Notes - Partnership Accounts
Category :
21.1 Partnership
According to Section 4, of the Indian Partnership Act, 1932, ‘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’.
21.1.1 Features/Characteristics of Partnership
21.2 Partnership Deed
The document containing the agreement in writing among partners is called partnership deed.
21.2.1 Importance of Partnership Deed
It is always better to have the agreement in writing to avoid any disputes. Partnership deed and its registration is not compulsory but it is desired as in case of dispute or doubt. It acts as a guiding document and also it specifies the duties and power of each partner.
Provisions of the Indian Partnership Act, 1932 in the Absence of Partnership Deed
In the absence of partnership deed, the relevant provisions of the Indian Partnership Act, 1932 are as follows
In the absence of partnership deed profits are to be shared equally irrespective of the type of partner (active, sleeping) or the amount of capital contributed by them.
Profit and Loss Appropriation Account
The profit and loss appropriation account is an extension of the profit and loss account. The main intention of preparing a profit and loss appropriation account is to show the distribution of profits among the partners.
Format of Profit and Loss Appropriation Account
Profit and Loss Appropriation Account
for the year ended...
Dr Cr
|
Particulars |
Amt (`) |
Particulars |
Amt (`) |
|
To Interest on Capital A/c A … B … To Partners’ Salaries A/c To Partners’ Commission A/c To Reserve A/c To Profit transferred to *A’s Capital A/c … **(or A’s Current A/c) *B’s Capital A/c ... **(or B’s Current A/c) |
… … … …
… |
By Profit and Loss A/c (Net profit subject to appropriations) By Interest on Drawings A/c A ... B ... |
…
… |
|
|
… |
|
… |
|
|
|
|
|
*Under fluctuating capital method. ** Under fixed capital method
Format of Accounts Maintained under Fixed Capital Method
Two accounts are maintained under Fixed Capital method:
Partners’ Capital Account and Partners’ Current Account.
Dr Partners’ Capital Account Cr
|
Particulars |
X (`) |
Y (`) |
Z (`) |
Particulars |
X (`) |
Y (`) |
Z (`) |
|
To Cash/Bank A/c |
… |
… |
… |
By Balance b/d |
… |
… |
… |
|
(Withdrawal of capital) |
|
|
|
By Cash/Bank A/c |
… |
… |
… |
|
To Balance c/d |
... |
... |
… |
(Additional capital) |
|
|
|
|
|
… |
… |
… |
|
… |
… |
… |
Dr Partners’ Current Account Cr
|
Particulars |
X (`) |
Y (`) |
Z (`) |
Particulars |
X (`) |
Y (`) |
Z (`) |
|
*To Balance b/d (In case of debit opening balance) |
… |
… |
…. |
*By Balance b/d (In case of credit opening balance) |
… |
… |
… |
|
To Drawing A/c |
… |
… |
… |
By Interest on Capital A/c |
… |
… |
… |
|
To Interest on Drawings A/c |
... |
... |
… |
By Commission A/c |
… |
… |
… |
|
To Profit and Loss |
|
|
|
By Salary A/c |
… |
… |
… |
|
Appropriation A/c (Loss) |
… |
… |
… |
By Profit and Loss |
|
|
|
|
|
|
|
|
Appropriation A/c (Profit) |
… |
… |
… |
|
* To Balance c/d |
… |
… |
… |
|
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|
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* By Balance c/d |
… |
… |
… |
|
|
… |
… |
… |
|
… |
… |
… |
* Any one will appear
Format of Account Maintained under Fluctuating Capital Method
Only one account is maintained under fluctuating capital method i.e. Partners’ Capital Account.
Dr Partners’ Capital Account Cr
|
Particulars |
X (`) |
Y (`) |
Z (`) |
Particulars |
X (`) |
Y (`) |
Z (`) |
|
*To Balance b/d (In case of debit opening balance) |
…
|
...
|
…
|
*By Balance b/d (In case of credit opening balance) |
…
|
...
|
...
|
|
To Cash/Bank A/c |
... |
... |
... |
By Cash/Bank A/c |
... |
... |
… |
|
(Withdrawal of capital) |
|
|
|
(Additional capital) |
|
|
|
|
To Drawings A/c |
… |
… |
… |
By Interest on Capital A/c |
... |
… |
... |
|
To Interest on Drawings A/c |
… |
… |
… |
By Salary A/c |
... |
… |
... |
|
To Profit and Loss |
… |
... |
... |
By Commission A/c |
... |
... |
... |
|
Appropriation A/c (Loss) |
|
|
|
By Profit and Loss |
... |
... |
... |
|
*To Balance c/d |
… |
… |
... |
Appropriation A/c (Profit) |
|
|
|
|
|
|
|
|
*By Balance c/d |
... |
… |
… |
|
|
.... |
... |
... |
|
... |
... |
... |
*Any one will appear
Goodwill
It is the good name or reputation of a business which helps it to earn more profits than others. Goodwill is an intangible asset (an asset not having physical existence) and not a fictitious asset because it has a realisable value and fictitious assets don’t have a realisable value.
Methods of Valuation of Goodwill
Following are the methods of valuation of goodwill
(i) Average Profit Method
(a) Simple Average Profit Method
Goodwill
\[=Average\text{ }Profit\times Number\text{ }of\text{ }Years\text{ }Purchase\]
Average Profit
Total Actual Profits of Given No. of Years \[\frac{=before\text{ }Abnormal\text{ }and\text{ }Non-business\text{ }Items\text{ }}{Given\text{ }Number\text{ }of\text{ }Years}\]
(b) Weighted Average Profit Method
\[Goodwill=Weighted\text{ }Average\text{ }Profit\times Number\text{ }of\text{ }Years\text{ }Purchase\]
Weighted Average Profit = \[\frac{Total\,of\,\Pr oducts}{Total\,of\,Weights}\]
(ii) Super Profit Method
Goodwill = Super Profit\[\times \,Number\text{ }of\text{ }Years\text{ }Purchase\]
Normal Profits = Average Capital Employed\[\times \frac{Noraml\,Rate\,of\,\operatorname{Re}turn}{100}\]
Capital Employed (Net Assets) = Total Assets (excluding goodwill) - External Liabilities
Super Profits = Average (Actual) Profits - Normal Profits
(iii) Capitalisation Method
(a) Capitalisation of Average Profit
Goodwill = Capitalised Value of Average Profits - Actual Capital Employed
Capitalised Value of Average Profits
=Average Profits\[\times \frac{100}{Noraml\,Rate\,of\,\operatorname{Re}turn}\]
Actual Capital Employed = Total Assets (excluding goodwill) - External Liabilities
(b) Capitalisation of Super Profit
\[Goodwill=Super\text{ }Profits\times \frac{100}{Normal\text{ }Rate\text{ }of\text{ }Return}\]
\[Normal\text{ }Profits=Average\text{ }Capital\,Employed\times \frac{Normal\text{ }Rate\text{ }of\text{ }Return}{100}\]
Super Profits = Average Profits - Normal Profits
21.2 Admission of a Partner
Admission of a partner is one of the modes of reconstituting the firm under which old partnership comes to an end and a new one between all partners (including incoming partner) comes into existence.
New Profit Sharing Ratio and Sacrificing Ratio
New Profit Sharing Ratio
The ratio in which all the partners (including incoming partner) share the future profits and losses is known as the new profit sharing ratio.
New Profit Sharing Ratio = Old Share - Sacrificing Share
Sacrificing Ratio
The ratio in which old partners agree to sacrifice their share of profit in favour of the new partner is called the sacrificing ratio.
Sacrificing Ratio = Old Share - New Share
Treatment of Goodwill
The amount brought in by incoming partner as goodwill is divided among the existing partners in their sacrificing ratio. Any goodwill already appearing in the books (balance sheet) will be immediately written-off (debited) to old partners’ capital account in old profit sharing ratio.
Revaluation of Assets and Reassessment of Liabilities
Revaluation account is prepared to record changes in the value of assets and liabilities at the time of admission, retirement, death and change in profit sharing ratio. It is a nominal account in nature. It is also known as profit and loss adjustment account.
This account is credited with all increase in the value of assets and decrease in the value of liabilities. It is debited with decrease on account of value of assets and increase in the value of liabilities. The balance of this account shows a gain or loss on revaluation which is transferred to the existing partner’s capital account in existing profit sharing ratio.
Format of Revaluation Account
Dr Revaluation Account Cr
|
Particulars |
Amt (`) |
Particulars |
Amt (`) |
|
To Decrease in Value of Assets |
… |
By Increase in Value of Assets |
… |
|
To Increase in Value of Liabilities |
… |
By Decrease in Value of Liabilities |
… |
|
To Unrecorded Liabilities |
… |
By Unrecorded Assets |
… |
|
To Increase in the Value of Investment |
|
*By Loss Transferred to Old |
|
|
Fluctuation Fund |
… |
Partners’ Capital/Current A/c |
… |
|
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(In old ratio) |
|
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To Increase in the Value of Workmen |
|
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Compensation Reserve |
… |
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*To Profit Transferred to Old Partners’ |
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Capital/Current A/c (In old ratio) |
… |
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* Either profit or will appear.
Adjustment for Reserves and Accumulated Profits/Losses
Any accumulated profit or reserve appearing in the balance sheet at the time of admission of a new partner, is credited to the old partner’s capital account in old profit sharing ratio. If there is any loss, the same will be debited to the old partner’s in, the old ratio.
21.3 Retirement of a Partner
Retirement of a partner means retiring from the firm i.e. ceasing to be a partner of the firm. Retirement of a partner is one of the modes of reconstituting the firm under which an old partnership comes, to an end and a new one between the continuing partners (i.e. partners other than the outgoing partner) comes into existence, however, the firm continues its business. On the retirement or death of a partner, the existing partnership deed comes to an end and in its place, a new partnership deed is framed, whereby the remaining partners continue to do their business on changed terms and conditions.
New Profit Sharing Ratio and Gaining Ratio
New Profit Sharing Ratio
After retirement of a partner the new ratio in which the continuing partners (i.e. partners other than the outgoing partner) decides to share the future profits and losses, is known as new profit sharing ratio.
New Ratio = Old Share + Acquired Gaining Share
Gaining Ratio
The ratio in which the continuing partners acquire the outgoing (retired or deceased) partners’ share is called as gaining ratio. This ratio is calculated by taking out the difference between new profit share and old profit share.
Gaining Ratio = New Share - Old Share
Treatment of Goodwill
At the time of retirement or death of a partner, retiring partner’s share of profits is taken by the continuing partners.
The continuing partners then compensate the retiring or deceased partner in the form of goodwill contributed in their gaining ratio. Any goodwill already appearing in the books (balance sheet) will be immediately written off (debited) to old partners’ capital accounts in old profit sharing ratio. Here, the word ‘old partners’ includes the retiring partner.
Gaining Partners’s Capitals*/Current** A/c Dr
To Sacrificing Partner’s Capitals*/Current ** A/c
*Under fluctuating capital method
* Under fixed capital method
Revaluation of Assets and Reassessment of Liabilities
At the time of retirement of a partner, the assets and liabilities are revalued so that the due share of an outgoing partner in the profit/loss arising from such revaluation may be ascertained and adjusted in capital account. (It is prepared in the same manner as in case of admission of a partner)
Adjustment for Reserves and Accumulated Profits/Losses
At the time of retirement, net balance (after setting off liability, if any) of specific reserves (e.g. workmen compensation reserve, investment fluctuation reserve), general reserve and accumulated profit or loss etc., appearing in the balance sheet is distributed among all the partners in their profit sharing ratio.
21.4 Death of a Partner
The partnership comes to an end immediately, whenever a partner dies although the firm may continue with the remaining partners. The deceased partner’s executors are entitled to get his share in the firm as per the provision of a partnership agreement. His share in the firm is calculated in the same manner as in the case of a retiring partner.
Format of Deceased Partner’s Capital Account
|
Particulars |
Amt (`) |
Particulars |
Amt (`) |
|
To Revaluation A/c (Share in loss) |
… |
By Balance b/d |
… |
|
To Share in Accumulated Losses |
… |
By Profit and Loss Suspense A/c |
… |
|
To Cash A/c (Drawings till death) |
… |
(Share in profit for current year till death) |
… |
|
To Profit and Loss Suspense A/c |
… |
By Revaluation A/c (Share in gain) |
… |
|
(Share in loss for current year till death) |
… |
By Share of Goodwill |
… |
|
To Interest on Drawings A/c |
|
By Share in Accumulated Profits |
… |
|
To Goodwill A/c (Share in existing goodwill written-off) |
… |
By General Reserve A/c |
… |
|
To Deceased Partner’s Executor’s A/c (Transfer) |
… |
By Profit and Loss A/c |
… |
|
(Balancing figure) |
… |
By Interest on Capital A/c |
… |
|
|
… |
By Salary, Commission A/c |
… |
Settlement of Deceased Partner’s Executor’s Account
The payment to the executors of the deceased partner is made as is stated in the partnership deed or as agreed to by the remaining partners and the executors.
The payment may be made either in full i.e. in one instalment or more than one instalment.
(i) When Payment is made in full in one instalment
The accounting entry is
|
Deceased Partner’s Executor’s A/c |
Dr |
|
To Bank A/c |
|
(ii) When payment is made in more than one installment Unless agreed otherwise, the executors are entitled to interest @ 6% per annum. The executors can opt to take share of profits instead of interest. The share of profits is ascertained by dividing the profits in the ratio of deceased partner’s capital to total capital employed.
The accounting entry is
|
When interest is due |
Interest A/c Dr To Deceased Partner’s Executor’s A/c |
|
When instalment is paid |
Deceased Partner’s Executor’s A/c Dr To Bank A/c |
21.5 Dissolution of a Partnership Firm
Dissolution means breaking-up or extinction i.e. discontinuance of existing relationship among the partners.
Dissolution of Partnership
It changes the existing relationship between partners but the firm may continue its business as before.
Dissolution of a Firm
Dissolution of the firm means dissolution of partnership among all the partners in the firm. In such a case the business of the firm also comes to an end.
Accounting Treatment on Dissolution
Following accounts are opened in the books of the firm (i) Realisation Account (ii) Partners’ Capital Account (iii) Partner’s Loan Account (iv) Cash/Bank Account
Format of Realisation Account
Dr Realisation Account Cr
|
Particulars |
Amt (`) |
Particulars |
Amt (`) |
|
To Sundry Assets A/c (Excluding cash, bank, fictitious assets, accumulated losses, debit balance of partners’ capital/current accounts, loans to partner(s)) |
At their respective book values
|
By Sundry Liabilities A/c (Excluding partners’ capitals, loan from partners, reserve, accumulated profits etc.) |
At their respective book values
|
|
To Provision on any Liability A/c |
… |
By Provision on any Asset A/c |
… |
|
To Bank/Cash A/c (Amount paid for discharging liabilities)
|
Amount paid
|
By Bank/Cash A/c (Amount received on realisation of assets) |
Amount realised
|
|
To Bank/Cash A/c (Amount paid for unrecorded liabilities) |
|
By Bank/Cash A/c (Amount received from unrecorded assets) |
…
|
|
To Bank/Cash A/c (Expenses on realisation)
|
Expenses paid
|
By Partner’s Capital/Current A/c (Assets taken over by a partner recorded or unrecorded) |
Agreed value of the cost |
|
To Partner’s Capital/Current A/c (Liability taken over by a partner or remuneration/ commission paid to him or any expenses beared by him) |
Amount paid
|
By Partners’ Capital/Current A/c (Loss on realisation)*. (Transferred to partners’ capital accounts in their profit sharing ratio) |
…
|
|
To Partners’ Capital/Current A/c (Profit on realisation)* (Transferred to partners’ capital accounts in (heir profit sharing ratio) |
… |
|
|
|
|
… |
|
… |
*Any one will appear.
All provisions created against any asset or liability like provision for doubtful debts, provision for depreciation should be transferred to realisation account on credit or debit side as the case may be and it should be noted that those assets or liabilities should appear in realisation account at gross value.
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