` 5,000. Loss

for the year ended 31st March, 2020 before rent and interest amounted to ` 9,000. Show distribution of

profit/loss.


10. Akhil and Bimal are partners sharing profits in the ratio of 3 : 2. Akhil gave loan to the firm of ` 1,00,000 on

1st October, 2019. On the same date, the firm gave loan to Bimal of ` 1,00,000. They do not have an

agreement as to interest.

Akhil had also given his personal property for firm’s godown at a monthly rent of ` 5,000.

Firm earns profit of ` 1,03,000 (before above adjustments) for the year ended 31st March, 2020. Show the

distribution of profit for the year.

11. Ankit, Bhanu and Charu are partners in a firm sharing profits and losses equally with capital of ` 2,50,000

each. On 1st October, 2019, Ankit and Bhanu gave loans of ` 2,50,000 each to the firm whereas Charu took

a loan of ` 1,00,000 from the firm on the same date. It was agreed among the partners that Charu will be

charged Interest @ 6% p.a. Interest on loan from partners was paid on 10th April, 2020. The firm closes its

books on 31st March each year.

Pass the Journal entries in the books of the firm for the year ended 31st March, 2020.

12. Nirmal and Pawan are partners sharing profits in the ratio of 3 : 2. The firm had given loan to Pawan of

` 5,00,000 on 1st April, 2019. Interest was to be charged @ 10% p.a. The firm took loan of ` 2,00,000 from Nirmal

on 1st October, 2019. Before giving effect to the above, the firm incurred a loss of ` 10,000 for the year

ended 31st March, 2020.

Determine the amount to be transferred to Profit and Loss Appropriation Account.

Profit and Loss Appropriation Account

13. A and B are partners. A’s Capital is ` 1,00,000 and B’s Capital is ` 60,000. Interest on capital is payable

@ 6% p.a. B is to get salary of ` 3,000 per month. Net Profit for the year is ` 80,000.

Prepare Profit and Loss Appropriation Account.

14. X, Y and Z are partners in a firm sharing profits in the ratio of 2 : 2 : 1. Fixed capitals of the partners were:

X ` 5,00,000; Y ` 5,00,000 and Z ` 2,50,000 respectively. The Partnership Deed provides that interest on

capital is to be allowed @ 10% p.a. Z is to be allowed a salary of ` 2,000 per month. Profit of the firm for the

year ended 31st March, 2020 after debiting Z ’s salary was ` 4,00,000.


15. X and Y are partners sharing profits in the ratio of 3 : 2 with capitals of ̀ 8,00,000 and ̀ 6,00,000 respectively.

Interest on capital is agreed @ 5% p.a. Y is to be allowed an annual salary of ` 60,000 which has not

been withdrawn. Profit for the year ended 31st March, 2020 before interest on capital but after charging

Y ’s salary was ` 2,40,000.

A provision of 5% of the net profit is to be made in respect of commission to the Manager.

Prepare Profit and Loss Appropriation Account showing the allocation of profits.

16. Prem and Manoj are partners in a firm sharing profits in the ratio of 3 : 2. The Partnership Deed provided

that Prem was to be paid salary of ` 2,500 per month and Manoj was to get a commission of ` 10,000

per year. Interest on capital was to be allowed @ 5% p.a. and interest on drawings was to be charged

@ 6% p.a. Interest on Prem’s drawings was ` 1,250 and on Manoj’s drawings was ` 425. Interest on Capitals

of the partners were ` 10,000 and ` 7,500 res pectively. The firm’s net profit for the year ended 31st March,

2020 was ` 90,575.

Prepare Profit and Loss Appropriation Account of the firm.

17. Atul and Mithun are partners sharing profits in the ratio of 3 : 2.

Balances as on 1st April, 2019 were as follows:

Capital Accounts (Fixed): Atul—` 5,00,000 and Mithun—` 6,00,000.


Loan Accounts: Atul—` 3,00,000 (Cr.) and Mithun—` 2,00,000 (Dr.)

It was agreed to allow and charge interest @ 8% p.a. Partnership Deed provided to allow interest on capital

@ 10% p.a. Interest on Drawings was charged ` 5,000 each.

Profit before giving effect to above was ` 2,28,000 for the year ended 31st March, 2020.


18. Reema and Seema are partners sharing profits equally. The Partnership Deed provides that both Reema and

Seema will get monthly salary of ` 15,000 each, Interest on Capital will be allowed @ 5% p.a. and Interest

on Drawings will be charged @ 10% p.a. Their capitals were ` 5,00,000 each and drawings during the year

were ` 60,000 each.

The firm incurred net loss of ` 1,00,000 during the year ended 31st March, 2020.


19. Bhanu and Partap are partners sharings profits equally. Their fixed capitals as on 1st April, 2019 are ` 8,00,000 and ` 10,00,000 respectively. Their drawings during the year were ` 50,000 and ` 1,00,000

respectively. Interest on Capital is a charge and is to be allowed @ 10% p.a. and interest on drawings is to

be charged @ 15% p.a. Net Profit for the year ended 31st March, 2020 was ` 1,20,000.


Partners’ Capital Accounts

Fixed Capital

20. Amar and Bimal entered into partnership on 1st April, 2019 contributing ` 1,50,000 and ` 2,50,000

respectively towards capitals. The Partnership Deed provided for interest on capitals @ 10% p.a. It also

provided that Capital Accounts shall be maintained following Fixed Capital Accounts Method. The firm

earned net profit of ` 1,00,000 for the year ended 31st March, 2020.

Pass the Journal entry for interest on capital.

21. Kamal and Kapil are partners having fixed capitals of ` 5,00,000 each as on 31st March, 2019. Kamal

introduced further captial of ` 1,00,000 on Ist October, 2019 whereas Kapil withdrew ` 1,00,000 on

1st October, 2019 out of capital.

Interest on capital is to be allowed @ 10% p.a.

The firm earned net profit of ` 6,00,000 for the year ended 31st March, 2020.

Pass the Journal entry for interest on capital and prepare Profit and Loss Appropriation Account.

22. Simran and Reema are partners sharing profits in the ratio of 3 : 2. Their capitals as on 31st March, 2019

were ` 2,00,000 each whereas Current Accounts had balances of ` 50,000 and ` 25,000 respectively.

Interest on capital is to be allowed @ 5% p.a. The firm earned net profit of ` 3,00,000 for the year ended

31st March, 2020.

Pass the Journal entries for interest on capital and distribution of profit. Also prepare Profit and Loss

Appropriation Account for the year.

Fluctuating Capital

23. Anita and Ankita are partners sharing profits equally. Their capitals, maintained following Fluctuating

Capital Accounts Method, as on 31st March, 2019 were ` 5,00,000 and ` 4,00,000 respectively. Partnership

Deed provided to allow interest on capital @ 10% p.a. The firm earned net profit of ` 2,00,000 for the year

ended 31st March, 2020.

Pass the Journal entry for interest on capital.


24. Ashish and Aakash are partners sharing profits in the ratio of 3 : 2. Their Capital Accounts had credit balances of ` 5,00,000 and ` 6,00,000 respectively as on 31st March, 2020 after debit of drawings during the year of ` 1,50,000 and ` 1,00,000 respectively. Net profit for the year ended 31st March, 2020 was ` 5,00,000.


Pass the Journal entry for interest on capital and prepare Profit and Loss Appropriation Account.

25. Naresh and Sukesh are partners with capitals of ` 3,00,000 each as on 31st March, 2020. Naresh had withdrawn ` 50,000 against capital on 1st October, 2019 and ` 1,00,000 drawings against profit. Sukesh also had drawings of ` 1,00,000.


Net profit for the year was ` 2,00,000, which is yet to be distributed.

Pass the Journal entries for interest on capital and distribution of profit.

26. On 1st April, 2013, Jay and Vijay entered into partnership for supplying laboratory equipments to government schools situated in remote and backward areas. They contributed capitals of ` 80,000 and ` 50,000 respectively and agreed to share the profits in the ratio of 3 : 2. The Partnership Deed provided that interest on capital shall be allowed at 9% per annum. During the year the firm earned a profit of ` 7,800.

Showing your calculations clearly, prepare ‘Profit and Loss Appropriation Account’ of Jay and Vijay for the year ended 31st March, 2014. (Delhi 2015)

Calculation of Interest on Partners’ Capitals

27. Following is the extract of the Balance Sheet of Neelkant and Mahadev as on 31st March, 2020:



Neelkant’s Capital 10,00,000 Sundry Assets 30,00,000Mahadev’s Capital 10,00,000Neelkant’s Current A/c 1,00,000Mahadev’ Current A/c 1,00,000Profit and Loss A/c (2019–20) 8,00,000 30,00,000 30,00,000

During the year, Mahadev’s drawings were ` 30,000. Profits during the year ended 31st March, 2020 is ` 10,00,000. Calculate interest on capital @ 5% p.a. for the year ending 31st March, 2020. (NCERT, Modified)

28. From the following Balance Sheet of Long and Short, calculate interest on capital @ 8% p.a. for the year ended 31st March, 2020:



Long’s Capital A/c 1,20,000 Fixed Assets 3,00,000Short’s Capital A/c 1,40,000 Other Assets 60,000General Reserve 1,00,000

3,60,000 3,60,000

During the year, Long withdrew ` 40,000 and Short withdrew ` 50,000. Profit for the year was ` 1,50,000 out of which ` 1,00,000 was transferred to General Reserve.

29. Moli and Bholi contribute ` 20,000 and ` 10,000 respectively towards capital. They decide to allow interest on capital @ 6% p.a. Their respective share of profits is 2 : 3 and the net profit for the year is ` 1,500. Show distribution of profits:

(i ) When there is no agreement except for interest on capitals; and (ii) When there is an agreement that the interest on capital as a charge.


30. Amit and Bramit started business on 1st April, 2019 with capitals of ` 15,00,000 and ` 9,00,000 respectively.

On 1st October, 2019, they decided that their capitals should be ̀ 12,00,000 each. The necessary adjustments

in capitals were made by introducing or withdrawing by cheque. Interest on capital is allowed @ 8% p.a.

Compute interest on capital for the year ended 31st March, 2020.

Salary or Commission to Partners

31. Amar, Bhanu, and Charu are partners in a firm. Amar and Bhanu are to get annual salary of ` 1,20,000 p.a.

each as they manage the business. Net profit for the year is ` 4,80,000. Determine the share of profit to be

credited to each partner.

32. A, B and C are partners sharing profits and losses in the ratio of 2 : 2 : 1. A is entitled to a commission of 10%

on the net profit. Net profit for the year is ` 1,10,000.

Determine the amount of commission payable to A.

33. X, Y and Z are partners sharing profits and losses equally. As per Partnership Deed, Z is entitled to a

commission of 10% on the net profit after charging such commission. The net profit before charging

commission is ` 2,20,000.

Determine the amount of commission payable to Z.

34. A, B, C and D are partners in a firm sharing profits in the ratio of 4 : 3 : 2 : 1. It earned net profit of ` 1,80,000

for the year ended 31st March, 2020. As per the Partnership Deed, they are to charge a commission @ 20%

of the profit after charging such commission which they will share as 2 : 3 : 2 : 3.

You are required to show appropriation of profits among the partners.

35. X and Y are partners in a firm. X is entitled to a salary of ` 10,000 per month and commission of 10%

of the net profit after partners’ salaries but before charging commission. Y is entitled to a salary of

` 25,000 p.a. and commission of 10% of the net profit after charging all commission and partners’ salaries.

Net profit before providing for partners’ salaries and commission for the year ended 31st March, 2019 was

` 4,20,000. Show distribution of profit.

Calculation of Interest on Partners’ Drawings

36. Ram and Mohan, two partners, drew for their personal use ` 1,20,000 and ` 80,000. Interest is chargeable

@ 6% p.a. on the drawings. What is the amount of interest chargeable from each partner?

37. Brij and Mohan are partners in a firm. They withdrew ` 48,000 and ` 36,000 respectively during the year

evenly in the middle of every month. According to the Partnership Deed, interest on drawings is to be

charged @ 10% p.a.

Calculate interest on drawings of the partners using the appropriate formula.

38. Dev withdrew ` 10,000 on 15th day of every month. Interest on drawings was to be charged @ 12% per

annum. Calculate interest on Dev’s Drawings. (CBSE 2019)

39. A and B are partners sharing profits equally. A drew regularly ` 4,000 in the beginning of every month for

six months ended 30th September, 2019. Calculate interest on drawings @ 5% p.a. for a period of six months.

40. One of the partners in a partnership firm has withdrawn ` 9,000 at the end of each quarter, throughout the

year. Calculate interest on drawings at the rate of 6% per annum. (CBSE Sample Question Paper 2018)

41. A and B are partners sharing profits equally. A drew regularly ` 4,000 at the end of every month for

six months ended 30th September, 2019. Calculate interest on drawings @ 5% p.a. for a period of six months.


42. Calculate interest on drawings of Ashok @ 10% p.a. for the year ended 31st March, 2020, in each of the following alternative cases:

Case 1. If he withdrew ` 7,500 in the beginning of each quarter.

Case 2. If he withdrew ` 7,500 at the end of each quarter.

Case 3. If he withdrew ` 7,500 during the middle of each quarter.

43. Kanika and Gautam are partners doing a dry cleaning business in Lucknow, sharing profits in the ratio 2 : 1 with capitals ` 5,00,000 and ` 4,00,000 respectively. Kanika withdrew the following amounts during the year to pay the hostel expenses of her son:

1st April ` 10,000

1st June ` 9,000

1st November ` 14,000

1st December ` 5,000

Gautam withdrew ` 15,000 on the first day of April, July, October and January to pay rent for the accommodation of his family. He also paid ` 20,000 per month as rent for the office of partnership which was in a nearby shopping complex.

Calculate interest on drawings @ 6% p.a. (CBSE Sample Paper 2015)

Profit and Loss Appropriation Account and Partners’ Capital Accounts

44. C and D are partners in a firm; C has contributed ` 1,00,000 and D ` 60,000 as capitals. Interest is payable @ 6% p.a. and D is entitled to salary of ` 3,000 per month. In the year ended 31st March, 2020, the profit was ` 80,000 before interest and salary.


45. Amit and Vijay started a partnership business on 1st April, 2019. Their capital contri butions were ` 2,00,000 and ` 1,50,000 respectively. The Partnership Deed provided as follows:

(a) Interest on capital be allowed @ 10% p.a.

(b) Amit to get a salary of ` 2,000 per month and Vijay ` 3,000 per month.

(c) Profits are to be shared in the ratio of 3 : 2.

Net Profit for the year ended 31st March, 2020 was ` 2,16,000. Interest on drawings amounted to ` 2,200 for Amit and ` 2,500 for Vijay.


46. Prepare Capital Accounts of the Partners Sohan and Mohan from the following information, if their capitals are fluctuating: Sohan (`) Mohan (`)

Capitals on 1st April, 2019 4,00,000 3,00,000 Drawings during the year ended 31st March, 2020 50,000 30,000 Interest on Capital 5% p.a. 5% p.a. Interest on Drawings 1,250 750 Share of Profit for the year ended 31st March, 2020 60,000 50,000 Partner’s Salary 36,000 ... Commission 5,000 3,000

47. A and B are partners sharing profits and losses in the ratio of 3 : 1. On 1st April, 2019, their capitals were: A ` 50,000 and B ` 30,000. During the year ended 31st March, 2020, the firm earned a net profit of ` 50,000. The terms of partnership are:

(a) Interest on capital is to be allowed @ 6% p.a.

(b) A will get a commission @ 2% on turnover.

(c) B will get a salary of ` 500 per month.

(d) B will get commission of 5% on profits after deduction of all expenses including such commission.


Partners’ drawings for the year were: A ` 8,000 and B ` 6,000. Turnover for the year was ` 3,00,000.

After considering the above facts, you are required to prepare Profit and Loss Appro priation Account and

Partners’ Capital Accounts.

48. Sajal and Kajal are partners sharing profits and losses in the ratio of 2 : 1. On 1st April, 2019 their Capitals

were: Sajal—` 5,00,000 and Kajal—` 4,00,000.

Prepare Profit and Loss Appropriation Account and the Partners’ Capital Accounts at the end of the year

from the following information:

(a) Interest on Capital is to be allowed @ 5% p.a.

(b) Interest on the loan advanced by Kajal for the whole year, the amount of loan being ` 3,00,000.

(c) Interest on partners’ drawings @ 6% p.a. Drawings: Sajal ` 1,00,000 and Kajal ` 80,000.

(d) 10% of the divisible profit is to be transferred to General Reserve.

Profit, before giving effect to the above, for the year ended 31st March, 2020 is ` 7,02,600.

Note: Net profit means net profit after debit of interest on loan by the partner.

49. Ali and Bahadur are partners in a firm sharing profits and losses as Ali 70% and Bahadur 30%. Their respective

capitals as at 1st April, 2019 stand as Ali ` 25,000 and Bahadur ` 20,000. The partners are allowed interest

on capitals @ 5% p.a. Drawings of the partners during the year ended 31st March, 2020 were ` 3,500 and

` 2,500 respectively.

Profit for the year, before allowing interest on capital and annual salary of Bahadur @ ` 3,000, was ` 40,000,

10% of divisible profit is to be transferred to Reserve.

Prepare Partners’ Current Accounts and Capital Accounts recording the above transactions.

50. A and B are partners sharing profits in the ratio of 3 : 2 with capitals of ` 50,000 and ` 30,000 respectively.

Interest on capital is agreed @ 6% p.a. B is to be allowed an annual salary of ` 2,500. A provision of 5% of

net profit is to be made in respect of Manager’s Commission and rent of ` 24,000 is to be accounted being

payable to A. Profit for the year before manager’s commission and rent to A was ` 39,000.

Prepare Profit and Loss Appropriation account and the Partners’ Capital Accounts.

51. A, B and C were partners in a firm having capitals of ` 50,000; ` 50,000 and ` 1,00,000 respectively. Their

Current Account balances were A: ` 10,000; B: ` 5,000 and C: ` 2,000 (Dr.). According to the Partnership

Deed the partners were entitled to an interest on Capital @ 10% p.a. C being the working partner was also

entitled to a salary of ` 12,000 p.a. The profits were to be divided as:

(a) The first ` 20,000 in proportion to their capitals.

(b) Next ` 30,000 in the ratio of 5 : 3 : 2.

(c) Remaining profits to be shared equally.

The firm earned net profit of ` 1,72,000 before charging any of the above items.

Prepare Profit and Loss Appropriation Account and pass necessary Journal entry for the appropriation

of profits. (Foreign 2009)

52. A, B and C are partners sharing profits and losses in the ratio of A 1/2, B 3/10, C 1/5 after providing for

interest @ 5% on their respective capitals, viz., A ` 50,000; B ` 30,000 and C ` 20,000 and allowing B and

C salary of ` 5,000 each per annum. During the year ended 31st March, 2020, A has drawn ` 10,000 and

B and C in addition to their salaries have drawn ` 2,500 and ` 1,000 respectively. Profit and Loss Account

for the year ended 31st March, 2020 showed net profit of ` 45,000. On 1st April, 2019, the balances in the

Current Accounts of the partners were A (Cr.) ̀ 4,500; B (Cr.) ̀ 1,500 and C (Cr.) ̀ 1,000. Interest is not charged

on Drawings and allowed on Current Account balances. Show Partners’ Capital and Current Accounts as at

31st March, 2020 after division of profits in accordance with the partnership agreement.


53. Amit, Binita and Charu are three partners. On 1st April, 2019, their Capitals stood as: Amit ` 1,00,000, Binita

` 2,00,000 and Charu ` 3,00,000. It was decided that:

(a) they would receive interest on Capitals @ 5% p.a.,

(b) Amit would get a salary of ` 10,000 per month,

(c) Binita would receive commission @ 5% of net profit after deduction of commission, and

(d) 10% of the net profit would be transferred to the General Reserve.

Before the above items were taken into account, profit for the year ended 31st March, 2020 was ` 5,00,000.

Prepare Profit and Loss Appropriation Account and the Capital Accounts of the Partners.

54. Anshul and Asha are partners sharing profits and losses in the ratio of 3 : 2. Anshul being a non-working

partner contributed ` 8,00,000 as her capital. Asha being a working partner did not contribute capital.

The Partnership Deed provides for interest on capital @ 5% and salary to every working partner @ ` 2,000

per month. Net profit (before providing for interest on capital and partner’s salary) for the year ended

31st March, 2020 was ` 32,000.

Show distribution of profits.

55. Kabir, Zoravar and Parul are partners sharing profits in the ratio of 5 : 3 : 2. Their capitals as on 1st April, 2019

were: Kabir—` 5,20,000, Zoravar—` 3,20,000 and Parul—` 2,00,000.

The Partnership Deed provided as follows:

(i) Kabir and Zoravar each will get salary of ` 24,000 p.a.

(ii) Parul will get commission of 2% of Sales.

(iii) Interest on capital is to be allowed @ 5% p.a.

(iv) Interest on Drawings is to be charged @ 5% p.a.

(v) 10% of Divisible Profit is to be transferred to General Reserve.

Sales for the year ended 31st March, 2020 were ` 50,00,000. Drawings by each of the partners during the

year was ` 60,000. Net Profit for the year was ` 1,55,500.


56. X and Y entered into partnership on 1st April, 2017. Their capitals as on 1st April, 2019 were ` 2,00,000 and

` 1,50,000 respectively. On 1st October, 2019, X gave ` 50,000 as loan to the firm. As per the provisions of

the Partnership Deed:

(i) 20% of Profits before charging Interest on Drawings but after making appropriations was to be

transferred to General Reserve.

(ii) Interest on capital is to be allowed @ 12% p.a. and Interest on Drawings is to be charged @ 10% p.a.

(iii) X to get monthly salary of ` 5,000 and Y to get salary of ` 22,500 per quarter.

(iv) X is entitled to a commission of 5% on sales. Sales for the year were ` 3,50,000.

(v) Profit to be shared in the ratio of their capitals up to ` 1,75,000 and balance equally.

Profit for the year ended 31st March, 2020, before allowing or charging interest was ̀ 4,61,000. The drawings

of X and Y were ` 1,00,000 and ` 1,25,000 respectively.

Pass the necessary Journal entries relating to appropriation of profit. Prepare Profit and Loss Appropriation

Account and the Partners’ Capital Accounts.

Adjustments for Incorrect Appropriations in the Past (Past Adjustments)

57. Reya, Mona and Nisha shared profits in the ratio of 3 : 2 : 1. Profits for the last three years were ` 1,40,000; ` 84,000 and ` 1,06,000 respectively. These profits were by mistake distributed equally. The error

is now to be corrected.

Give the necessary rectification Journal entry.


58. P and Q were partners in a firm sharing profits and losses equally. Their fixed capitals were ` 2,00,000

and ` 3,00,000 respectively. The Partnership Deed provided for interest on capital @ 12% per annum.

For the year ended 31st March, 2016, profits of the firm were distributed without providing interest

on capital.

Pass necessary adjustment entry to rectify the error. (Outside Delhi 2017)

59. Azad and Benny are equal partners. Their capitals are ` 40,000 and ` 80,000 respectively. After the accounts

for the year had been prepared, it was noticed that interest @ 5% p.a. as provided in the Partnership Deed

was not credited to their Capital Accounts before distribution of profits. It is decided to pass an adjustment

entry in the beginning of the next year. Record the necessary Journal entry.

60. Ram, Mohan and Sohan sharing profits and losses equally have capitals of ` 1,20,000, ` 90,000 and ` 60,000

respectively. For the year ended 31st March, 2020, interest was credited to them @ 6% p.a. instead of 5% p.a.

Give adjustment Journal entry.

61. Ram, Shyam and Mohan were partners in a firm sharing profits and losses in the ratio of 2 : 1 : 2. Their capitals

were fixed at ` 3,00,000, ` 1,00,000, ` 2,00,000. For the year ended 31st March, 2020, interest on capital was

credited to them @ 9% instead of 10% p.a. The profit for the year before charging interest was ` 2,50,000.

Show your working notes and pass necessary adjustment entry.

62. Simrat and Bir are partners in a firm sharing profits and losses in the ratio of 3 : 2. On 31st March, 2020 after

closing the books of account, their Capital Accounts stood at ` 4,80,000 and ` 6,00,000 respectively. On

1st May, 2019, Simrat introduced an additional capital of ` 1,20,000 and Bir withdrew ` 60,000 from his

capital. On 1st October, 2019, Simrat withdrew ` 2,40,000 from her capital and Bir introduced ` 3,00,000.

Interest on capital is allowed at 6% p.a. Subsequently, it was noticed that interest on capital @ 6% p.a. had

been omitted. Profit for the year ended 31st March, 2020 amounted to ̀ 2,40,000 and the partners’ drawings

had been: Simrat—` 1,20,000 and Bir—` 60,000.

Compute the interest on capital if the capitals are (a) fixed, and (b) fluctuating.

63. Profit earned by a partnership firm for the year ended 31st March, 2020 were distributed equally between the

partners—Pankaj and Anu—without charging interest on Drawings. Interest due on Drawings was Pankaj—

` 3,000 and Anu—` 1,000.

Pass necessary adjustment entry.

64. Mita and Usha are partners in a firm sharing profits in the ratio of 2 : 3. Their Capital Accounts as on

1st April, 2015 showed balances of ` 1,40,000 and ` 1,20,000 respectively. The drawings of Mita and Usha

during the year 2015–16 were ` 32,000 and ` 24,000 respectively. Both the amounts were withdrawn on

1st January 2016. It was subsequently found that the following items had been omitted while preparing

the final accounts for the year ended 31st March, 2016:

(a) Interest on Capital @ 6% p.a.

(b) Interest on Drawings @ 6% p.a.

(c) Mita was entitled to a commission of ` 8,000 for the whole year.

Showing your working clearly, pass a rectifying entry in the books of the firm. (AI 2017 C)

65. A, B and C were partners. Their fixed capitals were ` 60,000, ` 40,000 and ` 20,000 respectively. Their profit-

sharing ratio was 2 : 2 : 1. According to the Partnership Deed, they were entitled to interest on capital @ 5% p.a.

In addition, B was also entitled to draw a salary of ` 1,500 per month. C was entitled to a commission of 5%

on the profits after charging the interest on capital, but before charging the salary payable to B. The net

profits for the year, ` 80,000, were distributed in the ratio of their capitals without providing for any of the

above adjustments. Showing your workings clearly, pass the necessary adjustment entry. (CBSE 2019)


66. On 31st March, 2020, after the closing of the accounts, Capital Accounts of P, Q and R stood in the books

of the firm at ` 40,000; ` 30,000 and ` 20,000 respectively. Subsequently, it was noticed that interest on

capital @ 5% had been omitted. Profit for the year ended 31st March, 2020 was ` 60,000 and the partners’

drawings had been P—` 10,000, Q—` 7,500 and R—` 4,500. Profit-sharing ratio of P, Q and R is 3 : 2 : 1.

Pass necessary adjustment entry.

67. Mohan, Vijay and Anil are partners, the balances of their Capital Accounts being ` 30,000, ` 25,000 and ` 20,000 respectively. In arriving at these amounts profit for the year ended 31st March, 2020, ` 24,000 had

been credited to partners in their profit-sharing ratio. Their drawings were ` 5,000 (Mohan), ` 4,000 (Vijay)

and ` 3,000 (Anil) during the year. Subsequently, following omissions were noticed and it was decided to

rectify the errors:

(a) Interest on capital @ 10% p.a.

(b) Interest on drawings: Mohan ` 250, Vijay ` 200 and Anil ` 150.

Make necessary corrections through a Journal entry and show your workings clearly.

68. Piya and Bina are partners in a firm sharing profits and losses in the ratio of 3 : 2. Following was the Balance

Sheet of the firm as on 31st March, 2016:


Capitals: Sundry Assets 1,20,000

Piya 80,000

Bina 40,000 1,20,000

1,20,000 1,20,000

The profits ` 30,000 for the year ended 31st March, 2016 were divided between the partners without

allowing interest on capital @ 12% p.a. and salary to Piya @ ` 1,000 per month. During the year Piya

withdrew ` 8,000 and Bina withdrew ` 4,000. Showing your working notes clearly, pass the necessary

rectifying entry. (Delhi 2017 C)

69. Naveen, Qadir and Rajesh were partners doing an electronic goods business in Uttarakhand. After the

accounts of partnership were drawn up and closed, it was discovered that interest on capital has been

allowed to partners @ 6% p.a. for the years ending 31st March, 2017 and 2018, although there is no provision

for interest on capital in the Partnership Deed. On the other hand, Naveen and Qadir were entitled to a

salary of ` 3,500 and ` 4,000 per quarter respectively, which has not been taken into consideration. Their

fixed capitals were ` 4,00,000, ` 3,60,000 and ` 2,40,000 respectively. During the last two years they had

shared the profits and losses as follows:

Year Ended Ratio

31st March, 2017 3 : 2 : 1

31st March, 2018 5 : 3 : 2

Pass necessary adjusting entry for the above adjustments in the books of the firm on 1st April, 2018. Show

your workings clearly. (CBSE 2019)

70. Mannu and Shristhi are partners in a firm sharing profits in the ratio of 3 : 2. Following information is of the

firm as on 31st March, 2020:


Mannu’s Capital 3,00,000 Drawings:

Shristhi’s Capital 1,00,000 4,00,000 Mannu 40,000

Shristhi 20,000 60,000

Other Assets 3,40,000

4,00,000 4,00,000


Profit for the year ended 31st March, 2020 was ` 50,000 which was divided in the agreed ratio, but

interest @ 5% p.a. on capital and @ 6% p.a. on drawings was inadvertently omitted. Adjust interest on

drawings on an average basis for 6 months. Give the adjustment entry. (NCERT, Modified)

71. Mudit, Sudhir and Uday are partners in a firm sharing profits in the ratio of 3 : 1 : 1. Their fixed capital balances

are ` 4,00,000, ` 1,60,000 and ` 1,20,000 respectively. Net profit for the year ended 31st March, 2018

distributed amongst the partners was ` 1,00,000, without taking into account the following adjustments:

(a) Interest on capitals @ 2.5% p.a.;

(b) Salary to Mudit ` 18,000 p.a. and commission to Uday ` 12,000.

(c) Mudit was allowed a commission of 6% of divisible profit after charging such commission.

Pass a rectifying Journal entry in the books of the firm. Show workings clearly. (CBSE Sample Paper 2019)

72. A, B and C are partners in a firm. Net profit of the firm for the year ended 31st March, 2020 is ` 30,000, which

has been duly distributed among the partners in their agreed ratio of 3 : 1 : 1. It is noticed on 10th April,

2020 that the undermentioned transactions were not passed through the books of account of the firm for

the year ended 31st March, 2020.

(a) Interest on Capital @ 6% per annum, the capital of A, B and C being ̀ 50,000; ̀ 40,000 and ̀ 30,000 respectively.

(b) Interest on drawings: A ` 350; B ` 250; C ` 150.

(c) Partners’ Salaries: A ` 5,000; B ` 7,500.

(d) Commission due to A (for some special transaction) ` 3,000.

You are required to pass a Journal entry, which will not affect Profit and Loss Account of the firm and rectify

the position of partners inter se.

73. On 31st March, 2018 the balance in the Capital Accounts of Abhir, Bobby and Vineet, after making

adjustments for profits and drawings were ` 8,00,000, ` 6,00,000 and ` 4,00,000 respectively.

Subsequently, it was discovered that interest on capital and interest on drawings had been omitted. The

partners were entitled to interest on capital @ 10% p.a. and were to be charged interest on drawings @ 6% p.a.

The drawings during the year were: Abhir—` 20,000 drawn at the end of each month, Bobby—` 50,000

drawn at the beginning of every half year and Vineet—` 1,00,000 withdrawn on 31st October, 2017. The

net profit for the year ended 31st March, 2018 was ` 1,50,000. The profit-sharing ratio was 2 : 2 : 1.

Pass necessary adjusting entry for the above adjustments in the books of the firm. Also, show your

workings clearly. (CBSE 2019)

74. On 31st March, 2014, the balances in the Capital Accounts of Saroj, Mahinder and Umar after making

adjustments for profits and drawings, etc., were ` 80,000, ` 60,000 and ` 40,000 respectively. Subsequently,

it was discovered that the interest on capital and drawings has been omitted.

(a) The profit for the year ended 31st March, 2014 was ` 80,000.

(b) During the year Saroj and Mahinder each withdrew a sum of ` 24,000 in equal instalments in the end

of each month and Umar withdrew ` 36,000.

(c) The interest on drawings was to be charged @ 5% p.a. and interest on capital was to be allowed

@ 10% p.a.

(d) The profit-sharing ratio among partners was 4 : 3 : 1.

Showing your workings clearly, pass the necessary rectifying entry. (Delhi 2015 C)

75. Capitals of A, B and C as on 31st March, 2019 amounted to ` 90,000, ` 3,30,000 and ` 6,60,000 respectively.

Profit of ` 1,80,000 for the year ended 31st March, 2019 was distributed in the ratio of 4 : 1 : 1 after allowing

Interest on Capital @ 10% p.a. During the year, each partner withdrew ` 3,60,000. The Partnership Deed was

silent as to profit-sharing ratio but provided for interest on capital @ 12%.

Pass the necessary adjustment entry showing the working clearly.


76. Capital Accounts of A and B stood at ` 4,00,000 and ` 3,00,000 respectively after necessary adjustments in respect of the drawings and the net profit for the year ended 31st March, 2019. It was subsequently noticed that 5% p.a. interest on capital and also drawings were not taken into account in arriving at the distributable profit. The drawings of the partners had been: A—` 12,000 drawn at the end of each quarter and B—` 18,000 drawn at the end of each half year.

The profit for the year as adjusted amounted to ` 2,00,000. The partners share profits in the ratio of 3 : 2.

You are required to pass Journal entries and show adjusted Capital Accounts of the partners.

77. The firm of Harry, Porter and Ali, who have been sharing profits in the ratio of 2 : 2 : 1, have existed for some years. Ali wants that he should get equal share in the profits with Harry and Porter and he further wishes that the change in the profit-sharing ratio should come into effect retrospectively for the three years. Harry and Porter have agreed to it. Profits for the last three years ended 31st March, were:

Year ended 31st March, 2018 2019 2020

Profit (`) 2,20,000 2,40,000 2,90,000

Show adjustment of profits by means of an adjustment Journal entry. (NCERT, Modified)

Guarantee of Profit to a Partner

78. A and B are partners sharing profits in the ratio of 3 : 2. C was admitted for 1/6th share of profit with a minimum guaranteed amount of ` 10,000. At the close of the first financial year the firm earned a profit of ` 54,000. Find out the share of profit which A, B and C will get.

79. A, B and C were in partnership sharing profits and losses in the ratio of 4 : 2 : 1. It was provided that C’s share in profit for a year would not be less than ` 75,000. Profit for the year ended 31st March, 2020 amounted to ` 3,15,000. You are required to show the appropriation among the partners. The Profit and Loss Appropriation Account is not required.

80. X, Y and Z entered into partnership on 1st October, 2019 to share profits in the ratio of 4 : 3 : 3. X, personally guaranteed that Z’s share of profit after charging interest on capital @ 10% p.a. would not be less than ` 80,000 in a year. Capital contributions were: X—` 3,00,000, Y—` 2,00,000 and Z—` 1,50,000.

Profit for the year ended 31st March, 2020 was ` 1,60,000. Prepare Profit and Loss Appropriation Account.

81. A, B and C are partners in a firm. Their profit-sharing ratio is 2 : 2 : 1. C is guaranteed a minimum of ` 1,00,000 as share of profit every year. Any deficiency arising shall be met by B. The profits for the two years ended 31st March, 2019 and 2020 were ` 4,00,000 and ` 6,00,000 respectively.

Prepare Profit and Loss Appro priation Account for the two years.

82. A, B and C are partners sharing profits in the ratio of 5 : 4 : 1. C is given a guarantee that his minimum share of profit in any given year would be at least ` 5,000. Deficiency, if any, would be borne by A and B equally. Profit for the year ended 31st March, 2020 was ` 40,000.

Pass necessary Journal entries in the books of the firm.

83. Vikas and Vivek were partners in a firm sharing profits in the ratio of 3 : 2. On 1st April, 2019, they admitted Vandana as a new partner for 1/8th share in the profits with a guaranteed profit of ` 1,50,000. New profit-sharing ratio between Vikas and Vivek will remain same but they decided to bear any deficiency on account of guarantee to Vandana in the ratio 3 : 2. Profit of the firm for the year ended 31st March, 2020 was ` 9,00,000.

Prepare Profit and Loss Appropriation Account of Vikas, Vivek and Vandana for the year ended 31st March, 2020. (AI 2016, Modified)

84. A, B and C are partners in a firm sharing profits in the ratio of 3 : 2 : 1. They earned profit of ` 30,000 during the year ended 31st March, 2020. Distribute profit among A, B and C if:

(a) C’s share of profit is guaranteed to be ` 6,000 minimum.

(b) Minimum profit payable to C amounting to ` 6,000 is guaranteed by A.

(c) Guaranteed minimum profit of ` 6,000 payable to C is guaranteed by B.

(d) Any deficiency after making payment of guaranteed ` 6,000 will be borne by A and B in the ratio of 3 : 1.


85. A and B are in partnership sharing profits and losses in the ratio of 3 : 2. They admit C, their Manager, as a partner with effect from 1st April, 2020, for 1/4th share of profits.

C, while a Manager, was in receipt of a salary of ` 27,000 p.a. and a commission of 10% of net profit after charging such salary and commission.

In terms of the Partnership Deed, any excess amount, which C will be entitled to receive as a partner over the amount which would have been due to him if he continued to be the Manager, will be borne by A. Profit for the year ended 31st March, 2020 amounted to ` 2,25,000.


86. P, Q and R entered into partnership on 1st April, 2015 to share profits and losses in the ratio of 12 : 8 : 5. It was provided that in no case R’s share in profit be less than ` 30,000 p.a. The profits and losses for the year ended 31st March, were: 2018 Profit ` 1,20,000; 2019 Profit ` 1,80,000; 2020 Loss ` 1,20,000.

Pass the necessary Journal entries in the books of the firm.

87. Asgar, Chaman and Dholu are partners in a firm. Their Capital Accounts stood at ` 6,00,000; ` 5,00,000 and ` 4,00,000 respectively on 1st April, 2019. They shared Profits and Losses in the proportion of 4 : 2 : 3. Partners are entitled to interest on capital @ 8% per annum and salary to Chaman and Dholu @ ` 7,000 per month and ` 10,000 per quarter respectively as per the provision of the Partnership Deed.

Dholu’s share of profit (excluding interest on capital but including salary) is guaranteed at a minimum of ` 1,10,000 p.a. Any deficiency arising on that account shall be met by Asgar. The profit for the year ended 31st March, 2020 amounted to ` 4,24,000.

Prepare Profit and Loss Appropriation Account for the year ended 31st March, 2020. (Delhi 2013, Modified)

88. Ankur, Bhavna and Disha are partners in a firm. On 1st April, 2019, the balances in their Capital Accounts stood at ` 14,00,000, ` 6,00,000 and ` 4,00,000 respectively. They shared profits in the proportion of 7 : 3 : 2 respectively. Partners are entitled to interest on capital @ 6% per annum and salary to Bhavna @ ̀ 50,000 p.a. and a commission of ` 3,000 per month to Disha as per the provisions of the Partnership Deed.

Bhavna’s share of profit (excluding interest on capital) is guaranteed at not less than ` 1,70,000 p.a. Disha’s share of profit (including interest on capital but excluding commission) is guaranteed at not less than ` 1,50,000 p.a. Any deficiency arising on that account shall be met by Ankur. The profit of the firm for the year ended 31st March, 2020 amounted to ` 9,50,000.

Prepare ‘Profit and Loss Appropriation Account’ for the year ended 31st March, 2020. (AI 2013, Modified)

89. Ajay, Binay and Chetan were partners sharing profits in the ratio of 3 : 3 : 2. The Partnership Deed provided for the following:

(i) Salary of ` 2,000 per quarter to Ajay and Binay.

(ii) Chetan was entitled to a commission of ` 8,000.

(iii) Binay was guaranteed a profit of ` 50,000 p.a.

The profit of the firm for the year ended 31st March, 2015 was ̀ 1,50,000 which was distributed among Ajay, Binay and Chetan in the ratio of 2 : 2 : 1, without taking into consideration the provisions of Partnership Deed. Pass necessary rectifying entry for the above adjustments in the books of the firm. Show your workings clearly. (Delhi 2016 C)

90. The partners of a firm, Alia, Bhanu and Chand distributed the profits for the year ended 31st March, 2017, ` 80,000 in the ratio of 3 : 3 : 2 without providing for the following adjustments:

(a) Alia and Chand were entitled to a salary of ` 1,500 each per month.

(b) Bhanu was entitled for a commission of ` 4,000.

(c) Bhanu and Chand had guaranteed a minimum profit of ` 35,000 p.a. to Alia any deficiency to borne equally by Bhanu and Chand.

Pass the necessary Journal entry for the above adjustments in the books of the firm. Show workings clearly.

(CBSE Sample Paper 2018)


Minimum Earnings Guranteed by a Partner

91. Three Chartered Accountants A, B and C form a partnership, profits being shared in the ratio of 3 : 2 : 1

subject to the following:

(a) C’s share of profit guaranteed to be not less than ` 15,000 p.a.

(b) B gives a guarantee to the effect that gross fee earned by him for the firm shall be equal to his

average gross fee of the preceeding five years when he was carrying on profession alone, which on an

average works out at ` 25,000.

The profit for the first year of the partnership are ` 75,000. The gross fee earned by B for the firm is ` 16,000.

You are required to show Profit and Loss Appropriation Account after giving effect to the above.

(NCERT, Modified)

EVALUATION QUESTIONS: QUESTIONS WITH MISSING VALUES

1 (Commission to Partners and Distribution of Profit). X and Y are partners in a firm. X gets a commission of 10% on the net profits before charging any commission and Y gets a commission of 10% on the net profits after charging all commission.

Compute the missing values (?) from the following Profit and Loss Appropriation Account for the year ended 31st March, 2020:



To X’s Commission A/c 1,65,000 By Profit and Loss A/c (Net Profit) ?To Y’s Commission A/c ? To Profit transferred to: X’s Capital A/c ? Y’s Capital A/c ? ?

? ?

Solution:Dr. PROFIT AND LOSS APPROPRIATION ACCOUNT for the year ended 31st March, 2020 Cr.


To X’s Commission A/c 1,65,000 By Profit and Loss A/c (Net Profit) 16,50,000To Y’s Commission A/c (WN 2) 1,35,000 (WN 1)To Profit transferred to: X’s Capital A/c 6,75,000 Y’s Capital A/c 6,75,000 13,50,000

16,50,000 16,50,000

Working Notes:

1. Calculation of Profit before Charging any Commission:

X’s Commission 10% on the net profit before charging any commission = ` 1,65,000

∴ Net profit before charging any commission = 1,65,000 ×100/10 = ` 16,50,000.

2. Calculation of Y‘s Commission:

Net Profit after charging X’s Commission = ` 16,50,000 – ` 1,65,000 = ` 14,85,000

Y’s Commission = ` 14,85,000 × 10/110 = ` 1,35,000.


2 (Distribution of Profit). X and Y entered into partnership on 1st April, 2019. They do not have Partnership Deed. They contributed capitals of ` 10,00,000 and ` 6,00,000 respectively. On 31st October, 2019, X advanced a loan of ` 4,00,000 to the firm without any agreement as to interest. Books are closed on 31st March every year.

Fill the missing information/values (?) in the following Accounts:

Dr. PROFIT AND LOSS ACCOUNT for the year ended 31st March, 2020 Cr.


To ? ? By Net Profit ?To Net Profit transferred to Profit and Loss Appropriation A/c 8,50,000 ? ?



To X’s Capital A/c ? By Profit and Loss A/c (Net Profit) ?To Y’s Capital A/c ? ? ? ?


Particulars X (`) Y (`) Particulars X (`) Y (`)

To Balance c/d ? ? By Bank A/c ? ? By Profit and Loss Appropriation A/c ? ? ? ? ? ?

Dr. X’S LOAN ACCOUNT Cr.


To Balance c/d ? By ? ? By ? ? ? ?

Solution:Dr. PROFIT AND LOSS ACCOUNT for the year ended 31st March, 2020 Cr.


To Interest on X’s Loan A/c 10,000 By Net Profit 8,60,000 (` 4,00,000 × 5/12 × 6/100) To Net Profit transferred to Profit and Loss Appropriation A/c 8,50,000 8,60,000 8,60,000



To X’s Capital A/c (Profit) 4,25,000 By Profit and Loss A/c (Net Profit) 8,50,000To Y’s Capital A/c (Profit) 4,25,000 8,50,000 8,50,000 8,50,000



Particulars X (`) Y (`) Particulars X (`) Y (`)

To Balance c/d 14,25,000 10,25,000 By Bank A/c (Given) 10,00,000 6,00,000 By Profit and Loss Appropriation A/c 4,25,000 4,25,000 14,25,000 10,25,000 14,25,000 10,25,000

Dr. X’S LOAN ACCOUNT Cr.


To Balance c/d 4,10,000 By Bank A/c (Given) 4,00,000 By Interest on X’s Loan A/c 10,000 4,10,000 4,10,000

GUIDE TO ANSWERS

Objective Type Questions

1. State whether the following statements are True or False: (i) False; (ii) True; (iii) False; (iv) False; (v) True; (vi) True; (vii) False; (viii) False; (ix) True; (x) True; (xi) True;

(xii) False; (xiii) False; (xiv) True; (xv) False; (xvi) False; (xvii) True; (xviii) False; (xix) True; (xx) False.

2. Fill-in-the blanks with appropriate words:

(i ) fixed; (ii) 6% p.a. (iii) profit; (iv) equally; (v) Profit and Loss Appropriation Account; (vi) two; (vii) fifty; (viii) appropriation; (ix) profit; (x) Optional; (xi) Profit and Loss Appropriation Account; (xii) duty; (xiii) Profit, Loss; (xiv) Profit and Loss Account; (xv) Partnership Deed; (xvi) agreed ratio; (xvii) charge; (xviii) Fluctuating; (xix) 5.5; (xx) all.

3. Match the following:

1. (i ) (a); 2. (i) (b), (ii) (a); 3. (i) (a), (ii) (b); 4. (i) (a), (ii) (b); 5. (i) (c), (ii) (a); 6. (i) (a); 7. (i) (a), (ii) (c); 8. (i) (b).

Multiple Choice Questions (MCQs)Select the correct alternative:

1. (a); 2. (b); 3. (a); 4. (d); 5. (d); 6. (b); 7. (a); 8. (a); 9. (b); 10. (c); 11. (c); 12. (d); 13. (d); 14. (c); 15. (c); 16. (b); 17. (c); 18. (c); 19. (b); 20. (c); 21. (d); 22. (b).

Very Short Answer Type Questions 25. [Hints: (i) interest on capital, (ii) salary, (iii) commission, (iv) share of profit.] 26. [Hints: (i) interest on drawings, (ii) drawings, (iii) share of loss.] 37. [Hint: Yes, if partners have agreed that one or more of them shall not be liable for losses.] 39. [Hint: Seema’s Commission = 10/110 of ` 2,20,000 [` 2,27,500 – ` 7,500 (Salaries) = ` 20,000.] 51. [Hint: Unlimited liability means that the liability of a partner is joint and several. The personal assets of the

partner can be utilised for paying a firm’s debts.] 55. [Hint: In their old profit-sharing ratio.]

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Exercise 1. (a) Not allowed; (b) Not allowed; (c) 6% p.a.; (d) Equal; (e) Not charged; (f ) Allowed @ 6% p.a.; (g) Not charged.

2. (a) P must pay—` 25,000; (b) Q must pay—` 5,000;

(c) Goods may be bought from A Ltd.; (d) C cannot be admitted;

(e) R will get interest @ 6% p.a.

3. (a) A’s claim is not accepted, (b) B’s claim is not accepted,

(c) A and B’s claim is not accepted; C will not pay interest in the absence of agreement, and

(d) Profits or losses should be distributed among the partners equally. The claim made by A and B is not accepted.

4. In the absence of Partnership Deed, the provisions of Indian Partnership Act, 1932 will apply: (a) No interest will be paid on extra capital introduced. (b) Deep cannot be admitted as Bose and Chatterjee don’t agree. (c) No interest will be charged from Chatterjee as rate of interest was not agreed. (d) Interest on drawings will not be charged from Sarkar.

5. Harshad and Dhiman each gets ` 88,500 as profit and Harshad gets ` 3,000 as Interest on Loan.

[Hint: Harshad’s Claim: (a) Harshad is not entitled to any interest on capital, but he is entitled to interest on his loan @ 6% p.a.;

(b) Profits will be distributed equally as per Partnership Act, 1932. Dhiman’s Claim: (a) His claim is right that profits should be shared equally; (b) No remuneration will be allowed to Dhiman; (c) Interest on capital will not be allowed.]

6. A and B each gets ` 7,380 as profit and A gets ` 240 as interest on A’s loan.

7. Interest Payable to A—` 30,000 × 3/5 × 6/100 × 6/12 = ` 540;

Interest Payable to B—` 30,000 × 2/5 × 6/100 × 6/12 = ` 360.

[Hint: According to the Indian Partnership Act, 1932, interest @ 6% p.a. is payable on the amount of loan given by partners. In the present case, interest will be payable for 6 months, i.e., from 1st October, 2019 to 31st March, 2020.]

8. Interest on X’s Loan ` 2,400; Interest on Y’s Loan ` 1,200; Case 1. Profit: X ` 6,960; Y ` 10,440; Case 2. Loss: X ` 240; Y ` 360; Case 3. Profit: X ` 560; Y ` 840; Case 4. Loss: X ` 2,000; Y ` 3,000.

[Hint: Interest on Partner’s Loan is a charge against profit.]

9. Share of Loss: Bat—` 31,920; Ball—` 47,880.

[Hint: Interest on Partner’s Loan and Rent are charges against profit.]

10. ` 40,000 [(` 1,03,000 – ` 3,000) (interest on Loan by Akhil)—` 60,000 (rent)] will be distributed in the ratio of 3 : 2. Akhil—` 24,000; Bimal—` 16,000.

[Hint: In the absence of agreement, Akhil will get interest @ 6% p.a. on loan given by him. Interest will not be charged on loan to Bimal by the firm. Also, rent will be paid to Akhil as per the agreement.]

11. Interest credited to Loan Accounts of Ankit and Bhanu—` 7,500 each; Interest debited to Charu’s Capital Account—` 3,000.

12. Amount of Profit transferred to Profit and Loss Appropriation A/c—` 34,000.

13. Share of Profit: A—` 17,200; B—` 17,200.

14. Divisible Profit—` 2,75,000.

15. Provision for Manager’s Commission—` 15,000 (i.e., 5% of ` 3,00,000), Share of Profit: X—` 93,000; Y—` 62,000.


16. Divisible Profit—` 34,750; Share of Profit: Prem—` 20,850; Manoj—` 13,900.

17. Share of Profit: Atul—` 72,000; and Mithun—` 48,000.

18. Loss—` 94,000; Reema’s Share—` 47,000; Seema’s Share—` 47,000.

19. Loss—` 48,750; Dr. Bhanu’s Current A/c and Partap’s Current Account by ` 24,375 each.

20. Dr. Profit and Loss Appropriation A/c by ` 40,000;

Cr. Amar’s Current A/c by ` 15,000 and Bimal’s Current A/c by ` 25,000.

21. Dr. Profit and Loss Appropriation A/c by ` 1,00,000;

Cr. Kamal’s Current A/c by ` 55,000 and Kapil’s Current A/c by ` 45,000;

Share of Profit: Kamal—` 2,50,000 and Kapil—` 2,50,000.

[Hint: Profit-sharing ratio between Kamal and Kapil is not given. Hence, they will share profit equally.]

22. (i) Dr. Profit and Loss Appropriation A/c by ` 20,000;

Cr. Simran’s Current A/c by ` 10,000 and Reema’s Current A/c by ` 10,000;

(ii) Dr. Profit and Loss Appropriation A/c by ` 2,80,000;

Cr. Simran’s Current A/c by ` 1,68,000 and Reema’s Current A/c by ` 1,12,000.

[Hint: Interest will not be allowed on Current Account balances.]

23. Dr. Profit and Loss Appropriation A/c by ` 90,000;

Cr. Anita’s Capital A/c by ` 50,000 and Ankita’s Capital A/c by ` 40,000.

24. (i) Dr. Profit and Loss Appropriation A/c by ` 1,35,000;

Cr. Ashish’s Capital A/c by ` 65,000 and Aakash’s Capital A/c by ` 70,000;

(ii) Share of Profit: Ashish—` 2,19,000 and Aakash—` 1,46,000.

[Hint: Interest on capital is allowed on opening balances of capital.]

25. For Interest on Capital:

Dr. Profit and Loss Appropriation A/c by ` 82,500;

Cr. Naresh’s Capital A/c by ` 42,500 and Sukesh’s Capital A/c by ` 40,000;

For Profit distribution:

Dr. Profit and Loss Appropriation A/c by ` 1,17,500;

Cr. Naresh’s Capital A/c by ` 58,750 and Sukesh’s Capital A/c by ` 58,750.

26. Interest on Capital: Jay—` 4,800; Vijay—` 3,000.

[Hint: Since the amount of net profit is less than the total amount of Interest on Capital, i.e., ` 7,200 (Jay) + ` 4,500 (Vijay) = ` 11,700, the net profit has been distributed in the ratio of interest claims of Jay and Vijay, i.e., ` 7,200 : ` 4,500 or 8 : 5.]

27. Interest on Capital: Neelkant—` 50,000; Mahadev—` 50,000.

28. Interest on Long’s Capital—` 10,800; Interest on Short’s Capital—` 13,200.

29. (i ) Interest on Capital: Moli—` 1,000; Bholi—` 500; (ii ) Loss: Moli—` 120; Bholi—` 180.

30. Interest on Capital: Amit—` 1,08,000; Bramit—` 84,000.

31. Share of Profit—` 80,000 each.

32. Commission Payable to A—` 11,000.

33. Commission Payable to Z—` 20,000.

34. Commission payable to the partners = 20/120 × ` 1,80,000 = ` 30,000 which will be shared as: A—` 6,000; B—` 9,000; C—` 6,000 and D—` 9,000. Share of Profits: A—` 60,000; B—` 45,000; C—` 30,000 and D—` 15,000.

35. X’s Commission—` 27,500; Y’s Commission—` 22,500; Net Profit—` 2,25,000; X and Y’s Share—` 1,12,500 each.

[Hint: Y’s Commission = 10/110 of ` 2,47,500 (i.e., ` 4,20,000 – ` 1,20,000 (X’s Salary) – ` 25,000

(Y’s Salary) – ` 27,500 (X’s Commission)).]


36. Ram—` 3,600 and Mohan—` 2,400.

[Hint: When the dates of drawings are not given, interest on drawings is calculated on the total amount

of drawings for average period of 6 months.]

37. Interest on Brij’s Drawings—` 2,400 and Interest on Mohan’s Drawings—` 1,800.

38. Interest on Drawings—` 7,200.

39. Interest on Drawings—` 350.

[Hint: Interest on drawings will be charged for average period of 3.5 months on total drawings.]



[Hint: Interest on drawings will be charged for average period of 2.5 months on total drawings.]

42. Case 1—` 1,875; Case 2—` 1,125; Case 3—` 1,500.

43. Interest on Drawings: Kanika—` 1,500; Gautam—` 2,250.

44. C will get ` 23,200 and D—` 56,800.

45. Share of Profit: Amit—` 75,420; Vijay—` 50,280.

46. Sohan’s Capital A/c—` 4,69,750; Mohan’s Capital A/c—` 3,37,250.

47. Commission of B—` 1,581; Share of Profit: A—` 23,714; B—` 7,905; Capital A/cs: A—` 74,714; B—` 41,286.

48. Closing Balances of Capital A/cs: Sajal—` 8,09,000; Kajal—` 5,31,100; Share of Profit: Sajal—` 3,87,000;

Kajal—` 1,93,500; General Reserve—` 64,500.

[Hint: Interest on loan by a partner is a charge.]

49. Current Accounts: Ali—` 19,642; Bahadur—` 10,883; Amount transferred to Reserve—` 3,475.

50. Share of Profit: A—` 4,170 and B—` 2,780; Balances of Capital A/cs: A—` 57,170 and B—` 37,080.

[Hint: Manager’s Commission and rent are charges against profit. Hence, they will be transferred to Profit

and Loss Account to determine Net Profit before appropriations (such as partner’s salary, interest

on capital).

Dr. PROFIT AND LOSS ACCOUNT for the year ended ... Cr.


To Rent A/c 24,000 By Profit (given) 39,000

To Manager’s Commission A/c (5/100 × ` 15,000) 750

To Net Profit trfd. to P & L App. A/c 14,250

39,000 39,000

51. Divisible Profit—` 1,40,000; A’s share—` 50,000; B’s share—` 44,000; C’s share—` 46,000.

52. Share of Profit: A—` 15,000; B—` 9,000; C—` 6,000; Balances of Current A/cs: A (Cr.)—` 12,000; B (Cr.)—

` 9,500; C (Cr.)—` 7,000.

53. Divisible Profit—` 2,76,190; Commission (Binita)—` 23,810; General Reserve—` 50,000; Share of Profit:

Amit—` 92,063; Binita—` 92,063, Charu—` 92,064; Closing Balances of Capital A/cs: Amit—` 3,17,063;

Binita—` 3,25,873; Charu—` 4,07,064.

54. Interest on Anshul’s Capital—` 20,000; Salary to Asha—` 12,000.

[Hint: Since, both interest on capital and salary to partner are appropriations and net profit is less than the

amount of appropriations to be made, net profit has been distributed in the ratio of appropriations

to be made, i.e., ` 40,000 (interest on Anshul’s capital) : ` 24,000 (Asha’s salary) or 5 : 3.]

]


55. Share of Profit: Kabir—` 40,000; Zoravar—` 32,000; Parul—` 88,000.

[Hints: 1. Since, net profit is not adequate to meet the appropriations, it is distributed in the ratio of

appropriation to be made, i.e., ` 50,000 : ` 40,000 : ` 1,10,000 or 5 : 4 : 11.

2. In the absence of divisible profit, amount will not be transferred to General Reserve.]

56. Interest on Capital: X—` 24,000; Y—` 18,000; Salary: X—` 60,000; Y—` 90,000; Commission: X—` 17,500;

Interest on Drawings: X—` 5,000; Y—` 6,250; Share of Profit: X—` 1,18,125; Y—` 93,125; Capital Balance:

X—` 3,14,625; Y—` 2,19,875; Interest on X’s Loan: ` 1,500; Transfer to General Reserve—` 50,000.

57. Debit Nisha’s Capital A/c and Credit Reya’s Capital A/c by ` 55,000.

58. Debit P’s Current A/c and Credit Q’s Current A/c by ` 6,000.

59. Debit Azad by ` 1,000 and Credit Benny by ` 1,000.

60. Debit Ram and Credit Sohan by ` 300.

61. Debit Shyam’s Current A/c by ` 200 and Mohan’s Current A/c by ` 400; Credit Ram’s Current A/c by ` 600.

62. (a) Simrat—` 35,400; Bir—` 27,300; (b) Simrat—` 33,960; Bir—` 25,140.

63. Debit Pankaj’s Capital A/c and Credit Anu’s Capital A/c by ` 1,000.

64. Debit Usha’s Capital A/c and Credit Mita’s Capital A/c by ` 6,816.

65. Dr. A’s Current A/c—` 16,080; Cr. B’s Current A/c—` 14,253 and C’s Current A/c—` 1,827.

[Hint: C’s Commission = 5/100 × ` 74,000 [i.e., ` 80,000 – ` 6,000 (Interest on Capital)] = ` 3,700.]

66. Debit P’s Capital A/c by ` 300; Credit Q’s Capital A/c by ` 8 and R’s Capital A/c by ` 292.

[Hint: Opening Capital: P—` 20,000; Q—` 17,500; R—` 14,500.]

67. Debit Anil by ` 550 and Credit Mohan by ` 550; Corrected Profit transferred to each partner ` 6,100.

68. Debit Bina’s Capital A/c and Credit Piya’s Capital A/c by ` 5,856.

69. Dr. Rajesh’s Current A/c—` 17,800; Cr. Naveen’s Current A/c—` 10,000 and Qadir’s Current A/c—` 7,800.

70. Debit Shristhi and Credit Mannu by ` 2,880.

71. Dr. Sudhir’s Current A/c—` 6,000; Cr. Mudit’s Current A/c—` 1,000 and Uday’s Current A/c—` 5,000.

72. Dr. A’s Capital A/c—` 2,520 and C’s Capital A/c—` 2,740; Cr. B’s Capital A/c—` 5,260.

73. Dr. Bobby’s Capital A/c—` 14,402; Cr. Abhir’s Capital A/c—` 10,112; and Vineet’s Capital A/c—` 4,290.

74. Dr. Saroj’s Capital A/c—` 2,350 and Mahinder’s Capital A/c—` 1,300; Cr. Umar’s Capital A/c—` 3,650.

75. Debit A by ` 66,000 and Credit B by ` 30,000 and C by ` 36,000.

76. Partners’ Capital Accounts: A—` 3,98,790; B—` 3,01,210; Capitals on 1.4.2018: (Opening Capital):

A—` 3,28,000; B—` 2,56,000; Interest on Capital: A—` 16,400; B—` 12,800; Interest on Drawings: A—` 900;

B—` 450.

[Hints: (i) For Interest on Capital: Dr. Profit and Loss Adjustment A/c: ` 29,200;

Cr. A’s Capital A/c: ` 16,400 and B’s Capital A/c: ` 12,800.

(ii) For Interest on Drawings: Dr. A’s Capital A/c: ` 900 and B’s Capital A/c: ` 450;

Cr. Profit and Loss Adjustment A/c: ` 1,350.

(iii) Loss on Adjustment: Dr. A’s Capital A/c: ` 16,710 and B’s Capital A/c: ` 11,140;

Cr. Profit and Loss Adjustment A/c: ` 27,850.]

77. Debit Harry by ` 50,000 and Porter by ` 50,000; Credit Ali by ` 1,00,000.

78. A’s share—` 26,400; B’s share—` 17,600; C’s share—` 10,000.

79. Share of Profit: A—` 1,60,000; B—` 80,000; C—` 75,000.


80. Net Profit—` 1,27,500; Share of Profit: X—` 51,000 – ` 1,750 = ` 49,250; Y—` 1,27,500 × 3/10 = ` 38,250;

Z—` 38,250 + ` 1,750 =` 40,000.

[Hint: Guaranteed amount for half-year = ` 80,000 × 1/2 = ` 40,000.]

81. Deficiency to be met by B in: 2019—` 20,000; 2020—Nil.

82. Deficiency of C—` 1,000 borne by A and B equally, i.e., ` 500 each.

83. Deficiency of Vandana—` 37,500 borne by Vikas—` 22,500 and Vivek—` 15,000. Share of Profit: Vikas—

` 4,50,000; Vivek—` 3,00,000; Vandana—` 1,50,000.

84. (a) A—` 14,400; B—` 9,600 and C—` 6,000;

(b) A—` 14,000; B—` 10,000 and C—` 6,000;

(c) A—` 15,000; B—` 9,000 and C—` 6,000;

(d) A—` 14,250; B—` 9,750 and C—` 6,000.

85. Share of Profit: A—` 96,750; B—` 72,000; C—` 56,250.

86. For Deficiency—year ended 31st March, 2018:

Dr. P’s Capital A/c—` 3,600 and Q’s Capital A/c—` 2,400;

Cr. R’s Capital A/c—` 6,000.

For Deficiency—year ended 31st March, 2020:

Dr. P’s Capital A/c—` 32,400 and Q’s Capital A/c—` 21,600;

Cr. R’s Capital A/c—` 54,000.

87. Share of Profit: Asgar—` 70,000; Chaman—` 40,000 and Dholu—` 70,000.

[Hint: Deficiency of ` 10,000 in Dholu’s share is recovered from Asgar.]

88. Share of Profit: Ankur—` 4,14,000; Bhavna—` 1,80,000 and Disha—` 1,26,000.

[Hint: Deficiency of ` 6,000 is contributed by Ankur for Disha.]

89. Dr. Ajay’s Capital A/c: ` 6,400 and Binay’s Capital A/c: ` 2,000; Cr. Chetan’s Capital A/c: ` 8,400.

90. Dr. Bhanu’s Capital A/c—` 21,000 and Chand’s Capital A/c—` 2,000; Cr. Alia’s Capital A/c—` 23,000.

91. A’s share—` 41,400; B’s share—` 18,600; C’s share—` 15,000.

[Hint: The Gross fee of ` 16,000 earned by B for the firm is less than the amount guaranteed by him. So the

deficiency of ` 9,000 (i.e., ` 25,000 – ` 16,000) will be debited to B’s Capital Account and credited to

Profit and Loss Appropriation Account.]

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