Question

NCERT Solutions Class 12, Accountancy Part-I, Chapter- 1, Accounting for Partnership: Basic Concepts

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Concepts covered in Class 12 Accountancy Part-I Chapter- 1 Accounting for Partnership: Basic Concepts, are-

• Nature of Partnership
• Partnership Deed
• Special Aspects of Partnership Accounts
• Maintenance of Capital Accounts of Partners
• Past Adjustments
• Final Accounts

Our NCERT Solutions for Class 12 Accountancy offer detailed explanations to help students with their homework and assignments. By thoroughly mastering and practicing the concepts from each chapter using these solutions, you can significantly boost your chances of scoring top marks in your exams. Start your preparation today to excel in your studies!

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Answer 1

NCERT Solutions Class 12, Accountancy, Chapter 1, Accounting for Partnership: Basic Concepts

Short Answers

1. Define Partnership Deed.

Solution:

A partnership deed, also referred to as a partnership agreement, is a document of importance that contains the details of all the rights and responsibilities of the concerned parties involved in a business. It helps in preventing any kind of disputes or disagreements that can arise between partners over their role in the business and the associated benefits from the partnership in the firm.

2. Why is it considered desirable to make the partnership agreement in writing?

Solution:

According to the Partnership Act 1932, having a Partnership deed in writing is not mandatory. However, it is a safe option to have it in writing as it helps avoid any kind of disputes that may arise between partners of a firm in future. It also helps resolution of any kind of dispute as a written partnership that is signed by all the partners is suitable for use as evidence in a court of law.

3. List the items which may be debited or credited to the capital accounts of the partners when:

(i) Capitals are fixed

(ii) Capitals fluctuate

Solution:

(i) When Capitals are fixed

The following items are credited in the Partner's Capital Account when capital accounts are fixed.

(a) Opening balance of capital

(b) Additional capital introduced during an accounting year

The following items are debited in the Partner's Capital Account when capital accounts are fixed.

(a) Part of capital withdrawn

(b) Closing balance of capital

(ii) When Capitals are fluctuating

The following items are credited in the Partner's Capital Account when capital accounts are fluctuating.

(a) Opening balance of capital.

(b) Additional capital introduced during an accounting year

(c) Salaries to the partners

(d) Interest on capital

(e) Share of profit

(f) Commission and bonus to the partners

The following items are debited in the Partner's Capital Account when capital accounts are fluctuating.

(a) Drawings made during the accounting period

(b) Interest on drawings.

(c) Share of loss.

(d) Closing balance of capital. 

4. Why is the Profit and Loss Adjustment Account prepared? Explain.

Solution:

It is prepared because of the following reasons:

1. For recording transactions, errors or omissions which may be left while preparing the final accounts.

2. To act as an account for distributing profit and loss between partners

3. To accommodate for changes in the partnership deed

5. Give two circumstances under which the fixed capitals of partners may change.

Solution:

The following circumstances lead to change in the fixed capital of partners:

1. Introducing fresh capital in the firm by a partner with consent from other partners.

2. When a portion of capital is withdrawn with the consent of partners.

6. If a fixed amount is withdrawn on the first day of every quarter, for what period the interest on the total amount withdrawn will be calculated?

Solution:

When there is a withdrawal of money on the first day of each quarter, then the corresponding interest is calculated for a period of seven and half months on the total amount that is withdrawn.

7. In the absence of a partnership deed, specify the rules relating to the following:

(i) Sharing of profits and losses.

(ii) Interest on partner’s capital.

(iii) Interest on partner’s drawings.

(iv) Interest on partner’s loan

(v) Salary to a partner.

Solution:

(i) Sharing of profits and losses: If the partnership deed is absent, then the profit-sharing ratio should be equal among all partners, as per Partnership Act, 1932.

(ii) Interest on partner’s capital: If the partnership deed is absent, then as per Partnership Act, 1932, the partners are not entitled to interest earned on capital.

(iii) Interest on partner’s drawings: If the partnership deed is absent, then as per the Partnership Act, 1932, in the event of drawing money, it shall be charged to the partners.

(iv) Interest on partner’s loan: If the partnership deed is absent, then the partner is eligible for a 6% interest on a loan to the firm.

(v) Salary to a partner: In case of the absence of the partnership deed, the partners are not eligible for any salary; any salary whatsoever, if paid, will be as appropriation of profit (in case there is profit).

Answer 2

Long Answers

1. What is a partnership? What are its chief characteristics? Explain.

Solution:

According to Section 4 of the Partnership Act 1932, a partnership is defined as “An agreement between two or more persons who have mutually agreed to share profits or losses that will be carried by all or any one of them acting for all”. The individuals who set up the business jointly are called partners, and all the partners collectively are known as the firm.

The following are the important characteristics of a partnership firm:

1. Number of Partners: The minimum number of persons to form a partnership is 2, and the maximum is 50 as per the Companies Rules Act, 2014. Any more than the specified limit makes the partnership illegal.

2. Partnership Deed: A partnership deed is a necessary document that contains all the terms of the partnership and the details about the contribution of each partner towards the firm. It should be in written format as it helps in resolving disputes between partners and acts as evidence at times of legal procedures.

3. Business: One of the important characteristics of business is that it is formed in order to do legal business. So any kind of business that is deemed illegal makes the partnership illegal.

4. Profit/Loss Sharing: Partners are supposed to take profit and loss as per the ratio that was agreed at the time of partnership.

5. Liability: When the firm has unlimited liability, the partners of the firm need to pay from the personal asset if the firm is unable to pay to any concerned third party.

6. Mutual Agency: The firm is an agency and all the partners are its agents. Every partner is an agent and binds other partners by their act, while at the same time is bound by other partners’ actions.

2. Discuss the main provisions of the Indian Partnership Act 1932 that are relevant to partnership accounts if there is no partnership deed.

Solution:

As per the Indian Partnership Act 1932, the following provisions stay relevant when a partnership deed is not present:

1. Sharing of profits and losses: If a partnership deed is absent, then the profit-sharing ratio should be equal among all partners, as per Partnership Act, 1932.

2. Interest on partner’s capital: If the partnership deed is absent, then as per Partnership Act, 1932, the partners are not entitled to interest earned on capital.

3. Interest on partner’s drawings: If the partnership deed is absent, then as per Partnership Act, 1932, no interest shall be charged to the partners in the event of drawing money.

4. Interest on partner’s loan: If the partnership deed is absent, then the partner is eligible for a 6% interest on the loan to the firm.

5. Salary to a partner: In case of the absence of a partnership deed, the partners are not eligible for any salary; any salary whatsoever, if paid, will be as appropriation of profit (in case there is profit).

3. Explain why it is considered better to make a partnership agreement in writing.

Solution:

According to the Partnership Act of 1932, it is not mandatory to have a partnership deed in writing. However, it is a safe option to have it in writing as there are chances that the partners may have conflicts in the future that gives rise to dispute among the partners regarding the operations of the firm. A partnership deed that is documented helps in the proper functioning of the firm and assists in avoiding any kind of disputes that may arise between partners of a firm in future. It also helps resolution of any kind of dispute as a written partnership that is signed by all the partners is suitable for use as an evidence in a court of law.

4. Illustrate how interest on drawings will be calculated under various situations.

Solution:

Whenever a partner withdraws from the firm, any amount, which can be in the form of cash or other forms solely for personal use, is called the drawings. Interest on drawings is referred to the amount that is charged by the firm as interest on the total amount taken as drawings. Interest calculation is dependent on the time and the frequency in which the drawing is made. Here are some situations that can be shown where the calculation is done for interest charged on drawings.

5. How will you deal with a change in the profit-sharing ratio among existing partners? Take imaginary figures to illustrate your answer.

Solution:

There is a change in profit sharing only when there is an addition of a new partner, retirement or death of a partner or due to a mutually agreed decision among the partners. Some of the factors that need to be taken into account while changing the profit-sharing ratio are: goodwill, accumulated profits and reserves, liabilities and adjustment of capital and profit or loss on the revaluation of the assets, etc.

General reserve is essentially the accumulated profits and profit or loss that is obtained on the revaluation of assets and liabilities, adjustments in capital etc.

If one or more partners decide that it is the right time to change the profit-sharing ratio, then the gaining partner shall gain, and the other will lose; therefore, the gainer should compensate the latter. This results in debiting the gaining partner capital account and crediting the sacrificing partners’ capital account.

Gaining Partner’s Capital A/c Dr.

To Sacrificing Partner’s Capital A/c

(Adjustment entry passed)

Example:

Ram, Shyam, and Mohan are partners in a firm sharing profit and loss in a 3:2:1 ratio. They decide to share profit and loss equally in future. On that date, the books of the firm show ₹ 90,000 as the general reserve, profit due to the revaluation of plant and machinery ₹ 30,000. The following adjustment entry is passed through the capital accounts without affecting the books of accounts.

Particulars	Ram	Shyam	Mohan
Share of profit as per 3 : 2 : 1	45,000	30,000	15,000
Profit on revaluation of plant and machinery	15,000	10,000	5,000
	60,000	40,000	20,000
Share of profit as per 1:1:1	50,000	50,000	5,000
Difference (Gain or Loss)	25,000	–	25,000
	(Loss)		(Gain)

Here, Mohan gains while Ram loses, so Ram needs to be compensated by Mohan with an amount of ₹ 25,000. The following adjustment entry is passed.

Adjustment Entry:

Mohan’s Capital A/c		Dr.	25,000
To Ram’s Capital A/c				25,000
( Adjustment entry passed)

Answer 3

Numerical Questions

1. Triphati and Chauhan are partners in a firm sharing profits and losses in the ratio of 3 : 2. Their capitals were Rs 60,000 and Rs 40,000 as on January 01, 2019. During the year they earned a profit of Rs 30,000. According to the partnership deed both the partners are entitled to Rs 1,000 per month as Salary and 5% interest on their capital. They are also to be charged an interest of 5% on their drawings, irrespective of the period, which is Rs 12,000 for Tripathi, Rs 8,000 for Chauhan. Prepare Partner’s Accounts when, capitals are fixed.

Solution:

a) If interest on Capital and Partners’ salaries and interest on drawings is charged against profit, the solution will be as:

b) If interest on Capital and Partners’ salaries and interest on drawings is distributed out of  profit, the solution will be as:

As the question is silent about the treatment of Interest on Capitals, Salary, Interest on Drawings, so we have prepared the solution by following two methods, namely:

1. Charge against Profits

2. Out of Profits

This was done deliberately so as to make students aware-off the two above mentioned methods and also to match the answer with that of given in the NCERT. The appropriate answer to the question following Out of Profit Method should be as:

Tripathi's Current A/c balance Rs 3,600 and

Chauhan's Current A/c balance Rs 6,400.

In case no information regarding the treatment of above items is mentioned in the question, then we usually follow the Out of Profits Method.

2. Anubha and Kajal are partners of a firm sharing profits and losses in the ratio of 2 : 1. Their capital, were Rs 90,000 and Rs 60,000. The profit during the year were Rs 45,000. According to partnership deed, both partners are allowed salary, Rs 700 per month to Anubha and Rs 500 per month to Kajal. Interest allowed on capital @ 5% p.a. The drawings at the end of the period were Rs 8,500 for Anubha and Rs 6,500 for Kajal. Interest is to be charged @ 5% p.a. on drawings. Prepare partners capital accounts, assuming that the capital account are fluctuating.

Solution:

a)

Note: If Partners’ Salaries, Interest on capital and Interest on Drawing are treated as these have already adjusted in Profit and Loss Account. The Solution will be as 

Profit and Loss Appropriation Account

Partners’ Capital Account

b) Alternative 

Note: If Partners’ salaries, interest on capital and interest on drawings adjusted in Profit and Loss Appropriation Account. The solution will be as.

Profit and Loss Appropriation Account

Partners’ Capital Account

Answer 4

3. Harshad and Dhiman are in partnership since April 01, 2019. No Partnership agreement was made. They contributed Rs 4,00,000 and 1,00,000 respectively as capital. In addition, Harshad advanced an amount of Rs 1,00,000 to the firm, on October 01, 2019. Due to long illness, Harshad could not participate in business activities from August 1, to September 30, 2016. The profits for the year ended March 31, 2020 amounted to Rs 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 proportion of capital;

Dhiman Claims: 

(i) Profits should be distributed equally; 

(ii) He should be allowed Rs 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.

Solution:

DISTRIBUTION OF PROFITS 

Harshad Claims:

Decisions

(i) If there is no agreement on interest on partner’s capital, according to Indian partnership act 1932, no interest will be allowed to partners.

(ii) If there is no agreement on the matter of profit sharing, according to partnership act 1932, profit shall be distributed equally.

Dhiman Claims: 

Decisions

(i) Dhiman claim is justified, according partnership act 1932 if there is no agreement on the matter of profit distribution, profit shall be distributed equally.

(ii) No salary will be allowed to any partner because there is no agreement on matter of remuneration. 

(iii) Dhiman’s claim is not justified on the matter of interest on capital but justified on the matter of interest on loan. If there is no agreement on interest on partner’s loan, Interest shall be provided at 6% p.a. 

4. Aakriti and Bindu entered into partnership for making garment on April 01, 2019 without any Partnership agreement. They introduced Capitals of Rs 5,00,000 and Rs 3,00,000 respectively on October 01, 2019. Aakriti Advanced. Rs 20,000 by way of loan to the firm without any agreement as to interest.  Profit and Loss account for the year ended March 2020 showed profit of Rs 43,000. Partners could not agree upon the question of interest and the basis of division of profit. You are required to divide the profits between them giving reason for your solution.

Solution:

Reason

a) Interest onpartnersloan shall be allowed at 6% p.a. because there is no partnership agreement.

b) Interest on capital shall not be allowed because there is no agreement on interest on capital.

c) Profit shall be distributed equally because profit sharing ratio has not been given.

5. Rakhi and Shikha are partners in a firm, with capitals of Rs 2,00,000 and Rs 3,00,000 respectively. The profit of the firm, for the year ended 2016-17 is Rs 23,200. As per the Partnership agreement, they share the profit in their capital ratio, after allowing a salary of Rs 5,000 per month to Shikha and interest on Partner’s capital at the rate of 10% p.a. During the year Rakhi withdrew Rs 7,000 and Shikha Rs 10,000 for their personal use. You are required to prepare Profit and Loss Appropriation Account and Partner’s Capital Accounts.

Solution:

If interest on capital and Partners’ salaries will be provided even if firm involves in loss.

If interest on capital and salaries will be provided out of profit

If profit is less than the sum of distributable items, distribution shall be in proportion of items for distribution.

Answer 5

6. Lokesh and Azad are partners sharing profits in the ratio 3 : 2, with capitals of Rs 50,000 and Rs 30,000, respectively. Interest on capital is agreed to be paid @ 6% p.a. Azad is allowed a salary of Rs 2,500 p.a. During 2016, the profits prior to the calculation of interest on capital but after charging Azad’s salary amounted to Rs 12,500. A provision of 5% of profits is to be made in respect of manager’s commission. Prepare accounts showing the allocation of profits and partner’s capital accounts.

Solution:

Profit and Loss Adjustment Account

Partners’ Capital Account

7. The partnership agreement between Maneesh and Girish provides that : 

1. Profits will be shared equally;
2. Maneesh will be allowed a salary of Rs 400 p.m;
3. Girish who manages the sales department will be allowed a commission equal to 10% of the net profits, after allowing Maneesh’s salary;
4. 7% interest will be allowed on partner’s fixed capital;
5. 5% interest will be charged on partner’s annual drawings;
6. The fixed capitals of Maneesh and Girish are Rs 1,00,000 and Rs 80,000, respectively.

Their annual drawings were Rs 16,000 and 14,000, respectively. The net profit for the year ending March 31, 2019 amounted to Rs 40,000; 

Prepare firm’s Profit and Loss Appropriation Account.

Solution:

8. Ram, Raj and George are partners sharing profits in the ratio 5 : 3 : 2. According to the partnership agreement George is to get a minimum amount of Rs 10,000 as his share of profits every year. The net profit for the year 2013 amounted to Rs 40,000. Prepare the Profit and Loss Appropriation Account.

Solution:

9. Amann, Babita and Suresh are partners in a firm. Their profit sharing ratio is 2:2:1. Suresh is guaranteed a minimum amount of Rs 10,000 as share of profit, every year. Any deficiency on that account shall be met by Babita. The profits for two years ending March 31, 2019 and March 31, 2017 were Rs 40,000 and Rs 60,000, respectively. Prepare the Profit and Loss Appropriation Account for the two years.

Solution:

10. Simmi and Sonu are partners in a firm, sharing profits and losses in the ratio of 3:1. The profit and loss account of the firm for the year ending March 31, 2020 shows a net profit of Rs 1,50,000. Prepare the Profit and Loss Appropriation Account by taking into consideration the following information:

1. Partners capital on April 1, 2019;
   Simmi, Rs 30,000; Sonu, Rs 60,000;
2. Current accounts balances on April 1, 2016,
   Simmi, Rs 30,000 (cr.); Sonu, Rs 15,000 (cr.);
3. Partners drawings during the year amounted to
   Simmi, Rs 20,000; Sonu, Rs 15,000;
4. Interest on capital was allowed @ 5% p.a.;
5. Interest on drawing was to be charged @ 6% p.a. at an average of six months;
6. Partners’ salaries: Simmi Rs 12,000 and Sonu Rs 9,000. Also show the partners’ current accounts.

Solution:

11. Arvind and Anand are partners sharing profits and losses in the ratio 8 : 3 : 1. Balances in their capital accounts on April 01, 2019 were, Arvind- Rs. 4,40,000 and Anand Rs. 2,60,000. As per their agreement, partners were entitled to interest on capital @ 5% p.a., and interest on drawings was to be charged @ 6% p.a. Arvind was allowed an annual salary of Rs. 35,000/- for the additional responsibilities taken up by him. Partners drawings for the year were, I Arvind Rs. 40,000 and Anand Rs. 28,000. Profit and loss account of the firm for the year ending March 31, 2020 showed a Net Loss of Rs. 32,400. Prepare Profit and Loss Appropriation Account.

Solution:

No salary and interest on capital will be allowed in case of loss.

Interest on drawings:

Arvind = 40,000 × 6/100 × 6/12 = Rs. 1,200

Anand = 28,000 × 6/100 × 6/12 = Rs. 840

12. Ramesh and Suresh were partners in a firm sharing profits in the ratio of their capitals contributed on commencement of business which were Rs 80,000 and Rs 60,000 respectively. The firm started business on April 1, 2016. According to the partnership agreement, interest on capital and drawings are 12% and 10% p.a., respectively. Ramesh and Suresh are to get a monthly salary of Rs 2,000 and Rs 3,000, respectively.

The profits for year ended March 31, 2017 before making above appropriations was Rs 1,00,300. The drawings of Ramesh and Suresh were Rs 40,000 and Rs 50,000, respectively. Interest on drawings amounted to Rs 2,000 for Ramesh and Rs 2,500 for Suresh. Prepare Profit and Loss Appropriation Account and partners’ capital accounts, assuming that their capitals are fluctuating.

Solution:

Capital Ratio = Ramesh : Suresh

= 80000 : 60000

= 4 : 3

Answer 6

13. Sukesh and Vanita were partners in a firm. Their partnership agreement provides that:

(i)    Profits would be shared by Sukesh and Vanita in the ratio of 3 : 2;

(ii)   5% interest is to be allowed on capital;

(iii)  Vanita should be paid a monthly salary of Rs 600.

The following balances are extracted from the books of the firm, on March 31, 2017.

	Sukesh (Rs)	Vanita (Rs)
Capital Accounts	40,000	40,000
Current Accounts	(Cr.)   7,200	(Cr.)   2,800
Drawings	10,850	8,150

Net profit for the year, before charging interest on capital and after charging partner’s salary was Rs 9,500. Prepare the Profit and Loss Appropriation Account and the Partner’s Current Accounts.

Solution:

14. Rahul, Rohit and Karan started partnership business on April 1, 2019 with capitals of Rs 20,00,000, Rs 18,00,000 and Rs 16,00,000, respectively. The profit for the year ended March 2020 amounted to Rs 1,35,000 and the partner’s drawings had been Rahul Rs 50,000, Rohit Rs 50,000 and Karan Rs 40,000. The profits are distributed among partner’s in the ratio of 3:2:1. Calculate the interest on capital @ 5% p.a.

Solution:

Interest on Capital

Rahul = 20,00,000 × \(\frac 5{100}\) = Rs 100000

Rohit = 18,00,000 × \(\frac 5{100}\) = Rs 90000

Karan = 16,00,000 × \(\frac 5{100}\) = Rs 80000

15. Sunflower and Pink Rose started partnership business on April 01, 2016 with capitals of Rs 2,50,000 and Rs 1,50,000, respectively. On October 01, 2016, they decided that their capitals should be Rs 2,00,000 each. The necessary adjustments in the capitals are made by introducing or withdrawing cash. Interest on capital is to be allowed @ 10% p.a. Calculate interest on capital as on March 31, 2017.

Solution:

Product Method

Interest on Capital = Sum of Product × \(\frac {\text{Rate}}{100} \times \frac 1{12}\)

Interest on Sunflower's Capital = \(2700000 \times \frac {10}{100} \times \frac 1 {12}\) = Rs 17500

Alternative Method:

Simple Interest Method

16. On March 31, 2017 after the close of accounts, the capitals of Mountain, Hill and Rock stood in the books of the firm at Rs 4,00,000, Rs 3,00,000 and Rs 2,00,000, respectively. Subsequently, it was discovered that the interest on capital @ 10% p.a. had been omitted. The profit for the year amounted to Rs 1,50,000 and the partner’s drawings had been Mountain: Rs 20,000, Hill Rs 15,000 and Rock Rs 10,000. Calculate interest on capital.

Solution:

Generally interest on Capital is calculated on opening balance of capital. If additional capital is not given.

Interest on Capital

Mountain \(370000\times \frac {10}{100} = Rs\ 37000\)

Hill \(265000 \times \frac {10}{100} = Rs \ 26500\)

Rock \(160000 \times \frac{10}{100} = Rs\ 16000\)

17. Following is the extract of the Balance Sheet of, Neelkant and Mahdev as on March 31, 2020:

Balance Sheet as at March 31, 2017

Liabilities	Amount (Rs)	Assets	Amount (Rs)
Neelkant’s Capital	10,00,000	Sundry Assets	30,00,000
Mahadev’s Capital	10,00,000
Neelkant’s Current Account	1,00,000
Mahadev’s Current Account	1,00,000
Profit and Loss Apprpriation (March 2017)	8,00,000
	30,00,000		30,00,000

During the year Mahadev’s drawings were Rs 30,000. Profits during 2016-17 is Rs 10,00,000. Calculate interest on capital @ 5% p.a for the year ending March 31, 2020.

Solution:

Interest on Capital

Neelkant's \(1000000 \times \frac 5{100} = Rs\ 50000\)

Neelkant's \(1000000 \times \frac 5{100} = Rs\ 50000\)

Note: In this question, as the balances of both Partner's Capital Account and of Partner's Current Account are mentioned, so it has been assumed that the capital of the partners is fixed.

As we know, when the capital of the partners is fixed, drawings and interest on capital does not affect the capital balances of the partners. Rather, it would affect their current account balances. Therefore, in this case, capital at the beginning (i.e. opening capital) and capital at the end (i.e. closing capital) of the year would remain same. Thus, the interest on capital is calculated on fixed capital balances (given in the Balance Sheet of the question).

18. Rishi is a partner in a firm. He withdrew the following amounts during the year ended March 31, 2020.

May 01, 2019	Rs 12000
July 31, 2019	Rs 6000
September 30, 2019	Rs 9000
November 30, 2019	Rs 12000
January 01, 2020	Rs 8000
March 31, 2020	Rs 7000

Interest on drawings is charged @ 9% p.a. Calculate interest on drawings.

Solution:

Product Method

Here the formula will be

Interest on Drawings = Product × \(\frac{\text{Rate}}{100} \times \frac 1 {12}\)

\(= 306000\times \frac 9{100} \times \frac 1{12}\)

= Rs 2295

Answer 7

19. The capital accounts of Moli and Golu showed balances of Rs 40,000 and Rs 20,000 as on April 01, 2019. They shared profits in the ratio of 3 : 2. They allowed interest on capital @ 10% p.a. and interest on drawings, @ 12 p.a. Golu advanced a loan of Rs 10,000 to the firm on August 01, 2019. During the year, Moli withdrew Rs 1,000 per month at the beginning of every month whereas Golu withdrew Rs 1,000 per month at the end of every month. Profit for the year, before the above mentioned adjustments was Rs 20,950. Calculate interest on drawings show distribution of profits and prepare partner’s capital accounts.

Solution:

Working Note:

1) Interest on Golu's Loan:

\(= 10,000 \times \frac 6{100} \times \frac 8{12}\)

\(= 400\)

2) Calculation of Interest on Capital:

⇒ Total Capital × Rate × \(\frac {\text{Average Period}}{12}\)

Moli \(= 40,000 \times \frac {10}{100} \times \frac {12}{12} = 4,000\)

Golu \(= 20, 000 \times \frac {10}{100} \times \frac {12}{12} = 2,000\)

3) Calculation of Interest on Drawings:

⇒ Total Drawings × Rate × \(\frac {\text{Average Period}}{12}\)

Moli \(= 12,000 \times \frac {12}{100} \times \frac {6\frac 12}{12} = Rs. 780\)

Golu \(= 12,000 \times \frac {12}{100} \times \frac {5\frac 12}{12} = Rs. 660\)

Note:  

1. If drawings is done at the beginning of every month, then interest on drawings is calculated of \(6\frac 12\) months.
2. If drawings is done at the ending of every month, then interest on drawings is calculated of \(5\frac 12\) months.
3. If rate of interest on loan is not given, then it will be charged always 6%.
4. Interest on Partner's Loan being a charge on profits, it to be shown as a deduction from Net Profit in Profit and Loss Appropriation Account or shown on the debit side of Profit and Loss Account.

20. Rakesh and Roshan are partners, sharing profits in the ratio of 3 : 2 with capitals of Rs 40,000 and Rs 30,000, respectively.

They withdrew from the firm the following amounts, for their personal use: 

Rakesh	Month	Rs.
	May 31, 2019	600
	June 30, 2019	500
	August 31, 2019	1,000
	November 1, 2019	400
	December 31, 2019	1,500
	January 31, 2020	300
	March 01, 2020	700
Rohan	At the beginning of each month	400

Interest is to be charged @ 6% p.a. Calculate interest on drawings, assuming that book of account are closed on March 31, 2020, every year.

Solution:

Rakesh’s Interest on Drawings

Interest = Sum of Product × \(\frac{Rate}{100} \times \frac 1{12}\)

= \( 25300 \times \frac 6{100} \times \frac 1{12}\)

= Rs 126.5

Interest on Rohan’s Capital

= Total Drawing × \(\frac{Rate}{100} \times \frac {13}{2 \times 12}\)

= \( 4800 \times \frac 6{100} \times \frac {13} {2 \times 12}\)

= Rs 156

21. Himanshu withdraws Rs 2,500 at the end Month of each month. The Partnership deed provides for charging the interest on drawings @ 12% p.a. Calculate interest on Himanshu’s drawings for the year ending 31st December, 2017.

Solution:

Total Drawing of Himanshu = Rs 2,500 × 12 = Rs 30,000

Interest on Drawing = Total Drawings × \(\frac{\text{Rate}}{100} \times \frac{11}{2 \times 12}\)

= \(Rs\ 30000 \times \frac {12}{100} \times \frac {11}{2 \times 12}\)

= Rs 1650

22. Bharam is a partner in a firm. He withdraws Rs 3,000 at the starting of each month for 12 months. The books of the firm closes on March 31 every year. Calculate interest on drawings if the rate of interest is 10% p.a.

Solution:

Total Drawing of Bharam = Rs 3,000 × 12 = Rs 36,000

Interest on Drawing = Total Drawings × \(\frac{\text{Rate}}{100} \times \frac{13}{2 \times 12}\)

\(= Rs\ 36000 \times \frac {10}{100} \times \frac {13}{2 \times 12}\)

= Rs 1950

23. Raj and Neeraj are partners in a firm. Their capitals as on April 01, 2019 were Rs 2,50,000 and Rs 1,50,000, respectively. They share profits equally. On July 01, 2019, they decided that their capitals should be Rs 1,00,000 each. The necessary adjustment in the capitals were made by introducing or withdrawing cash by the partners’. Interest on capital is allowed @ 8% p.a. Compute interest on capital for both the partners for the year ending on March 31, 2020.

Solution:

Interest on Capital

Raj

Interest = Sum of Product × \(\frac {Rate}{100} \times \frac 1{12}\)

\(= 1650000 \times \frac 8{100} \times \frac 1{12}\)

\(= Rs\ 11000\)

Neeraj

Interest = \(13,50,000\times\frac 8{100} \times \frac 1{12} \)

\(= Rs \ 9000\)

24. Amit and Bhola are partners in a firm. They share profits in the ratio of 3:2. As per their partnership agreement, interest on drawings is to be charged @ 10% p.a. Their drawings during 2019 were Rs 24,000 and Rs 16,000, respectively. Calculate interest on drawings based on the assumption that the amounts were withdrawn evenly, throughout the year.

Solution:

Interest on Drawings = Drawings x \(\frac {\text{Rate}}{100}\)

Amit = \(24, 000 \times \frac {10}{100} \times \frac 6 {12} = Rs\ 1200\)

Bhola = \(16, 000 \times \frac {10}{100} \times \frac 6 {12} = Rs\ 800\)

Answer 8

25. Harish is a partner in a firm. He withdrew the following amounts during the year 2017 :

	Rs
February 01	4,000
May 01	10,000
June 30	4,000
October 31	12,000
December 31	4,000

Interest on drawings is to be charged @ 7.5 % p.a.

Calculate the amount of interest to be charged on Harish’s drawings for the year ending December 31, 2017.

Solution:

Calculation of interest on Harish’s drawings

Interest on drawings = \(1, 72, 000 \times \frac {7.5}{100} \times \frac 1{12} = Rs \ 1075\)

26. Menon and Thomas are partners in a firm. They share profits equally. Their monthly drawings are Rs 2,000 each. Interest on drawings is to be charged @ 10% p.a. Calculate interest on Menon’s drawings for the year 2006, assuming that money is withdrawn:

1. at the beginning of every month,
2. at the middle of every month, and
3. at the end of every month.

Solution:

Case (i)

If they withdraw money in the beginning of each month

Interest of drawings = Total drawings × Rate × \(\frac{13}{2 \times 12}\)

Menon’s = \(24,000 \times \frac {10}{100} \times \frac {13} {2 \times 12} = Rs \ 1300\)

Thomas’s = \(24,000 \times \frac {10}{100} \times \frac {13} {2 \times 12} = Rs \ 1300\)

Case (ii)

If they withdraw in the middle of every month

Interest on Drawings = Total drawings × \(\frac {10}{100} \times \frac 6{12}\)

Menon’s = \(24,000 \times \frac {10}{100} \times \frac 6{12} = Rs\ 1200\)

Thomas’s = \(24,000 \times \frac {10}{100} \times \frac 6{12} = Rs\ 1200\)

Case (iii)

If they withdraw at the end of every month.

Interest on drawings = Total drawings × \(\frac {Rate}{100} \times \frac {11}{2 \times 12}\)

Menon’s = \(24, 000 \times \frac {10}{100} \times \frac {11}{2 \times 12} =Rs \ 1100\)

Thomas’s = \(24, 000 \times \frac {10}{100} \times \frac {11}{2 \times 12} =Rs \ 1100\)

27. On March 31, 2017, after the close of books of accounts, the capital accounts of Ram, Shyam and Mohan showed balance of Rs 24,000 Rs 18,000 and Rs 12,000, respectively. It was later discovered that interest on capital @ 5% had been omitted. The profit for the year ended March 31, 2017, amounted to Rs 36,000 and the partner’s drawings had been Ram, Rs 3,600; Shyam, Rs 4,500 and Mohan, Rs 2,700. The profit sharing ratio of Ram, Shyam and Mohan was 3:2:1. Calculate interest on capital.

Solution:

Here, Interest on Capital = Opening Capital x \(\frac {Rate}{100}\)

Ram’s = \(9600 \times \frac 5{100} = Rs \ 480\)

Shyam’s = \(10500 \times \frac 5{100} = Rs\ 525\)

Mohan's = \(8700 \times \frac 5{100} = Rs\ 435\)

28. Amit, Sumit and Samiksha are in partnership sharing profits in the ratio of 3:2:1. Samiksha’ share in profit has been guaranteed by Amit and Sumit to be a minimum sum of Rs 8,000. Profits for the year ended March 31, 2017 was Rs 36,000. Divide profit among the partners.

Solution:

Guarantee of Profit to the partners

29. Pinki, Deepati and Kaku are partner’s sharing profits in the ratio of 5:4:1. Kaku is given a guarantee that his share of profits in any given year would not be less than Rs 5,000. Deficiency, if any, would be borne by Pinki and Deepti equally. Profits for the year amounted to Rs 40,000. Record necessary journal entries in the books of the firm showing the distribution of profit.

Solution:

30. Abhay, Siddharth and Kusum are partners in a firm, sharing profits in the ratio of 5 : 3 : 2. Kusum is guaranteed a minimum amount of Rs 10,000 as per share in the profits. Any deficiency arising on that account shall be met by Siddharth. Profits for the years ending March 31, 2016 and 2017 are Rs 40,000 and 60,000 respectively. Prepare Profit and Loss Appropriation Account.

Solution:

Answer 9

31. Radha, Mary and Fatima are partners sharing profits in the ratio of 5:4:1. Fatima is given a guarantee that her share of profit, in any year will not be less than Rs 5,000. The profits for the year ending March 31, 2020 amount to Rs 35,000. If any, a shortfall in the profits guaranteed to Fatima is to be borne by Radha and Mary in the ratio of 3:2. Record necessary journal entries to show profit distribution among partners.

Solution:

Alternative Method

32. X, Y and Z are in Partnership, sharing profits and losses in the ratio of 3 : 2 : 1, respectively. Z’s share in the profit is guaranteed by X and Y to be a minimum of Rs 8,000. The net profit for the year ended March 31, 2020 was Rs 30,000. Prepare Profit and Loss Appropriation Account, indicating the amount finally due to each partner.

Solution:

33. Arun, Boby and Chintu are partners in a firm sharing profit in the ratio or 2:2:1. According to the terms of the partnership agreement, Chintu has to get a minimum of Rs 60,000, irrespective of the profits of the firm. Any Deficiency to Chintu on Account of such guarantee shall be borne by Arun. Prepare the profit and loss appropriation account showing distribution of profits among partners in case the profits for year 2015 are: (i) Rs 2,50,000; (ii) 3,60,000.

Solution:

Case (i)

Case (ii)

34. Ashok, Brijesh and Cheena are partners sharing profits and losses in the ratio of 2 : 2 : 1. Ashok and Brijesh have guaranteed that Cheena share in any year shall be less than Rs 20,000. The net profit for the year ended March 31, 2017 amounted to Rs 70,000. Prepare Profit and Loss Appropriation Account.

Solution:

Profit and Loss Appropriation Account as on
March 31, 2017

35. Ram, Mohan and Sohan are partners with capitals of Rs 5,00,000, Rs 2,50,000 and 2,00,000 respectively. After providing interest on capital @ 10% p.a. the profits are divisible as follows:

Ram 1/2, Mohan 1/3 Sohan 1/6. But Ram and Mohan have guaranteed that Sohan’s share in the profit shall not be less than Rs 25,000, in any year. The net profit for the year ended March 31, 2017 is Rs 2,00,000, before charging interest on capital.

You are required to show distribution of profit by preparing P & L Appropriation Account.

Solution:

36. Amit, Babita and Sona form a partnership firm, sharing profits in the ratio of 3 : 2 : 1, subject to the following:

i) Sona’s share in the profits, guaranteed to be not less than Rs 15,000 in any year.

ii) Babita gives guarantee to the effect that gross fee earned by her for the firm shall be equal to her average gross fee of the proceeding five years, when she was carrying on profession alone (which is Rs 25,000). The net profit for the year ended March 31, 2017 is Rs 75,000. The gross fee earned by Babita for the firm was Rs 16,000.

You are required to show Profit and Loss Appropriation Account (after giving effect to the alone).

Solution:

Answer 10

37. The net profit of X, Y and Z for the year ended March 31, 2016 was Rs 60,000 and the same was distributed among them in their agreed ratio of 3 : 1 : 1. It was subsequently discovered that the under mentioned transactions were not recorded in the books :

i) Interest on Capital @ 5% p.a.

ii) Interest on drawings amounting to X Rs 700, Y Rs 500 and Z Rs 300.

iii) Partner’s Salary : X Rs 1000, Y Rs 1500 p.a.

The capital accounts of partners were fixed as : X Rs 1,00,000, Y Rs 80,000 and Z Rs 60,000. Record the adjustment entry.

Solution:

Past Adjustment

Explanation:

Capital have credit balance if it deducted will be debited and if it is added it will be credited.

Here X wrongly taken excess Rs 2,500 hence Rs 2,500 will be deducted from X capital Account on the other hand Y and Z taken less amount as they should have been taken, hence capital account of Y and Z will be added.

38. The firm of Harry, Porter and Ali, who have been sharing profits in the ratio of 2 : 2 : 1, have existed for same 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 were for the last three year. Harry and Porter have agreement on this account. The profits for the last three years were:

	Rs
2014-15	22,000
2015-16	24,000
2016-17	29,000

Show adjustment of profits by means of a single adjustment journal entry. 

Solution:

Distribution of Profit

Journal (Adjusting entry)

39. Mannu and Shristhi are partners in a firm sharing profit in the ratio of 3 : 2. Following is the balance sheet of the firm as on March 31, 2017.

Liabilities			Amount (Rs)	Assets			Amount (Rs)
Mannu’s Capital		30,000	40,000	Drawings :
Shristhi’s Capital		10,000		Mannu		4,000	6,000
				Shristhi		2,000
				Other Assets			34,000
			40,000				40,000

Profit for the year ended March 31, 2017 was Rs 5,000 which was divided in the agreed ratio, but interest @ 5% p.a. on capital and @ 6% p.a. on drawings was inadvertently enquired. Adjust interest on drawings on an average basis for 6 months. Give the adjustment entry.

Solution:

Adjustment of Profit

Adjusting Journal Entry

40. On March 31, 2017 the balance in the capital accounts of Eluin, Monu and Ahmed, after making adjustments for profits, drawing, etc; were Rs 80,000, Rs 60,000 and Rs 40,000 respectively. Subsequently, it was discovered that interest on capital and interest on drawings had been omitted. The partners were entitled to interest on capital @ 5% p.a. The drawings during the year were Eluin Rs 20,000; Monu, Rs 15,000 and Ahmed, Rs 9,000. Interest on drawings chargeable to partners were Eluin Rs 500, Monu Rs 360 and Ahmed Rs 200. The net profit during the year amounted to Rs 1,20,000. The profit sharing ratio was 3 : 2 : 1. Pass necessary adjustment entries.

Solution:

In this question interest on capital shall be calculated on opening capital

Adjustment of Profit

Adjusting Journal Entry

41. Azad and Benny are equal partners. Their capitals are Rs 40,000 and Rs 80,000, respectively. After the accounts for the year have been prepared it is discovered that interest at 5% p.a. as provided in the partnership agreement, has not been credited to the capital accounts before distribution of profits. It is decided to make an adjustment entry at the beginning of the next year. Record the necessary journal entry.

Solution:

Interest on Capital

Azad = \(40000 \times \frac 5{100} = Rs \ 2000\)

Benny = \(80000 \times \frac 5{100} = Rs \ 4000\)

Adjustment of Profit

Adjusting Journal Entry