PARTNERSHIP – PROFIT & LOSS APPROPRIATION ACCOUNT
THEORETICAL QUESTIONS
Q1. Explain “Fixed Capital Account” & “Fluctuating Capital Accounts” in relation to partnership accounts.
Ans.
Fixed Capital Account: Under this method capital & current two accounts are opened for each partner. The capital account shows the partners contribution & withdrawal to capital.
Partner’s current account, is opened to record the transactions between the partners and the firm, i.e. salary, interest on capital, drawings, and so on.
Fluctuating Capital Accounts: When all the transactions between the partners and the firm are recorded to capital account, in such case capital accounts are known as fluctuating capital accounts.
Q2. Write a short note on: Partners Drawings
Ans. In absence of any provision in partnership deed, no interest is to be allowed on partner’s capital accounts and no interest on drawings is to be charged.
Interest on drawings is a gain for the firm and it is credited to the profit and loss appropriation account and debited to the partner’s drawings accounts.
For calculating interest on drawings, following points has to be considered:
(1) When a partner draws a fixed sum at the beginning of each month, interest on total drawings will be equal to interest of 6.5 months at an agreed rate
(2) When a partner draws a fixed sum at the middle of each month, interest on total drawings will be equal to interest of 6 months at an agreed rate
(3) When a partner draws a fixed sum at the end of each month, interest on total drawings will be equal to interest of 5.5 months at an agreed rate.
Example: Suppose A, B and C are partners sharing profits equally. During the year 2025 the following amounts were withdrawn by the partners in anticipation of profits.
A @ ` 100 p.m. at the beginning of each month,
B @ ` 100 p.m. at the middle of each month,
C @ ` 100 p.m. at the end of each month and rate of interest on drawing 10% p.a.
10.2 CH. 10: PARTNERSHIP – PROFIT & LOSS APPROPRIATION ACCOUNT
Now applying the above formula the interest on drawings will be as follows:
A = 100 × 12 × 10% × 6.5 = 65 12
B = 100 × 12 × 10% × 6 = 60 12
C = 100 × 12 × 10% × 5.5 = 55 12
Q3. Write a short note on: Partners Loan Ans.
When a partner provides a loan to the firm, it should be credited to a separate loan account. It is important to distinguish loan and capital account of partners for the following reasons:
1. As per the provision of the Indian Partnership Act, 1932, partners loan is repayable on dissolution in priority to capital.
2. In the absence of any agreement partners are entitled to get 6% interest p.a. on loan whereas they are not entitled to interest on capital.
Q4. Discuss the rules if there is no Partnership Agreement. [Jan. 2021 (4 Marks)] Ans.
As per the Indian Partnership Act, 1932, in the absence of any agreement among the partners,
1. No partner has the right to a salary.
2. No interest is to be allowed on capital.
3. No interest is to be charged on the drawings.
4. Interest at the rate of 6%.p.a is to be allowed on a partner’s loan to the firm.
5. Profits and losses are to be shared equally.
DISTINCTIONS
Q5. Make a distinction between “fixed capital account” and “fluctuating capital account”
Ans.
Points
Number of Accounts
Capital Balance
Fixed Capital Account
Two accounts per partner: Capital Account & Current Account.
Capital balance under fixed capital account remains constant unless new capital is introduced or permanently withdrawn.
Transaction Transactions relating to profit/loss, salary, interest, drawings are recorded in Current Account.
Fluctuating Capital Account
Only one account per partner: Capital Account.
Capital balance under fluctuating capital account changes every year.
Transactions relating to profit/loss, salary, interest, drawings are recorded in Capital Account.
Points
Fixed Capital Account
Fluctuating Capital Account
Balance Sheet Both Capital & Current Accounts are shown separately. Only the Capital Account appears on the Balance Sheet.
Simplicity More complex due to maintaining two accounts. Simple, as all entries are in one place.
TRUE/FALSE
State with reasons whether following statements are True or False:
1. In absence of any agreement partners share profits of the business in the ratio of their capital contribution.
False. In absence of any agreement partners share profits equally and not in capital contribution ratio.
2. Profit sharing ratio and capital contribution ratio need not be same.
True. Profit sharing can be different from that of the capital introduced by each of the partner. Not necessary that partner contributing more capital should have a higher profit sharing ratio and vice versa.
3. Every partnership firm must register itself with Registrar of firms.
False. Registration of firms is not compulsory under Indian Partnership Act, 1932.
4. A partner can advance loan to the partnership firm in addition to capital contributed by him.
True. Where the partnership deed is absent, then the interest shall be paid at 6% per annum. So the interest on the loan to be paid to the partner.
5. A partner can demand interest on capital even if it is not provided in the partnership deed.
False. Interest on capital can be paid only if it is provided in the partnership deed.
6. If a partner does not take part in day to day business activities of the firm then he is not entitled to any share of profit.
False. Every partner need not take part in the business. Even if a partner does not take part in the business he is entitled for his share of profit.
7. Interest should be paid @ 6% p.a. on partner’s loan even if it is not provided in the partnership deed.
True. In absence of Partnership deed, Interest at the rate of 6%.p.a is to be allowed on a partner’s loan to the firm.
PRACTICAL PROBLEMS
Problem No. 1] Ram, Rahim and Karim are partners in a firm. They have no agreement in respect of profit-sharing ratio, interest on capital, interest on loan advanced by partners and remuneration payable to partners.
In the matter of distribution of profits they have put forward the following claims.
(1) Ram, who has contributed maximum capital demands interest on capital at 10% p.a. and share of profit in the capital ratio, But Rahim and Karim do not agree.
10.4 CH. 10: PARTNERSHIP – PROFIT & LOSS APPROPRIATION ACCOUNT
(2) Rahim has devoted full time for running the business and demand salary at the rat of ` 500 p.m. But, Ram and Karim do not agree.
(3) Karim demands interest on loan of ` 2,000 advanced by him at the market rate of interest which is 12% p.a.
How shall you settle the dispute and prepare Profit & Loss Appropriation Account after transferring 10% of the divisible profit to reserve. Net profit before taking into account any of the above claims amounted to ` 45,000 at the end of the first year of their business.
Ans. There is no partnership deed. Therefore, following provisions of the Indian Partnership Act, 1932 are to be applied for setting the dispute.
(i) No interest on capital is payable to any partner. Therefore, Ram is not entitled to interest on capital.
(
ii) No remuneration is payable to any partner. Therefore, Rahim is not entitled to any salary,
(iii) Interest on loan is payable @ 6% p.a. Therefore, Karim is to get interest @ 6% p.a. ` 2,000.
(
iv) The profits should be distributed equally
Dr. Profit & Loss Appropriation Account Cr
To Interest on Karim Loan A/c
[2,000 × 6%]
To Reserve A/c
[4,5000 – 120] × 10%
To Share of Profit
Problem No. 2] X, Y & Z are partners sharing profits & losses in the ration of 5:3:2. Each partner withdraws per month as follows:
X – ` 1,500 at the beginning of each month,
Y – ` 1,500 at the middle of each month,
Z – ` 1,500 at the end of each month.
Rate of interest on drawing is 8%. Calculate the interest on drawings.
Ans.
Calculation of interest on drawings:
X = 1,500 × 12 × 8% × 6.5 = 780 12
Y = 1,500 × 12 × 8% × 6 = 720 12
Z = 1,500 × 12 × 8% × 5.5 = 660 12
Problem No. 3] A, B and C are partners in a firm with capitals of ` 50,000, ` 40,000 and ` 20,000 respectively. They share profits and losses as:
(i) Up to ` 10,000, in the ratio of 4:3:3
(ii) Above ` 10,000, equally.
Net profit of the firm for the year ended 31st December 2025 amounted to ` 40,200 and the drawings of the partners were: A – ` 6,000 B – ` 5,000 C – ` 3,000.
You are required to prepare the profit and loss appropriation account for the year ended 31.12.2025 and capital accounts of the partners after considering the following adjustment:
(1) Interest on partners capitals to be paid @10% p.a.
(2) Interest on drawings to be charged @ 5% p.a.
(3) A to receive salary of ` 5,000 p.a.
(4) B and C to get commission @ 10% each on the net profit.
Ans. In the books of Firm
A (50,000 ×
Note: It is assumed that drawings are made by partners at the middle of the year and hence accordingly, interest on drawing is charged for half year.
10:
Problem No. 4] X, Y and Z are partners in a firm sharing profits and losses in the ratio of 4:3:2. During 2013, their capital, drawings & salaries were as follows:
Partners are entitled to interest on capital @ 5% p.a. Interest on drawings to be charged @ 8% p.a. The net profit for the year ended 31.12.2023 was ` 1,45,000. On 1.7.2023 X made advance of ` 1,00,000 to the firm at 6% p.a. You are required to prepare the profit & loss appropriation account and capital accounts of the partners.
Ans.
In the books of Firm
Problem No. 5] Weak, Able and Lazy are in partnership sharing profits and losses in the ratio of 2:1:1. It is agreed that interest on capital will be allowed @ 5% p.a. and interest on drawings will be charged @ 4% p.a. No interest will be charged/ allowed on current accounts.
Weak (`) Able (`) Lazy (`)
Capital (1.1.2024)
(1.1.2024)
(2024)
The draft accounts for 2024 showed a net profit of ` 60,000 before taking into account interest on capital and drawings and subject to following rectification of errors:
(
(
a) Life insurance premium of Weak amounting to ` 750 paid by the firm on 31st December, 2024 has been charged to miscellaneous expenditure account
b) Repairs of machinery amounting to ` 10,000 has been debited to plant account and depreciation thereon charged @ 20%.
(
c) Travelling expenses of ` 3,000 of Able for a pleasure trip to USA paid by the firm on 30th June 2024 has been debited to travelling expenses account. You are required to prepare the profit and loss appropriation account for the year ended 31st December 2024 and the partner’s current accounts for the year Ans.
In the books of the Firm
Calculation of interest on additional drawings of Weak: No interest will be charged on ` 750 as amount
Calculation of interest on additional drawings of Able:
3,000 × 4% × 6 = 60 12
GUARANTEE OF PROFITS TO PARTNER
Problem No. 6] Rohit and Rahul are in partnership sharing profits and losses in the ratio of 3:2. As Rohit, on account of his advancing years, feels he cannot work as hard as before, the chief clerk of the firm, Rohan, is admitted as a partner with effect from 1.1.2014, and becomes entitled in 1/10th of the net profits and nothing else, the mutual ratio between Rohit and Rahul remaining unaltered. Before becoming a partner, Rohan was getting salary of ` 5,000 p.m. together with a commission of 4% on the net profits after deducting his salary and commission.
It is provided in the partnership deed that the share of Rohan profits as a partner in excess of the amount to which he would have been entitled if he had continued as the chief clerk, should be taken out of Rohit’s share of profits. The net profit for the year ended 31.12.2014, amounts to be ` 11,00,000. Draw up the profit and loss appropriation account for the year ended 31.12.2014 showing the distribution of net profit amount the partners.
Ans.
Dr. Profit & Loss Appropriation A/c
To Partners Capital A/c: By Net Profit
- Rohit (6,00,000 – 10,000) 5,90,000 - Rahul 4,00,000 - Rohan (1,00,000 + 10,000) 1,10,000 11,00,000
Calculation of remuneration to Rohan as clerk:
(5,000 × 12)
[10,40,000 × 4 ] 104
Remuneration to Rohan as clerk = 60,000 + 40,000 = 1,00,000
Calculation of share of profit to Rohit & Rahul:
(-) Share of Rohan (1,00,000) 10,00,000
Share of Rohit = [10,00,000 × 3 ] = 6,00,000 5 Excess - Rohan getting as clerk (10,000) 5,90,000
Share of Rahul = [10,00,000 × 2 ] = 4,00,000 5
Problem No. 7] X and Y were partners in a firm, sharing profit and losses in the ratio of 3:2. They admit Z for 1/6th share in profits and guaranteed that his share of profits will not be less than 50,00,000. Total profits of the firm for the year ended 31st March, 2022 were 1,80,00,000. Calculate share of profit for each partner when: (i) Guarantee is given by firm (ii) Guarantee is given by X and Y equally. [June 2023 (5 Marks)]
10.10 CH. 10: PARTNERSHIP – PROFIT & LOSS APPROPRIATION ACCOUNT
Ans.
Guarantee is given by firm:
Z’s share as partner =1,80,00,000 × 1 = 30,00,000 6
However, his profits shall not be less than ` 50,00,000. Hence, ` 20,000 has to be borne by X and Y in the ratio of 3:2.
Dr.
To Partners Capital A/c:
1,80,00,000 - X (90,00,000 – 12,00,000)
- Y (60,00,000 – 8,00,000)
- Z (30,00,000 + 20,00,000)
Guarantee is given by X and Y equally:
1,80,00,000
1,80,00,000 - X (90,00,000 – 10,00,000)
- Y (60,00,000 – 10,00,000)
- Z (30,00,000 + 20,00,000) 50,00,000 1,80,00,000 1,80,00,000
