📘 Accounting for Partnership – Micro Notes
Compiled from SimonMash notes & standard materials
🔹 1. Nature of Partnership (പങ്കാളിത്തത്തിന്റെ സ്വഭാവം)
- Definition (Sec 4): Relation between persons who have agreed to share profits of a business carried on by all or any of them acting for all.
- Essential Features:
- Two or more persons (min 2, max 50)
- Agreement (written/oral) – Partnership Deed
- Lawful business
- Sharing of profits
- Mutual agency (every partner is agent of firm)
- Unlimited liability
സവിശേഷതകൾ: രണ്ടോ അതിലധികമോ വ്യക്തികളുടെ അസോസിയേഷൻ, ബിസിനസ് നിലനിൽപ്പ്, എല്ലാവർക്കും വേണ്ടി എല്ലാവരാലും അല്ലെങ്കിൽ അവരിൽ ആരെങ്കിലും ഒരാൾ ബിസിനസ് നടത്തുക, ലാഭനഷ്ട പങ്കിടൽ.
📄 2. Partnership Deed (പങ്കാളിത്ത കരാർ)
Meaning: Written document containing terms of partnership. Preferable to avoid disputes.
Contents of Deed (കരാറിന്റെ ഉള്ളടക്കം):
- Name and address of firm & partners
- Nature of business
- Capital contribution
- Profit sharing ratio
- Interest on capital, drawings, loan
- Salary / commission to partners
- Admission, retirement, death rules
- Dispute resolution, dissolution
If Deed is silent (Indian Partnership Act 1932 applies):
- Profits & losses shared equally
- No interest on capital
- No interest on drawings
- No salary / commission
- Interest on partner’s loan @ 6% p.a.
💰 3. Partners' Capital Accounts
Fixed Capital Method
- Two accounts: Capital A/c (fixed) + Current A/c
- Capital A/c changes only when permanent changes (additional capital introduced or withdrawal of capital)
- All adjustments (interest, salary, drawings, profit share) go through Current A/c
- Balance Sheet shows both Capital (fixed) and Current A/c balance (added/deducted)
Fluctuating Capital Method
- Only one account: Capital A/c
- All transactions (drawings, interest, salary, profit) recorded directly in Capital A/c
- Capital balance changes every year (fluctuates)
Fixed Capital: Capital A/c, Current A/c എന്നീ രണ്ട് അക്കൗണ്ടുകൾ. Current അക്കൗണ്ടിൽ മൂലധനത്തിന്റെ പലിശ, ശമ്പളം തുടങ്ങിയ ക്രമീകരണങ്ങൾ നടത്തുന്നു.
Fluctuating Capital: ഓരോ പങ്കാളിക്കും ഒരു അക്കൗണ്ട് മാത്രം (Capital A/c). എല്ലാ ഇടപാടുകളും Capital അക്കൗണ്ടിൽ രേഖപ്പെടുത്തുന്നു.
Fluctuating Capital: ഓരോ പങ്കാളിക്കും ഒരു അക്കൗണ്ട് മാത്രം (Capital A/c). എല്ലാ ഇടപാടുകളും Capital അക്കൗണ്ടിൽ രേഖപ്പെടുത്തുന്നു.
📊 4. Profit & Loss Appropriation Account
Shows distribution of net profit among partners. Prepared after Profit & Loss A/c.
- Debit side (appropriations): Interest on Capital, Partner's Salary, Commission, Transfer to Reserves
- Credit side: Interest on Drawings, Net Profit brought from P&L A/c
- Remaining profit/loss transferred to Partners’ Capital/Current A/cs in profit-sharing ratio.
🧮 5. Interest on Capital
Rule: Allowed only if Deed provides. Calculated on opening capital + additional capital (from date of introduction). If opening capital missing, use formula:
Opening Capital = Closing Capital + Drawings – (Additional Capital + Share of Profit + Salary/Commission)
If loss: No interest (unless deed specifically allows). If profit < total interest due: Interest restricted to profit amount & distributed in ratio of interest due.
Examples – 10 Methods of Interest on Capital
1. Only Opening Capital Given: A: ₹1,00,000, 10% → Interest = ₹10,000
2. With Additional Capital (no drawings): Opening ₹80,000, Additional ₹20,000 on 1 July, 10%, year end 31 Dec → (80,000×10%) + (20,000×10%×6/12) = ₹8,000 + ₹1,000 = ₹9,000
3. With Drawings Only (ignored, no dates): Opening ₹1,50,000, Drawings ₹30,000, 10% → ₹15,000
4. Additional Capital + Drawings (ignored): Opening ₹2,00,000, Additional ₹50,000 on 1 July, Drawings ₹40,000 → (2,00,000×10%) + (50,000×10%×6/12) = ₹22,500
5. Finding Opening Capital: Closing ₹1,80,000 + Drawings ₹20,000 – (Additional ₹30,000 + Share of Profit ₹50,000 + Salary ₹10,000) = Opening ₹1,10,000. Interest @10%: (1,10,000×10%) + (30,000×10%×6/12) = ₹12,500
6. Firm Incurs Loss: No interest allowed unless deed permits.
7. Profit less than Interest due: Interest due H ₹12,000, I ₹8,000 (total ₹20,000). Profit ₹15,000 → distributed 3:2 → H ₹9,000, I ₹6,000.
8. Product Method – Additional only: Opening ₹1,00,000 1 Apr; add ₹20,000 1 Jul; year end 31 Mar. Products: (1,00,000×3) + (1,20,000×9) = 3,00,000+10,80,000 = 13,80,000 → Interest = (13,80,000×10%)/12 = ₹11,500
9. Product Method – Drawings only (with dates): Opening ₹2,00,000 1 Apr; drawings ₹10,000 1 Oct; year end 31 Mar. Products: (2,00,000×6) + (1,90,000×6) = 12,00,000+11,40,000 = 23,40,000 → Interest = (23,40,000×10%)/12 = ₹19,500
10. Product Method – Both additions & drawings: Opening ₹1,00,000 1 Apr; add ₹20,000 1 Jul; drawings ₹10,000 1 Oct; year end 31 Mar. Products: (1,00,000×3)+(1,20,000×3)+(1,10,000×6)= 3,00,000+3,60,000+6,60,000=13,20,000 → Interest = (13,20,000×10%)/12 = ₹11,000
💸 6. Interest on Drawings
Charged only if Deed provides. Three methods:
Method 1: Simple (exact dates)
₹10,000 withdrawn on 1 July, 10%, year end 31 Dec → Interest = 10,000 × 10% × 6/12 = ₹500
Method 2: Product Method (different amounts & dates)
Drawings: 5,000 on 1 May (8 months), 8,000 on 1 Aug (5 months), 4,000 on 1 Nov (2 months). Total products = (5,000×8)+(8,000×5)+(4,000×2) = 40,000+40,000+8,000 = 88,000. Interest = (88,000 × 10%)/12 = ₹733.33
Method 3: Average Period (fixed regular drawings)
Total yearly drawings ₹24,000, rate 10%.
- Monthly – beginning: Avg period 6.5 → 24,000×10%×6.5/12 = ₹1,300
- Monthly – middle: 6 → ₹1,200
- Monthly – end: 5.5 → ₹1,100
- Quarterly – beginning: 7.5 → ₹1,500
- Quarterly – middle: 6 → ₹1,200
- Quarterly – end: 4.5 → ₹900
ശരാശരി കാലയളവ്: മാസാദി = 6.5, മാസമധ്യം = 6, മാസാവസാനം = 5.5. ത്രൈമാസാദി = 7.5, ത്രൈമാസമധ്യം = 6, ത്രൈമാസാവസാനം = 4.5.
🔄 7. Reconstitution of Partnership (പുനർനിർമാണം)
Change in partnership agreement while firm continues. Modes:
- Change in profit sharing ratio
- Admission of a partner
- Retirement of a partner
- Death of a partner
🚪 8. Admission of a Partner
Rights of new partner: Right to share future profits & assets.
Adjustments required:
- New profit sharing ratio & sacrificing ratio
- Goodwill valuation & treatment
- Revaluation of assets & liabilities
- Distribution of accumulated profits/losses (reserves)
- Adjustment of partners' capitals (if agreed)
New Profit Sharing Ratio – 6 Cases
| Case | Description | Example |
|---|---|---|
| 1 | New partner's share given – acquired from old partners in their old ratio (implied) | Anil & Vishal (3:2) admit Sumit for 1/5 → new = 12:8:5 |
| 2 | Acquired in a specified ratio | Akshay & Bharati (3:2) admit Dinesh for 1/5 acquired equally (1/10 each) → new = 5:3:2 |
| 3 | Acquired in parts (specific fractions) | Anshu & Nitu (3:2) admit Jyoti for 3/10 (2/10 from Anshu, 1/10 from Nitu) → new = 4:3:3 |
| 4 | Old partners sacrifice fraction of their own share | Ram & Shyam (3:2); Ram sacrifices 1/4 of his share, Shyam 1/3 → new = 27:16:17 |
| 5 | New partner's share wholly taken from one partner | Das & Sinha (4:1) admit Pal for 1/4 wholly from Das → new = 11:4:5 |
| 6 | New ratio given directly; find sacrificing ratio | Rohit & Mohit (5:3) admit Bijoy for 1/7, new ratio 4:2:1 → sacrifice = 3:5 |
Sacrificing Ratio
Formula: Sacrificing Ratio = Old Share – New Share (for each sacrificing partner). Used to distribute goodwill brought by new partner.
Goodwill – Valuation & Treatment
Valuation methods:
- Average Profits Method: Goodwill = Average Profit × Years' Purchase
- Super Profits Method: Normal Profit = Capital Employed × Normal Rate/100; Super Profit = Average Profit – Normal Profit; Goodwill = Super Profit × Years' Purchase
- Capitalisation Method: Capitalised Value = (Average Profit × 100)/Normal Rate; Goodwill = Capitalised Value – Net Assets (Capital Employed). Or Goodwill = (Super Profit × 100)/Normal Rate.
Treatment on Admission:
- Case 1: New partner brings goodwill in cash → Bank A/c Dr; To New Partner's Capital A/c and Premium for Goodwill A/c. Then Premium for Goodwill A/c Dr; To Sacrificing Partners' Capital A/cs.
- Case 2: Brought but not in cash → New Partner's Capital A/c Dr; To Sacrificing Partners' Capital A/cs.
- Case 3: Not brought (hidden goodwill) – capitals adjusted.
- Case 4: Existing goodwill in books → written off to old partners' capital accounts in old ratio.
Other Adjustments
- Accumulated Profits/Losses (Reserves, P&L balance): Transferred to old partners' capital accounts in old ratio.
- Revaluation of Assets & Liabilities: Revaluation A/c prepared; profit/loss transferred to old partners in old ratio.
- Adjustment of Capitals: Capitals made proportionate to new profit sharing ratio based on new partner's capital or total firm capital.
🚶 9. Retirement of a Partner
Adjustments required: Change in PSR, Gaining ratio, Goodwill adjustment, Reserves & accumulated P&L, Revaluation A/c, Profit up to retirement date, Total amount due, Settlement, Adjustment of continuing partners' capitals.
New Ratio & Gaining Ratio
New Share = Old Share + Acquired Share. Gaining Ratio = New Ratio – Old Ratio.
Cases:
- If relative ratio unchanged → new ratio = old ratio among continuing partners; gaining ratio = old ratio.
- If new ratio given → gaining ratio by subtracting old from new.
- If retiring partner's share acquired in specified ratio → compute new shares.
- If entire share taken by one partner → that partner gains fully.
Goodwill Treatment on Retirement
When Goodwall does NOT appear in books (4 methods):
- Raise at full value & retain: Goodwill A/c Dr (full value) → To All Partners (old ratio). Then Gaining Partners Dr (gaining ratio) → To Retiring Partner.
- Raise & write off: Goodwill A/c Dr → To All Partners; Gaining Partners Dr → To Retiring Partner; then All Partners Dr (new ratio) → To Goodwill A/c.
- Raise only retiring partner's share: Goodwill A/c Dr (retiring share) → To Retiring Partner; Gaining Partners Dr → To Goodwill A/c.
- Direct adjustment (most common): Gaining Partners' Capitals Dr (gaining ratio) → To Retiring Partner's Capital.
When Goodwill already appears: Compare book value with current value – raise/write down difference to all partners in old ratio.
Hidden Goodwill: If lump sum paid exceeds his capital after adjustments, excess = his goodwill share. Entry: Gaining Partners' Capitals Dr → To Retiring Partner's Capital.
Other Aspects
- Revaluation A/c: Same as admission, profit/loss transferred to all partners (including retiring) in old ratio.
- Accumulated Profits & Losses: Transferred to all partners' capitals in old ratio.
- Profit up to retirement date: Calculated proportionately; entry: P&L Suspense A/c Dr → To Retiring Partner's Capital.
- Settlement: Paid as lump sum cash, transferred to loan account, or instalments (interest @6% on outstanding).
- Adjustment of continuing partners' capitals: May be adjusted to new ratio based on total capital or as agreed.
⚰️ 10. Death of a Partner
Similar to retirement – amount due transferred to Deceased Partner's Executor's Loan A/c. All adjustments (goodwill, revaluation, reserves, profit up to death, interest on capital) same as retirement. Profit up to death calculated proportionately.
Joint Life Policy: On death, amount received credited to all partners' capitals in old ratio, or used to pay deceased partner's share.
🏁 11. Dissolution of Partnership vs Dissolution of Firm
- Dissolution of Partnership: Termination of agreement (due to admission, retirement, death, change in ratio). Business continues; Revaluation A/c prepared; no court intervention.
- Dissolution of Firm: Complete winding up of business. Firm ceases to exist; assets sold, liabilities paid; Realisation A/c prepared; court may intervene.
Modes of Dissolution of Firm (5 types)
- By agreement
- Compulsory (insolvency, illegal business)
- By notice (partnership at will)
- On happening of contingencies (expiry of term, death, etc.)
- By court (on suit by partner – insanity, misconduct, etc.)
Settlement of Accounts – Section 48
Treatment of Losses (order):
- First out of profits
- Next out of partners' capital
- Lastly by partners individually in profit-sharing ratio
Application of Assets (order):
- Payment of firm's debts to third parties
- Payment to partners for advances (loans) proportionately
- Payment to partners for capital proportionately
- Residue divided among partners in profit-sharing ratio
Realisation Account – Accounting Procedure
Key journal entries:
- Transfer assets (except cash/bank): Realisation A/c Dr; To Sundry Assets A/c
- Transfer external liabilities: Sundry Liabilities A/c Dr; To Realisation A/c
- Sale of assets: Bank A/c Dr; To Realisation A/c
- Asset taken over by partner: Partner's Capital A/c Dr; To Realisation A/c
- Payment of liabilities: Realisation A/c Dr; To Bank A/c
- Liability taken over by partner: Realisation A/c Dr; To Partner's Capital A/c
- Realisation expenses paid by firm: Realisation A/c Dr; To Bank A/c
- Expenses paid by partner: Realisation A/c Dr; To Partner's Capital A/c
- Profit on realisation: Realisation A/c Dr; To Partners' Capital A/cs (in PSR)
- Loss on realisation: Partners' Capital A/cs Dr; To Realisation A/c
- Unrecorded assets realised: Bank A/c Dr; To Realisation A/c
- Unrecorded liability paid: Realisation A/c Dr; To Bank A/c
Difference: Realisation A/c vs Revaluation A/c
| Realisation A/c | Revaluation A/c |
|---|---|
| Prepared at dissolution of firm | Prepared at admission/retirement/death |
| To find profit/loss on realisation of assets & settlement of liabilities | To find profit/loss on revaluation of assets & liabilities |
| All assets & liabilities transferred at book value | Only changes in value recorded |
| Realisation expenses recorded | No expenses recorded |
| Closes the books of the firm | Books continue; new balance sheet prepared |
Treatment of Goodwill, Reserves & Accumulated Losses
- Goodwill: Transferred to Realisation A/c at book value. If realised or taken over, recorded accordingly.
- Reserves & credit balance of P&L: Transferred to Partners' Capital A/cs in profit-sharing ratio.
- Accumulated losses (P&L Dr.): Written off against Partners' Capital A/cs in profit-sharing ratio.
Downloaded from www.Simonmash.com ® – Original notes contain detailed Malayalam explanations for each topic. This micro version captures key points in English for quick revision.
📚 End of Partnership Accounting Micro Notes