Accounts needed in Partnership Accounts.

There is not much difference between the accounts of a partnership firm and that of sole proprietorship (provided there is no change in the firm itself). The only difference to be noted is that instead of one Capital Account there will be as many Capital Accounts as there are partners.

CAPITAL ACCOUNT

Capital account represents, the amount introduced by the partners in the Firm, As it is a liability to the Firm (As the money belongs to Partners) it is shown on the liability side of the Capital A/c

Drawings Account or Current Account

When a partner takes money out of the firms for his domestic purpose, either his Capital Account can be debited or a separate account, named as Drawings Account, can be opened in his name and the account may be debited. In a Trial Balance of a partnership firm, therefore, one may find Capital Accounts of partners as well as Drawings Accounts. Finally the Drawings Account of a partner may be transferred to his Capital Account so that a net figure is available. But, often the Drawings Account or Current Account (as it is usually called) remains separate.

Profit and Loss Appropriation

During the course of business, a partnership firm will prepare Trading Account and a Profit and Loss Account at the end of every year.

This is to say that final accounts of a sole proprietorship concern will not differ from the accounts of a partnership firm. The Profit and Loss Account will show the profit earned by the firm or loss suffered by it. This profit or loss has to be transferred to the Capital Accounts of partners according to the terms of the Partnership Deed or according to the provisions of the Indian Partnership Act (if there is no Partnership Deed or if the Deed is silent on a particular point).

Suppose the Profit and Loss Account reveals a profit of ` 90,000. There are two partners, A and B. A devotes all his time to the firm; B does not. A’s capital is ` 50,000 and B’s is ` 20,000. There is no Partnership Deed. In such a case the profit will be distributed among A and B equally.

Let us Understand Few concepts Looking at the illustrations Below. 

A and B start business on 1st January, 2011, with capitals of ` 30,000 and ` 20,000. According to the Partnership Deed, B is entitled to a salary of ` 500 per month and interest is to be allowed on capitals at 6% per annum. The remaining profits are to be distributed amongst the partners in the ratio of 5:3. During 2011 the firm earned a profit, before charging salary to B and interest on capital amounting to ` 25,000. During the year A withdrew ` 8,000 and B withdrew ` 10,000 for domestic purposes.

Give journal entries relating to division of profit.

Journal Entries

What if the partnership deed is silent? 

Lets understand that by another illustration.

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 :

• 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.

• Rahim has devoted full time for running the business and demands salary at the rate of ` 500 p.m. But Ram and Karim do not agree.

• 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 and 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.

Solution

There is no partnership deed. Therefore, the following provisions of the Indian Partnership Act are to be applied for settling the dispute.

• No interest on capital is payable to any partner. Therefore, Ram is not entitled to interest on

• No remuneration is payable to any partner. Therefore, Rahim is not entitled to any salary.

• Interest on loan is payable @ 6% p.a. Therefore, Karim is to get interest @ 6% p.a. on ` 2,000 instead of 12%.

• The profits should be distributed equally.

Well, by now we know how to deal with the P/L Appropriation Ac when the Partnership deed provides expressively and when the Deed is silent.

A simple doubt, Why P/L Appropriation and not P/l?

Well the difference is that, P/l is used for Showing any Expenditure, But as partners are owners of the Firm and hence they are sharing the profits made.

Hence sharing of profits between owners is not Expenditure but Sharing of profits between owners. So Transactions such as Profit sharing, Transfer to reserves, Dividend etc are showed in P/l Appropriation and not P/l. (As share holders are owners of company, dividend issue is sharing of profits made by company between owners and not any expenditure)

Finally Lets understand how does a Capital a/c look via a Illustration.

A and B start business on 1st January, 2011, with capitals of ` 30,000 and ` 20,000. According to the Partnership Deed, B is entitled to a salary of ` 500 per month and interest is to be allowed on opening capitals at 6% per annum. The remaining profits are to be distributed amongst the partners in the ratio of 5:3. During 2011, the firm earned a profit, before charging salary to B and interest on capital amounting to ` 25,000. During the year A withdrew ` 8,000 and B withdrew ` 10,000 for domestic purposes.

Prepare Capital Accounts of Partners A and B.

Hope the above concepts are clear, Please comment for any Doubts.