Partnership

Accounting with Mahesh Dilhan Fernando
STICK to the BASICS
IntroductIon..
A business can be organized in the form of a sole proprietorship, a partnership firm or a company. Earlier, you have studied how to prepare Profit and Loss Account and Balance Sheet of a sole proprietor. If one man was intelligent enough and commanded all the resources that he needed and also the necessary power to do everything, he would have carried on his business as an individual. BUT!!!!!!!, THIS IS NOT TRUE IN LIFE. Every man needs help from others and this is true in business which requires huge resources for the ongoing expansion programmers. Therefore, one of the inevitable ways is to form partnership by joining hands with person(s) who can complement the efforts by bringing in the necessary intellectual as well as financial capital. Although the basic accounting procedure is similar in all cases, there are certain special features in the accounts of a partnership firm. In the case of a partnership firm, for example, the special features relate to the distribution of profits, the maintenance of capital accounts and the adjustments required when the firm is reconstituted. In this Tutorial, we shall study the nature of partnership and discuss the basic aspects of partnership accounts like preparation of capital accounts, distribution of profits amongst partners and change in the profit sharing ratio of the existing partners along with preparation of Profit and Loss Account and Balance Sheet of the partnership firm.
Mahesh Dilhan Fernando B.B.A. (Business Finance) (Special) University of Colombo
Page 1
STICK to the BASICS
Nature of a partnership Definition:According to the Partnership act of 1890.. "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" Based on this definition the following items can be shown as the essential features 1. TWO OR MORE PERSONS- (it can be humans or institutions) 2. AGREEMENT between partners and to act mutually 3. BUSINESS- (trade or any other service) 4. PROFIT MOTIVE- (the main goal is to earn profit through business) 5. Business carried on BY ALL or any of them ACTING FOR ALL In reality we cannot find a large number of partnerships which engage in production, distribution and selling. But this kind of ownership is very popular among professional business services. For an example, Lawyers, Doctors, Accountants, Auditors etc.
HOW A PARTNERSHIP CAN BE FORMED?

A Partnership can be formed in three different ways. 1. BY ORAL AGREEMENT:-This kind of formation is possible if and only if the capital of the business is not exceeding Rs. 1,000. 2. BY IMPLICATION:-This is an occasion where the partners carryout the business implying the people outside that they do so. This formation is also valid for a business which is not has a capital exceeding Rs.1,000. 3. BY WRITTEN AGREEMENT:-According to the Act of Prevention Frauds it has stated that a partnership which has a capital exceeding Rs. 1,000 should form the partnership under this kind of agreement. This agreement is also called.
Partnership Deed
PARTNERSHIP AGREEMENT IN WRITING is called PARTNERSHIP DEED. Partnership deed is a document which is signed by all the partners and which contains all the matters determining and governing the mutual rights, duties and liabilities of the partners in the conduct and management of the affairs of the partnership. It may also be referred to as articles of partnership containing the name, nature of business, capital, duration of the firm, etc.
Page 2
STICK to the BASICS
Contents of Partnership Deed
The partnership deed usually contains the following particulars: Name of the firm; Interest on loan by the Names and addresses of all partners(s) to the firm; partners; Salaries, commissions, etc. if Nature and place of the payable to any partner(s); business; The safe custody of the books Date of commencement of of accounts and other partnership; documents of the firm; Duration of partnership, if any; Mode of auditor's appointment, Amount of capital contributed if any; or to be contributed by each Rules to be followed in case of partner; admission, retirement, death, of Rules regarding operation of a partner; bank accounts; Settlement of accounts on Ratio in which profits are to be dissolution of the firm; and shared; Mode of settlement of disputes Interest, if any, on partners' among the partners. capital and drawings;
Types of Partnerships 1. UNLIMITED PARTNERSHIP:
A partnership where it has an unlimited liabilityfor all the partners of the business. Unlimited liability means that all the partners are liable beyond the amount invested in the business, and each may bind the entire partnership. 2. LIMITED PARTNERSHIP: This is a partnership which has as least one unlimited (general) partner with number of limited partners. These kinds of partnerships are not established in Sri Lanka.
PARTNERSHIP STATUES AND CASES

1. Partnership Act of 1890 (section 24) 2. The Act of Prevention Frauds No 07 of 1840 3. Business Names Registration ordinance act No 06 of 1918 4. Limited Partnership Act of 1907 5. Company Act (amended) No 07 of 2007 (seection 519)
Page 3
STICK to the BASICS
Case Laws

Pate vs Pate Garner vs Murray Inland revenue act
Types of Partners
1. GENERAL PARTNER:- A partner with unlimited legal responsibility for the debts and liabilities of a partnership.
2. SLEEPING PARTNER:-A partner who invest capital in the business but not support to the management of the partnership. The public do not know him as a partner of the business.
3. SILENT PARTNER:-A business partner who provides capital but does not actively participate in the management of operations. The public
know him as a partner of the business.
4. SECRET PARTNER:-A partner whose partnership is hidden from the public.
participation
in
business
5. NOMINAL PARTNER:- Person who has an interest in the success of a partnership firm but, legally, is not partner because he or she neither owns a part of the firm nor actively participates in its affairs.
Often a nominal partner is a well-known, well connected individual whose name lends credibility and recognition to the firm, and is paid a fee for this service.
6. LIMITED PARTNER:-A partner in a partnership whose liability is limited to the extent of the partner's share of ownership. Limited partners generally do not have any kind of management responsibility in the partnership in which they invest and are not responsible for its debt obligations. For this reason, limited partners are not considered to be material participants. 7. QUASI PARTNER:-A retired partner. But he would invest his capital in the business and earn interest.
Financial
Statements
of
partnership
The following statement can be identified as the main accounting out puts of a partnership.
1. TRADING ACCOUNT 2. PROFIT AND LOSS APPROPRIATION ACCOUNT 3. PARTNERS CURRENT ACCOUNT 4. PARTNERS CAPITAL ACCOUNT 5. BALANCE SHEET 6. CASH FLOW STATEMENTS 7. NOTES 8. MANUFACTURING ACCOUNT (ONLY FOR THE MANUFACTURING BUSINESS)
Page 4
partners capItal accounts

In case of partnership firm, the transactions relating to partners long-term equity are recorded in their respective capital accounts. Normally, each partner's capital account is prepared separately. But these accounts can also be shown in a tabular form as shown later in this chapter. There are two methods by which the capital accounts of partners can be maintained. These are: 1. Fluctuating Capital Method; and 2. Fixed Capital Method.
FLUCTUATING CAPITAL METHOD
Under the fluctuating capital method, only one account that is the capital account for each partner is maintained. It records all items affecting partner's account like interest on capital, drawings, interest on drawings, salary, commission, and share of profit or loss in the capital account itself. As a result of these, the balance in the capital account keeps on fluctuating.
FORMAT UNDER FLUCTUATION CAPITAL METHOD

Partners Capital Account
A
Drawings Good will written down Losses on revaluation XX XX XX XX XX
B
XX XX XX XX XX
C
XX Balance B/F Additional Capital XX Goodwill XX Profits on revaluation XX Interest on Capital XX Salaries
A
XX XX XX XX XX XX XX XX XX
B
C
Interest on drawings Share of loss (if)
Commissions & Bonus Share of Profit
B/C/D
XX XX
XX XX
XX XX
FIXED CAPITAL METHOD
Under the fixed capital method, the capitals of the partners shall remain fixed unless some additional capital is introduced or some amount of capital is withdrawn by an agreement among the partners. So all items like interest on capital, drawings, interest on drawings, salary, commission, and share of profit or loss are not to be shown in the capital accounts.
STICK to the BASICS
For all these transactions, a separate account called 'Partner's Current Account' is opened. Under fixed capital method, two accounts are maintained for each partner (i) CAPITAL ACCOUNT, AND (ii) CURRENT ACCOUNT.
Format under fixed capital method A

Drawings Good will written down Losses on revaluation XX XX XX
Partners Capital Account
B
XX XX XX
C
XX Balance B/F Additional Capital XX Goodwill XX Profits on revaluation
A
XX XX XX XX
B
XX XX XX XX
C
XX XX XX XX
B/C/D
XX XX
XX XX
XX XX
XX
XX
XX
Note : A Partners' Capital Account usually shows a credit balance. It can,
however, show a debit balance under certain circumstances, such as over withdrawal or insolvency of the partner.
partners current account

This is the account which records short-term equity related transactions of partners. In this account it records the short term transaction which can be identified as internal or external among partners and the partnership.
Page 6
STICK to the BASICS
STRUCTURE OF THE CURRENT ACCOUNT

Partners current account
A
B/B/F Drawings (cash) Drawing (goods) Interest on drawings Expenses of partners paid by the business Interest on Deb. Bal. Share of loss (if) XX XX XX XX XX XX XX
B
XX XX XX XX XX XX XX
C
XX Balance B/F XX Interest on Capital XX Salaries Interest on credit Bal. XX Expenses bared by XX partners XX Interest on Loans XX Commissions & Bonus Share of Profit XX B/C/D XX
A
XX XX XX XX XX XX XX XX XX XX
B
C
B/C/D
In Partners' Current Account, opening balance and closing balance may appear on either side, i.e. debit or credit. Exercise No: 01
XX XX
XX XX
Amila and Sumith commenced business as partners on April 1, 2009. Amila contributed Rs. 40,000 and Sumith Rs. 25,000 as their share of capital. The partners decided to share their profits in the ratio of 2:1. Amila was entitled to a salary of Rs. 6,000 p.a. Interest on capital was to be provided @ 6% p.a. The drawings of Amila and Sumith for the year ending March 31, 2010 were Rs. 4,000 and Rs. 8,000, respectively. The profits of the firm after providing Amila's salary and interest on capital were Rs. 12,000. Draw up the Capital Accounts of the partners (fluctuating capital method) Prepare Capital Acc. And Current Acc. of the partners (fixed capital method).
DISTRIBUTION OF PROFIT
In case of partnership firm, the net profit (after charging the interest on capital, partners' salary and commission and after taking into account the interest on drawings) is to be shared by all the partners in the agreed profit sharing ratio. As stated earlier, in the absence of any specific agreement to this effect, the profit is to be distributed equally among the various partners.
Page 7
STICK to the BASICS
Profit and Loss Appropriation Account:
According to the Partnership act of 1890 profit and loss appropriation account is an account which allocate the profit among partners according to the Partnership Deed. And in a situation where it does not exist a deed this should be done according to the Standards of Partnership Act. It is debited the things that are receivable to the partners as partners. (Interest on capital, Salaries, Share of profit) It is credited the items that is payable by the partners to the partnership. (Interest on drawings, share of loss)
Structure of Profit and Loss Appropriation Account

Profit and loss appropriation account of ABC partnership For the year ended ______________ Net Loss as per P& L acc. Net Profit as per P& L (If) XXX acc. Interest on Capital A B C Salaries A B C XXX XXX XXX XXX XXX XXX
XXXX XXX XXX XXX
Interest on Drawings A B C XXX
XXX
XXX XXX
Transfers to reserves Share on Profits A B C XXX XXX XXX
XXX XXXX XXXX
Page 8
STICK to the BASICS
Exercise No:02
Jagath and Akash are partners sharing profits in the proportion of 3:2. The under mentioned trial balance was extracted from their books on December 31, 2009. Trial Balance as on December 31, 2009 000 Rs. Jagath's Capital Akash's Capital Jagath's Drawings Akash's Drawings Goodwill Plant and Machinery Office Furniture Purchases Sales Sundry Debtors Sundry Creditors Returns Inwards and Outwards Rent Postage and Telegrams Advertising Expenditure Opening stock Cash in hand Wages Telephone Charges Salaries to staff Printing and Stationery Commission Travelling Expenses Carriage Inwards Motor Van Bills payable Total Rs. 65,000 40,000
4,000 3,000 10,000 40,000 5,000 85,000 40,500 1,500 3,750 500 9,000 11,500 16,000 14,000 500 12,250 750 5,000 2,000 5,800 20,860
1,60,000 14,510 2,500
8,900 290,910 290,910
Page 9
STICK to the BASICS
You are required to prepare the Profit and Loss Account for the year ended December 31, 2009 and Balance Sheet as at that date. The following adjustments are to be made: 1. The value of stock on December 31, 2000 was Rs. 12,500. 2. Write off Rs. 250 from office furniture; 10% on plant and machinery and 20% on motor van. 3. Create a provision of 5% on the sundry debtors for bad debts. 4. Write off 1/5th of the advertising expenses. 5. Partners are entitled to interest on capital @ 5% p.a. and Akash is entitled to a salary of Rs. 1,800 p.a.
Exercise No:03
Kamal, Nimal and Amal set up a partnership firm on January 1, 2009. They contributed Rs. 50,000, Rs. 40,000 and Rs. 30,000 respectively as their capitals and decided to share profits in the ratio of 3:2:1. The partnership deed provided that Kamal is to be paid a salary of Rs. 1,000 p.m. and Nimal a commission of Rs. 5,000. It also provided that interest on capital be allowed @ 6% p.a. The drawings for the year were: Kamal Rs. 6,000, Nimal Rs. 4,000 and Amal Rs. 2,000. Interest on drawings Rs. 270 on Kamal's drawings, Rs. 180 on Nimal's drawings and Rs. 90 on Amal's drawings. The net amount of profit as per the profit and loss account for the year ended 2001 was Rs. 35,660.
You are required to record the necessary journal entries relating to appropriation of profit and prepare the profit and loss appropriation account and the partners' current accounts. Exercise No:04
Pawan and Purna are partners in a firm sharing profits in the ratio of 3:2. T he balance in their capital and current accounts as on January1, 2008 were as under:
Capital Account Current Account (Cr.)
Pawan (Rs.)
120,000 40,000
80,000 32,000
(Rs.)
Purna
The partnership deed provided that Pawan is to be paid salary @ Rs. 2,000 p.m. whereas Purna is to get commission of Rs. 16,000 for the year. Interest on capital is to be allowed @ 6% p.a. The drawings of Pawan and Purna for the year were Rs. 12,000 and Rs. 4,000, respectively. Interest on
Page 10
STICK to the BASICS
drawings for Pawan and Purna works out at Rs. 300 and Rs. 100, respectively. The net profit of the firm before making these adjustments was Rs 99,600. Prepare the Profit and Loss Appropriation Account and the partners' capital and current accounts.
CALCULATION OF INTEREST ON CAPITAL

Interest on Capital is to be paid Only when agreed upon Only out of profits No interest if not mentioned
Journal entries to record Interest on Capital

Profit and loss appropriation Account (dr) Current Accounts of Partners XXXX XXXX
partners salarY
Although it is restricted to earn salaries according to the section 24, it is possible if it has provided any arrangements about the salaries of partners in Partnership Deed.
Journal entries to record Partners Salary

Profit and loss appropriation Account (dr) Current Accounts of Partners XXXX XXXX
TRANSFER OF RESERVES
It is possible to transfer a portion of profit earned during an accounting period to the reserves account with an idea of use it for business purposes in future. When they do so the share on profit of partners would be reduced.
Journal entries to record Transfers to reserves

Profit and loss appropriation Account (dr) Reserves Account XXXX
XXXX
Page 11
STICK to the BASICS
SHARE ON PROFIT OR LOSS
It is the amount of profit or loss out of distributable profit or loss in a partnership owned by the each partner. Distributable Profit or loss= Net Pr. + Int. on drawings- (Int. on Cap. + Salaries+ Transfer of reserves)
PROFIT SHARING RATIO
By profit sharing ratio in a partnership firm, we mean the ratio in which the profits and losses of the firm are to be distributed amongst the partners. The basis for arriving at the ratio is the agreement between the partners. If there is a partnership deed, the ratio should be ascertained from the provisions in the partnership deed. In the absence of a partnership deed and where there is no indication as to the agreement between the partners in this aspect, it should be considered as equal share for all partners. The ratio may be a specified as absolute values or it may be taken as the ratio of their Capital account balances or it may be based on anything else as agreed upon by the partners. Deriving this ratio (if it is not given) would be one important requirement in problem solving.
CALCULATION OF INTEREST ON DRAWINGS
When any partner makes withdrawals from the business, he is depriving the firm of funds which could have been used to generate profits. To discourage withdrawals, the partners may agree to charge interest on drawings. Interest on drawings is payable to the business. It adds to the profits, thus increasing the amount for sharing among the partners. This interest is calculated for the period beginning from the date of withdrawal to the end of the trading period. Interest on drawings is debited to the Current Account of the partner who made the withdrawals to reduce his equity in the Current Account. Following may be the possibilities requiring the different calculations of interest when: Amount, rate of interest and date of withdrawal is given: Amount and rate of interest are given but date of withdrawal is not specified: Fixed amount is withdrawn every month: If amount is withdrawn at each quarter: Different amounts are withdrawn at different intervals:
Mahesh Dilhan Fernando B.B.A. (Business Finance) (Special) University of Colombo Page 12
STICK to the BASICS
When the amount, rate of interest and date of withdrawal is given

Ex:- Suppose, Thushan is a partner who withdrew Rs. 80,000 on July 1, 2008. Interest on drawings is charged @ 10% per annum. The calculation of interest will be as follows.
When the amount and rate of interest are given but date of withdrawal is not specified
Suppose, Thushan is a partner who withdrew Rs. 80,000 and interest on drawings is charged @ 10% per annum. The calculation of interest will be as follows
Here, it is noted that in the absence of any particular date of withdrawal, it is assumed that withdrawals are made evenly throughout the year. Hence, interest is charged for the average of the period of the year, i.e., six months.
Page 13
STICK to the BASICS
Fixed amount is withdrawn every month
In this case, there may be three possibilities and accordingly the interest for that period will be charged: (average period concept) a) If amount is withdrawn during the month (implicitly assumed to be in the middle of month), interest is calculated for six months;
Average period is obtained like this.. It has to be paid an interest for 11 1 /2 months for the drawings done in the middle of first month. And an interest to be paid for 1 /2 of the month for the
x drawings which is done in the final month. And the average of these two will
give you 6 months. Average Period= (11 1 /2 + 1 /2 )/2= 6 months Interest is calculated as follows:Interest on drawings= Monthly Drawings x % of interest x Average period
b) If the withdrawal is made in the beginning of the month, interest is calculated for 6 months (six and a half months)
c) If withdrawal is made at the end of the month, interest is calculated for 5 months (five and a half months).
Page 14
STICK to the BASICS
N:B: Drawings may be done in several ways by partners. Mainly there are two ways. 1. Cash Drawings Journal entry should be passed as follows.
2. Goods Drawings
Current accounts of partners Cash Account
(dr) XXXX
XXXX
Current Accounts of partners Purchases Account
(dr) XXXX
XXXX
Exercise No: 05 Jayawickrama is a partner in a firm. He withdrew the following amounts during the year 2009: Rs. January 31 12,000 March 31 6,000 June 30 10,000 September 30 13,000 October 31 15,000 The interest on drawings is to be charged @ 6% p.a. Assuming the accounting year closes on December 31each year, find out the interest on drawings. Exercise No: 06 If Mr. Dias, a partner of the business has done drawings in the beginning of every month valued 2,500 each, find out the Interest on drawings. Exercise No: 07 Sanath, Mahela and Kumara are engaged with a business. They have done drawings during 2009 as follows. Sanath- Rs. 3,000 in the beginning of every month Mahela- Rs. 5,000 in the middle of every month Kumara- Rs. 6,000 in the ending of every month starting from June. If rate of interest is 8% calculate the interest of drawings and write down the relevant journal entries.
Page 15
STICK to the BASICS
Exercise No: 08 Darshan, Ahmed, Kishok and Tito carried out a partnership. The drawings they have done during 2010 is as follows. Darshan- 10,000 in cash Ahmed1,500 at the end of every month Kishok2,000 in the beginning of every month TitoJanuary to March 2,500 in the middle of every month. May to December 2,000 in the beginning of every month.
Guarantee of Profit to a Partner
Guarantee is an assurance that a partner will not get as his share of profit less than the guaranteed amount. There may be two situations: (a) Guarantee to one partner by (others) the firm, (b) Guarantee to a partner by another partner individually.
Guarantee to one partner by (others) the firm
Sometimes, a partner is guaranteed a minimum amount by way of his share in the profits of the firm. Such a guarantee may be given to an existing partner or to a new partner at the time of admission. Such guaranteed amount shall be paid to partner when his share of profit, as calculated, according to his profit sharing ratio is less than the guaranteed amount. The deficiency of such guaranteed amount will be borne by the other partner's in their profit sharing or agreed ratio as the case may be.
Exercise No: 09
A, B and C are partners. They admit D as a partner with a guarantee that his share of profits shall not be less than Rs. 20,000 p.a. Profits are to be shared in the proportion of 4:3:3:2. The total profits for the year ended 2009 were Rs. 96,000. Prepare the profit and loss appropriation account showing the division of the profits for the year.
Page 16
STICK to the BASICS
GUARANTEE TO INDIVIDUALLY
PARTNER
BY
ANOTHER
PARTNER
Sometimes this guarantee is done by only one partner who exists in the business.
Exercise No: 10
In above Exercise No: suppose A alone agrees to guarantee D that his share of profits shall not be less than Rs. 20,000 p.a.. if the conditions are same prepare the profit and loss appropriation account showing the division of the profits for the year.
Exercise No: 11
Kanthi and Lal are partners in a firm sharing profit in the ratio of 2:1. They decide to admit Pubudu with 1/4th share in profits with a guaranteed amount of Rs. 12,500. Kanthi undertook to meet the liability arising out of the guaranteed amount to Pubudu. The profit sharing ratio between Kanthi, Lal and Pubudu will be 2:1:1. The firm earned profit of Rs. 38,000 for the year ended March 31, 2009. You are required to prepare Profit and Loss Appropriation Account and show the distribution of profit amongst the partners.
Goodwill MEANING OF GOODWILL

Over a period of time, a well-established business develops an advantage of good name, reputation and wide business connections. This helps the business to earn more profits as compared to a newly set up business. In accounting, the monetary value of such advantage is known as 'goodwill'. It is regarded as an intangible asset. In other words, goodwill is the value of the reputation of a firm in respect of the profits expected in future over and above the normal profits. It is generally observed that when a person pays for goodwill, he/she pays for something, which places him in the position of being able to earn super profits as compared to the profit earned by other firms in the same industry. Thus, goodwill exists only when the firm earns super profits . Any firm that earns normal profits or is incurring losses has no goodwill.
Page 17
STICK to the BASICS
Factors giving rise to Goodwill
The main factors helping the creation of goodwill are as follows : Nature of Business Location Efficiency of Management
Market situation Special Advantages
CIRCUMSTANCES TO VALUE GOODWILL

1. 2. 3. 4. 5. 6. Change in the profit sharing ratio amongst the existing partners; Admission of a new partner; Retirement of a partner; Death of a partner; Dissolution of a firm which involves sale of business as a going concern; and Amalgamation of firms.
METHODS OF CALCULATING GOODWILL IN A PARTNERSHIP
Average profit method Weighted average profit method Super profit method Capitalization method Annuity method There we have some more methods to calculate goodwill in a partnership. But in A\L syllabus calculation of goodwill is omitted.
ACCOUNTING FOR GOODWILL
It is considerable to discuss about three different situations where we have to account for goodwill in A\L syllabus. 1. Admission of a new partner 2. Retirement of a partner 3. Change in the profit sharing ratio amongst the existing partners These situations in a partnership we identify as RECONSTITUTIONS OF A PARTNERSHIPS.
Page 18
STICK to the BASICS
Admission of a new partner

When a business enterprise needs additional capital or managerial help or both for expansion of the business it may admit a new partner to enhancement its existing resources. In case of a sole proprietorship, it is converted into a partnership on the admission of a new person as an owner of the enterprise. According to the Partnership Act 1890, a new partner can be admitted into the firm only with the agreement of all the existing partners unless otherwise agreed upon. With the admission of a new partner, the partnership firm is reconstituted and a new agreement is entered into to carry on the business as partnership firm. A newly admitted partner acquires two main rights in the firm
1. Right to share in the assets of the partnership firm; and, 2. Right to share in the profits of the partnership firm.
Following are the important points, which require attention at the time of admission of a new partner: 1. Deciding upon new profit sharing ratio; 2. Calculation of sacrificing ratio; 3. Adjustment of goodwill; 4. Revaluation of assets and Reassessment of liabilities; 5. Distribution of accumulated profits or (losses) and reserves; 6. Adjustment of capital.
Deciding upon new profit sharing ratio

When new partner is admitted he obtains his share in profits from the old partners. In other words, on the admission of a new partner, the old partners sacrifice a share of their profit in favour of the new partner. What will be the share of new partner and how he will acquire it from the existing partners is decided reciprocally among the old partners and the new partner. This need for the purpose of the new profit sharing ratio.
STICK to the BASICS
Exercise No: 12 (Calculation of new profit sharing ratio) Basil and Susil are partners sharing profits in the ratio of 3:2. They admitted Sisil as a new partner for 1/5th share in the future profit. Calculate new profit sharing ratio of Basil, Susil and Sisil. Exercise No: 13 (Calculating of new profit sharing ratio when new partners
share is acquired from all partners)
Rathna and Deepa are partners sharing profits in the ratio of 3:2. They admitted Desha as a new partner for 3/10 share, which she acquired 2/10 from Rathna and 1/10th from Deepa. Calculate the new profit sharing ratio of Rathna, Deepa and Desha. Exercise No: 14 (Calculation of new profit sharing ratio when new partner
acquires his share from only one partner)
Seth and Siri are partners in a firm sharing profits in 4:1 ratio. They admitted Sanda as a new partner for 1/4th share in the profits, which Sanda acquired fully from Seth. Determine the new profit sharing ratio of the partners. Exercise No: 15 (Calculation of new profit sharing ratio when new partner
acquires his share from all the existing partner as a fraction of their share)
Aralu and Bulu are partners in a firm sharing profits in the ratio of 3:2. They admit Nelli as a new partner. Aralu surrenders 1/4th of his share and Bulu 1/3rd of his share in favour of Nelli. Calculate new profit sharing ratio of Aralu, Bulu and Nelli. Exercise No: 16 (Calculation of new profit sharing ratio when more than one
admitted simultaneously.)
Sita and Geetha were partners in a firm sharing profits in 5:3 ratio. They admit Kavita and Kamini as new partners. Sita surrenders 1/2 of her share in favour of Kavita and Geetha surrenders 1/3rd of her share in favour of Kamini. Calculate the new profit sharing ratio of Sita , Geetha, Kavita and Kamini. Exercise No: 17 (Calculation of new profit sharing ratio when new partner
acquires his share from old partners in some ratio)
Sampat and Ganpat are partners in a firm sharing profits in 2:1 ratio. They admit Champat as a new partner for 1/5th share in the profits which he acquires from Sampat and Ganpat in 1:2 ratio. Calculate the new profit sharing ratio of Sampat, Ganpat and Champat.
Page 20
STICK to the BASICS
Calculation of sacrificing ratio
The ratio in which the old partners agree to sacrifice their share of profit in favour of the incoming partner is called sacrificing ratio. The sacrifice by a partner is equal to: Old share of profit New share of profit From the calculation point of view of sacrificing ratio, there may be following situations. Incoming partner acquires his share of profit from all the existing partners In this case, the implied supposition is that old partners are making sacrifice in favour of incoming partner in their old profit sharing ratio. Consequence of this is that in future, the old partners among themselves continue to share future profits in their old ratio. Suppose, A and B are partners, sharing profits in the ratio of 3:2. C is admitted for 1/6th share. In future, A, B and C will share profits in the ratio of 3:2:1, for the reason that, for C's 1/6th share is contributed by A and B in their old profit sharing ratio, i.e. 3:2. Incoming partner may acquire his share from one of the partners In this case, the sacrifice made by the existing partners is equal to the share of profits of the incoming partner. In this case, the new profit sharing ratio of old partners will change. Exercise No 18: (Calculation of sacrificing ratio) Zoology and Biology are partners in a firm sharing profits in the ratio of 5:3. They admit Psychology as a new partner for 1/7th share in the profit. The new profit sharing ratio will be 4:2:1. Calculate the sacrificing ratio of Zoology and Biology. Exercise No: 19 (Calculation of sacrificing ratio) Palitha and Saman are partners in a firm sharing profits in in the ratio of 3:2. They admitted Thilak as a new partner for 1/4th share. The new profit sharing ratio between Palitha and Saman will be 2:1. Calculate their sacrificing ratio. Exercise No: 20 (Calculation of partner's gain/sacrifice) Ramesh and Suresh are partners sharing profits in the ratio of 4 : 3. They admit Mohan as a new partner. The profit sharing ratio of Ramesh, Suresh and Mohan will be 2 : 3 : 1. Calculate the gain or sacrifice of old partners.
STICK to the BASICS
(Sometimes, the change in profit sharing ratio due to admission of a new partner may result into a gain to existing partner(s). This implies that his new share is more than his old share.)
Treatment for Goodwill

Goodwill is the consequence of the efforts made by the existing partners in the past. Therefore, on the eve of the admission, the new partner who is going to acquire the right to share future profits must compensate the existing partners by making payment to them. This payment is called premium (share of goodwill). From accounting point of view, there may be different situations related to treatment of goodwill which are discussed here. There are two methods to keep accounts for goodwill under this situation 1. Considering the contribution of goodwill of the new partner 2. Considering the total amount of goodwill which the business holds at the time of admission
Considering the contribution of goodwill of the new partner

Goodwill (premium) paid privately If the goodwill premium is paid privately by the new partner to the old partners outside the business then the same is not recorded in the books of accounts and hence no journal entry is recorded. Exercise No: 21 (When goodwill is paid privately) Matida and Josi are partners in a firm sharing profits in the ratio of 3:1. On April 1, 2009 they admit Sophia as a new partner for 1/4th share. Sophia paid Rs. 50,000 privately to Matida and Josi as her share of premium. Record the accounting treatment, if any, in the books of Matida and Josi for the same. Goodwill/premium brought in cash by the new partner and retained in the business When the new partner brings in cash for his share of goodwill, it is transferred to the capital accounts of old partners.
Page 22
STICK to the BASICS
It is to be noted that the cash brought in by the incoming partner is for an unrecorded asset in the books of the firm. Therefore, the situation is similar to that of sale of an unrecorded asset. The required journal entries for the cash brought in by the new partner on account of goodwill is as follows. For bringing premium (share of goodwill) Cash/ Bank a/c Premium a/c
Dr.
Cr.
For transferring goodwill to the capital accounts of the old partners in their sacrificing ratio. Premium a/c Dr. Sacrificing Partner's Capital a/c Cr.
However, instead of these two entries one can record only one entry given below : Cash/Bank a/c Dr. Sacrificing Partner's Capital a/c Cr.
Exercise No: 22 (When premium brought in cash and retained in business) Kavindu and Ravindu are partners in a firm sharing profits in the ratio of 5:3. They admitted Pasindu as a new partner for 1/5th share in the profit. Pasindu brought Rs. 20,000 for his 1/5th share in the profit as premium. Record necessary journal entries in the books of firm on Pasindu's admission. The new profit sharing ratio will be 3:1:1. Exercise No: 23 (When premium is brought in cash) Gunathilake and Premathilake are partners in a firm sharing profits in the ratio of 2:1. They admitted Dayathilake as a new partner for 1/5th share on April 1, 2009. The new profit sharing ratio of Gunathilake, Premathilake and Dayathilake will be 3:1:1. Dayathilake brought Rs. 50,000 for his capital and Rs. 12,000 as his share of premium. Record the necessary journal entries for the treatment of goodwill/premium in the books of the firm.
Page 23
STICK to the BASICS
Exercise No: 24 (When premium is paid in cash) Gold and Silver are partners in a firm sharing profits in the ratio of 4:1. They admit Copper as a new partner on April 1, 2009 for 1/3rd share in profit. It was agreed that Gold, Silver and Copper would share profits equally in future. Copper brought Rs. 15,000 as goodwill (premium) for his 1/3rd share in profits . Record the necessary journal entries in the books of the firm. Exercise No: 25 (Balance Sheet of the reconstituted firm) Meena and Neena are partners in a firm sharing profits in the ratio of 5:2. On April 1, 2009 their Balance Sheet was as follows : Balance Sheet of Meena and Neena as at April 1, 2009 Meena's Capital Neena's Capital Creditors 80,000 Building 70,000 Plant and Machinery 30,000 Stock Debtors Bank 180,000 80,000 40,000 20,000 30,000 10,000 180,000
On the date of the above Balance Sheet they admitted Leena as a new partner on the following terms : That the new profit sharing ratio will be 2:3:3. That Leena will bring Rs. 100,000 for her capital and the necessary amount of goodwill/premium in cash for 3/8 share in the future profits. The goodwill of the firm on Leena's admission was valued at Rs. 140,000. Record the necessary journal entries in the books of the firm on Leena's admission and prepare the capital accounts of the partners and the Balance Sheet of the new firm.
Page 24
STICK to the BASICS
Goodwill/Premium brought by the new partner and the same withdrawn by the old partners fully or partly. Sometimes the old partners may decide to withdraw the goodwill/premium brought by the new partners either fully or partly. In such a situation an extra entry for drawings for the amount withdrawn by the old partners will also be recorded besides the two journal entries for bringing the goodwill/premium in cash and its transfer to the capital accounts of the sacrificing partners in sacrificing ratio. The journal entry will be as follows. Sacrificing partners capital a/c Cash / Bank a/c Dr.
Cr.
Exercise No: 26 (When premium for goodwill is fully withdrawn) Pushpa and Kanthi are partners in a firm sharing profits in the ratio of 2:3. On Jan. 1, 2009 they admit Latha as a new partner for 1/4th share in the profits. Latha brought Rs. 80,000 for her capital and Rs. 18,000 for her 1/4th share in the profits. The new profit sharing ratio of Pushpa, Kanthi and Latha will be 3:3:2. Pushpa and Kanthi decided to withdraw the premium paid by Latha. Record necessary journal entries in the books of the firm. Exercise No: 27 (When goodwill (Premium) is partly withdrawn) A and B are partners in a firm sharing profits in the ratio of 8:7. On March 31, 2009, their capital stood at Rs. 80,000 and Rs. 70,000 respectively. On that date they admitted C as a new partner for 1/3rd share in the profits. C brought Rs. 50,000 for his capital and Rs. 15,000 for his 1/3rd share of goodwill/premium. Out of this goodwill/premium brought by C, half of the amount was withdrawn by A and B. Record necessary journal entries in the books of the firm on C's admission and prepare the capital accounts of the partners. When the new partner is not able to bring his share of goodwill/ premium in cash. Sometimes, the new partner may not be in a position to compensate the sacrificing partners for his share of goodwill/premium in cash. In such a situation, the new partner's capital account is debited for his share of goodwill and the sacrificing partner's capital account will be credited in their sacrificing ratio. The following journal entry will be recorded.
Page 25
STICK to the BASICS
Exercise No: 28 (Incapable to bring premium in cash) Salman and Sharuk are partners in a firm sharing profits in the ratio of 3:2. On Jan. 1, 2009 they admit Ameer as a new partner for 1/6th share in the profits. Ameer brought Rs. 200,000 for his capital but could not bring any amount for goodwill. The firm's goodwill on Ameer's admission was valued at Rs. 150,000. Record necessary journal entries in the books of the firm. New profit sharing ratio is 3: 2: 1. When this situation is in practice there is another possible method to follow. It is transferring the quota of goodwill of the arriving partner to a credit account until he pays. In such occasions the subsequent journal entries has to be followed. Transferring the goodwill into a credit account Credit Goodwill account Dr. Capital accounts of old partners (Sacrificing Ratio) When the new partner pays the goodwill fully or partly. Cash/ Bank Dr. Credit goodwill account
Cr.
Cr.
Considering the total amount of goodwill which the business holds at the time of admission
It occurs two different methods of recording goodwill under this circumstance. 1. Considering the total goodwill as an asset at the time of the reconstitution. 2. Adjusting the goodwill against the capital accounts of partners. Considering the total goodwill as an asset at the time of the reconstitution. Following journal entry has to be followed. Goodwill/ Premium A\c Dr. Old partners capital accounts (old ratio) Cr. Under this technique it is necessitate showing the goodwill as an asset in the balance sheet.
Page 26
STICK to the BASICS
Exercise No: 29 (Recording the total goodwill in the balance sheet) Mahinda and Basil were partners of a business who share profits in to the ration of 6: 5. On 1st of January 2009 they admitted Chamal as a partner into the business. On the same day the calculated total good will was 110,000. You are required to show the relevant journal entries in recording goodwill at the entrance. Exercise No: 30 (Recording the balance of goodwill) The following balance sheet extractions were taken from the business of Chathuri and Hansi for the year ended 31 st December 2009. They were sharing profits equally. Capital Accounts Chathuri Hansi Goodwill
200,000 180,000 120,000
On the same day they admitted Sonia as a partner. And revalued goodwill for 200,000 and decided to record the adjusted goodwill in the balance sheet. Show relevant journal entries to record goodwill at the entrance.
Adjusting the goodwill against the capital accounts of partners. In this occasion it has to be recorded the calculated goodwill as an asset of the business. And then it should be written off through the capital accounts of partners. a) Recording the goodwill as an asset. Goodwill/ Premium A\c Dr. Old partners capital accounts (old ratio) b) Writing off goodwill. New partners capital accounts (new ratio) Dr Goodwill Account Simply.
Cr.
Cr.
New partners capital accounts (new ratio)Dr Old partners capital accounts (old ratio)
Cr.
Page 27
STICK to the BASICS
Exercise No: 31 (Recording the total goodwill in the balance sheet and then
writing off)
P and Q were partners of a business who share profits in to the ration of 2: 1. On 1st of January 2009 they admitted R as a partner into the business. On the same day the calculated total good will was 240,000. New profit sharing ratio is 2: 1: 1. You are required to show the relevant journal entries in recording goodwill at the entrance if they writing off goodwill after recording goodwill as an asset. Exercise No: 32 The following balance sheet extractions were taken from the business of Browny and Blacky for the year ended 31 st December 2009. They were sharing profits into the ration of 3: 2. Capital Accounts Browny Blacky Goodwill
600,000 400,000 200,000
On the same day they admitted Pinky as a partner. And revalued goodwill for 300,000. New profit sharing ratio was 3: 2: 1. and decided to write off the total goodwill from the books after the adjustments. Show relevant journal entries to record goodwill at the entrance of Pinky.
Revaluation of assets and Reassessment of liabilities
In the event of reconstitution of the partnership firm, revaluation of assets and reassessment of liabilities may be required. Revaluation of assets becomes necessary because the present value of the assets may be different from their book value.
Methods of recording Revaluation in a partnership 1. By using a Revaluation Account 2. By using a Memorandum Revaluation Account
Page 28
STICK to the BASICS
Using a revaluation account Under this method, revalued amount of assets and reassessed value of liabilities is recorded in the balance sheet. And, in order to find out the profit or loss incurred through revaluation and reassessment process, it is prepared an account named REVALUATION ACCOUNT. This method is also simplified into two different aspects. First Method Considering only the DIFFERENCE between NET BOOK VALUE and REVALUED VALUE to keep accounts Following journal entries are passed under this method. When revaluing assets If Revalued value is GREATER than NBV (Cost- Acc. Depreciation) Relevant Asset Account (dr) XXXX Revaluation Account XXXX If Revalued value is LESS than NBV Revaluation Account (dr) Relevant Asset Account
XXXX
XXXX
When reassessing liabilities.. If reassessed value is GREATER than book value of the liability Revaluation Account (dr) XXXX Relevant Liability Account XXXX If reassessed value is LESS than book value of the liability Relevant Liability Account (dr) XXXX Revaluation Account XXXX In a Provision Account When the value of the provision has INCREASED Revaluation Account (dr) XXXX Relevant Provisions Account XXXX When the value of the provision has decreased Relevant Provisions Account (dr) XXXX Revaluation Account XXXX
Page 29
STICK to the BASICS
Revaluation expenses Revaluation Account Cash / Bank Account
(dr)
XXXX
XXXX
Then Revaluation Account should be balanced off to find out the profit or loss incurred through the revaluation process. If we have a profit (if the balance is on the debit side). That profit should be distributed among existing partners of the business according to the old profit sharing ratio Revaluation Account (dr) XXXX Capital Accounts of partners XXXX (Old ratio) If we have a loss (if the balance is on the credit side). That loss is also should be distributed among existing partners of the business according to the old profit sharing ratio Capital Accounts of partners (dr) XXXX (Old ratio) Revaluation Account XXXX N:B: Under this system accumulated depreciations of assets which are
revalued, is transferred to relevant assets account before revaluation is done. Therefore after revaluation, there it does not exist any balance of provision for depreciation accounts of assets which are revalued.
Exercise No: 33
Siridasa and Jothipala were partners of a business which was agreed to share profits 3:2. In the beginning of 2009 new partner named Somadasa entered to the partnership bringing in a capital valued 500,000 and changing the ratio to 3:2:5. The balance sheet as at 1. 1. 2009 is as follows.
Page 30
STICK to the BASICS
Capital Accounts Siridasa Jothipala Current Accounts Siridasa Jothipala Current Liabilities Creditors Accrued Expenses
Balance Sheet of Siridasa and Jothipala business as at 01. 01. 2009 Non- Current Assets 300,000 Land and 200,000 500,000 Buildings(NBV) Motor Vehicles 20,000 Current Assets 80,000 100,000 Closing Stock Debtors Cash in hand 310,000 40,000 350,000 950,000
320,000 280,000 600,000
100,000 200,000 50,000 350,000
950,000
It was decided to revaluate assets and liabilities as the entrance of Somadasa to the existing business as follows. I. Evaluate Land and Building for Rs. 380,000. II. Reduce motor vehicles by Rs. 20,000. III. Written off 10% from closing stock. IV. Written off 10,000 from debtors as bad debts. You are required to prepare all the accounts in the ledger along with the revaluation account and the adjusted balance sheet as that date. Exercise No: 34 (Preparation of Revaluation Account) Following in Balance Sheet of A and B who share profits in the ratio of 3:2. Balance Sheet of A and B As at April 1, 2009 Sundry Creditors Capital Account A B 20,000 Plant and Machinery Furniture 30,000 Stock 20,000 Debtors Cash in Hand 70,000 On that date C is admitted into the partnership on the following terms:
30,000 10,000 15,000 12,000 3,000 70,000
Page 31
STICK to the BASICS
That C is to bring in Rs. 15,000 as capital and Rs. 5,000 as premium for goodwill for 1/6th share. That the value of stock is reduced by 10% while plant and machinery is appreciated by 10%. That furniture is revalued at Rs. 9,000. Investment worth Rs. 1,000 (not mentioned in the balance sheet) is to be taken into account. Record journal entries and prepare revaluation account and capital account of partners. Exercise No: 35 (Revaluation of assets and Reassessment of liabilities) Given below is the Balance Sheet of A and B, who are carrying on partnership business as on March 31, 2009. A and B share profits in the ratio of 2:1 Balance Sheet of A and B As at March 31, 2009 Capital Accounts A B Outstanding expenses Sundry creditors Bills Payable Building 180,000 Plant and Machinery 150,000 Stock on Hand 2,000 Sundry Debtors 58,000 Cash at Bank 10,000 Cash in Hand 400,000 150,000 100,000 40,000 60,000 40,000 10,000 400,000
C is admitted as a partner on the date of the balance sheet on the following terms : C will bring in Rs. 1,00,000 as his capital and Rs. 60,000 as his share of goodwill for 1/4th share in profits. Plant is to be appreciated to Rs. 1,20,000 and the value of buildings is to be appreciated by 10%. Stock is found overvalued by Rs. 4,000. A provision for bad and doubtful debts is to be created at 5% of debtors. Creditors were unrecorded to the extent of Rs. 1,000. Record the necessary journal entries and prepare the revaluation account and partners capital accounts, and show the Balance Sheet of reconstituted firm.
Page 32
STICK to the BASICS
Second Method Recording BOTH the BOOK VALUE and the REVALUATION VALUE in the revaluation account This method is most commonly used and more accurate procedure to keep accounts for revaluation. The following journal entries should be passed under this method. Regarding Assets Book value of assets revalued Revaluation Account Relevant asset Account
(dr)
XXXX XXXX
Accumulated depreciation of assets to be revalued Accumulated depreciation of the asset (dr) Revaluation Account Revaluation value of assets Relevant asset account Revaluation account Regarding Liabilities Book Value of liabilities reassessed Relevant Liability account Revaluation account Reassessed or revalued value of liabilities Revaluation account Relevant liability account Regarding Provisions Book value of provision Relevant provision account Revaluation account Revaluation value of provision Revaluation account Relevant provision account
XXXX
XXXX
(dr)
XXXX
XXXX
(dr)
XXXX XXXX
(dr)
XXXX
XXXX
(dr)
XXXX XXXX
(dr)
XXXX
XXXX
Page 33
STICK to the BASICS
Revaluation expenses Revaluation account Cash/ Bank account
(dr)
XXXX XXXX
Under this method also it should be discovered the profit or loss appeared through revaluation of assets. If there is a profit Revaluation account (dr) XXXX Capital accounts (old ratio) XXXX If it is a loss Capital Accounts (old ratio) Revaluation account Exercise No: 36
(dr)
XXXX XXXX
The following balance sheet is extracted from the business which was carried out by Geetha and Kanthi for the year ended 31 st Dec. 2009. 000 Capital Geetha 500 Non-Current Cost Acc. NBV Kanthi 600 1,100 Dep Land & Current Account- Geetha 50 building 400 100 300 60 110 Vehicles 300 50 250 Kanthi Furniture 200 10 190 70 740 General reserves 320 Creditors Current assets Closing Stk. 260 Debtors 200 Bank 300 Cash 100 860 1,600 1,600 Geetha and Kanthi decided to admit Jayakodi on the same day. And the assets and liabilities were revaluated as follows. Land and building 350,000 Vehicles 310,000 Furniture 150,000 Closing Stock 280,000 Debtors 190,000 Creditors 300,000 Find out and distribute the profit or loss through the revaluation.
STICK to the BASICS
Using a Memorandum Revaluation Account
Under this method the revalued value of assets and the liabilities are not recorded in the accounts. The main purpose of preparing such an account is to attain the profit or loss of the revaluation. Although this method does not change the value of assets it change the equities of partners considered. Therefore this account named memorandum revaluation account because it is prepared just to find out the profit or loss created by the revaluation. Process of this method 1. Open a revaluation account with the purpose of finding profit or loss of the revaluation process. 2. Find the profit or loss of revaluation and, a) record it on old profit sharing ratio in the capital account b) And write off the same amount of profit or loss on new profit sharing ratio from the capital account. Exercise No: 37 Ganga and Yamuna carried out a partnership sharing profits 7: 3. And they admitted Saraswathi on 31st December 2009. The following is the balance sheet prepared on that day. New profit sharing ratio is 6: 3: 1. The balance sheet of Ganga & Yamuna Partnership As at 31st Dec. 2009 000 Non-Current Capital Accounts Cost Acc. NBV assets Ganga 350 Dep Yamuna 250 600 Land & Buil. 380 180 200 Vehicles 300 50 250 Current Accounts Furniture and Ganga 30 fittings 150 - 150 Yamuna 20 50 600 Goodwill 60 General Reserve 100 Current assets Current Liabilities 200 Stock Debtors Bank 950 80 60 150
290 950
Page 35
STICK to the BASICS
Saraswathi brought 300,000 as her capital into the business. On the same day the assets revalued as follows. To reduce accumulated depreciation of land and building to 150,000. To increase Acc. Dep. Of vehicles by 10% on cost. To estimate furniture and fittings to 140,000. To estimate final stock to 95,000 To write off debtors by 15,000 as bad. Prepare the new balance sheet using memorandum revaluation account.
Adjustments for Reserve and Accumulated Profits or Losses Account

Sometimes the Balance Sheet of a firm may show reserve and accumulated profits or losses .The new partner is not entitled to have any share in such accumulated balances. Therefore, the balance appearing in the form of reserves or profits or losses should be transferred to capital accounts of the old partners in old profit sharing ratio.
Adjustment of Capital
Sometimes, at the time of admission, the partners may come to an agreement that their capitals should also be adjusted so as to be equivalent to their profit sharing ratio. There are three roots where we can adjust capital accounts to the profit sharing ratio. 1. The Strongest basis or increasing net assets 2. The Weakest Basis or Decreasing Net assets 3. Common Basis or immovable Net assets
The Strongest Basis \ increasing net assets
In order to adjust capital under strongest basis we need to find out the STRONGEST PARTNER. Strongest partner is the partner who has introduced uppermost capital to represent one unit of share profit. It can be obtained through dividing the introduced capital of partners by respective share of profit. The definite result of this basis is increasing net asset or capital.
Page 36
STICK to the BASICS
The weakest basis \ decreasing net assets
In order to adjust capital under weakest basis we need to find out the WEAKEST PARTNER. Weakest partner is the partner who has introduced lowermost capital to represent one unit of share profit. It can be obtained through dividing the introduced capital of partners by respective share of profit. The definite result of this basis is decreasing net asset or capital.
The common basis \ immovable net assets
Under this method we need a mutual amount of capital to represent a share of profit in the partnership. It may calculated by dividing the total capital introduced by partners with total shares of profits. The fact is that there will not be any change in net assets under this method.
Exercise No: 38 Sun and Moon were partners of a business sharing profit in to the ratio of 2: 1. On 1st of January 2010 they admitted Star as a partner of the business. After the admission there capital accounts showed the following balances. Sun Moon Star 900,000 500,000 100,000
And they decided to share profits into the ratio of 3: 2: 1. Adjust the capital account using the following methods. 1. Strongest basis 2. Weakest basis 3. Common basis Transfer the difference in to the capital account.
Page 37
STICK to the BASICS
Exercise No: 39 (Adjustment of Capital) A and B are partners sharing profits in the ratio of 2:1. C is admitted into the firm for 1/4th share of profits. C brings in Rs. 20,000 in respect of his capital. The capitals of old partners after all adjustments in respect of goodwill, revaluation of assets and liabilities, etc. have been worked out at Rs. 45,000 for A and Rs. 15,000 for B. It is agreed that partners' capitals will be according to the new profit sharing ratio. Determine the new capitals of partner following strongest basis and record the necessary journal entries assuming that the partner whose capital falls short, brings in the amount of deficiency and the partner who has an excess, withdraws the excess amount. Exercise No: 40 (Capital adjustment) A, B and C are partners in a firm sharing profits the ratio of 3:2:1. D is admitted into the firm for 1/4 share in profits, which he gets as 1/8 from A and 1/8 from B. The total capital of the firm is agreed upon as Rs. 120,000 and D is to bring in cash equivalent to 1/4 of this amount as his capital. The capitals of other partners are also to be adjusted in the ratio of their respective shares in profits and losses. The respective capitals of A, B and C after all adjustments have been made, works out at Rs. 40,000, Rs. 35,000 and Rs. 30,000, respectively. Calculate the final capitals of A, B and C.
Page 38
STICK to the BASICS
RETIREMENT OF A PARTNER
On the retirement of a partner, the existing partnership deed comes to an end. In its place the new partnership deed needs to be framed, i.e. the firm requires reconstitution. The remaining partners shall continue to do their business but on the different terms and conditions. At the time of retirement of a partner, we need to compute the new profit sharing ratio and gaining ratio among the continuing partners. This will enable us to carry out the following adjustments: Goodwill Revaluation of assets and reassessment of liabilities Distribution of accumulated profits (losses) and reserves Capital adjustments (if any). The above adjustments will help us to ascertain the amount due to retiring partner.
Calculation of New Profit Sharing Ratio

New profit sharing ratio is the ratio in which the remaining partners will share profits (excluding retiring partner). The new share of each of the remaining partners will consist of his own share in the firm plus share acquired from the retiring partner. At the time of retirement of a partner, the share of retiring partner is acquired by existing partners, on the basis of agreement among them. If the continuing partners decide to acquire the share of retiring partner in old profit sharing ratio, then there is no need to compute the new profit sharing ratio, since it will be same as the old profit sharing ratio among them.
STICK to the BASICS
In the absence of any information regarding profit sharing ratio in which the continuing partners will share in profit of the retiring partner, it is assumed that they will acquire his share in old profit sharing ratio. If the continuing partners acquire the share in profits of the retiring partner in a proportion other than their old ratio, then we need to compute the new profit sharing ratio. In this case, the new share of continuing partners, in profits will be total of their respective old share and share acquired from the retiring/deceased partner.
New share of the continuing = partner
Their respective old share
Share acquired from outgoing partner
Gaining Ratio
The ratio in which the continuing partner has acquired the share from the retiring partner is called GAINING RATIO. Gain of continuing partner = New share Old share Exercise No: 41 (Calculation of new profit sharing ratio and gaining ratio) Seetha, Geetha and Neetha are partners sharing profits in the ratio of 5:3:2. Calculate new profit sharing ratio and gaining ratio if : (i) Seetha retires, (ii) Neetha retires, and (iii) Geetha retires. Exercise No: 42 (Calculation of new profit sharing ratio) Ranjan, Ravi and Rishi are partners sharing profits in the ratio of 3:2:1. Ranjan retires and his share is taken up by Ravi and Rishi : (i) equally, (ii) in the ratio of 3 : 2. Calculate the new profit sharing ratio. Exercise No: 43 (Calculation of new profit sharing ratio and gaining ratio) Buddhi, Nuwan and Tharanga are partners sharing profits in the ratio of 3/8, 1/2 and 1/8. Buddhi retires and surrenders 2/3 of his share in favour of Nuwan and remaining in favour of Tharanga. Calculate new ratio and gaining ratio.
Page 40
STICK to the BASICS
Exercise No 44 (Calculation of new profit sharing ratio) Sachin, Milinda, Aruna and Naveen are partners sharing profits in the ratio of 3:2:1:4. Sachin retires and his share acquired by Milinda and Aruna in the ratio of 3:2. Calculate new ratio and gaining ratio.
Treatment of Goodwill
The retiring partner is entitled to his share of goodwill at the time of retirement because the goodwill has been earned by the firm with the efforts of all the existing partners. At the time of retirement of a partner, goodwill is valued as per agreement among the partners. Since the retiring partner will not be sharing the future profits of the firm, a part of which might be accruing because of the present value of goodwill. Therefore, in all fairness, the retiring partner should be compensated for the same by the continuing partners in their gaining ratio. As we discussed at the section of the admission of a partner here it also occur two possible ways to keep accounts for goodwill. 1. Considering the share of goodwill which is attributable to the retiring partner 2. Considering the total goodwill
Considering the share of goodwill attributable to the retiring partner
which
is
Recording the share of goodwill of the retiring partner as an asset in the business Goodwill Account Dr. Capital Acc. of retiring partner Cr. Writing off goodwill after recording it in the books Recording the goodwill in books Goodwill Account Dr. Capital Acc. of retiring partner Writing off goodwill Capital accounts of continuing partners (to gaining ratio) Goodwill Account
Cr.
Dr. Cr.
Page 41
STICK to the BASICS
Considering the total goodwill

Recording the total goodwill as an asset Goodwill Account Capital Accounts of old partners (old Profit sharing ratio) Dr. Cr.
Writing off goodwill after recording it in books Recording goodwill in books Goodwill Account Dr. Capital Accounts of old partners (old Profit sharing ratio) Writing off goodwill Capital Accounts of New partners (new profit sharing ratio) Goodwill Account
Cr.
Dr. Cr.
Exercise No: 45 (Goodwill) Thilakasiri, Kusumsiri and Padmasiri are partners sharing profits in the ratio 5:3:2. Thilakasiri retires and goodwill is valued at Rs. 50,000. New profit sharing ratio of continuing partners will be equal. Record necessary journal entry. Exercise No: 46 (Goodwill) Shashi, Madhu, Usha and Renu are partners sharing profits in ratio of 3:2:3:2. On the retirement of Usha, goodwill was valued at Rs. 1,20,000. Usha's share of goodwill will be given to her by adjusting it into the capital accounts of Shashi, Madhu and Renu. Record necessary entry for the treatment of goodwill when new profit sharing ratio decided is 3 :1: 6.
Revaluation of Assets and Reassessment of Liabilities
At the time of retirement some of the assets may not have been shown at their current values. Similarly, there may be certain liabilities which have been shown at a value different from the obligation to be met by the firm. Besides this, there may be unrecorded assets and liabilities which have to be recorded. To ascertain net gain (loss) on revaluation of assets and/or reassessment of liabilities, "Revaluation account" is prepared.
Page 42
STICK to the BASICS
This gain (loss) is transferred to the capital account of all partners including retiring partner in their old profit sharing ratio. It is possible to follow the two methods that we came out in admission. 3. By using a Revaluation Account 4. By using a Memorandum Revaluation Account Exercise No: 47 (Revaluation of assets and reassessment of liabilities) Tharumini, Mihirani and Shashini are equal partners. Tharumini retire and the Balance Sheet of this firm on that date is as under: Balance Sheet of Tharumini, Mihirani and Shashini as at 01/01/ 2009 Capital Tharumini Mihirani Shashini Creditors Reserve Plant 10,000 Furniture 15,000 Patents 20,000 Debtors 11,500 Cash 4,500 61,000 61,000 20,000 6,000 15,000 16,000 4,000
At the retirement they decided to make following adjustments. a) To share profit or losses in ratio of 3: 2 among continuing partners. b) To revalue assets and re-assess liabilities as follows. Plant 30,000 Furniture 10,000 Creditors 9,500 c) On retirement it was found that patents were valueless Record necessary journal entries under following methods. 1. Considering only the difference between net book value and revalued value to keep accounts 2. Recording both the book value and the revaluation value in the revaluation account 3. Using a Memorandum Revaluation Account
Page 43
STICK to the BASICS
Exercise No: 48 Dushara, Nathashi, Idshani and Diyon were partners who share profit to the ratio of 4: 3: 2: 1. The following balance sheet was extracted for the year ended 31st December 2010. Balance sheet of DNID partnership As at 31st December 2010 Capital Dushara Nathashi Idshani Diyon
200,000 150,000 100,000 Non curent Assets Land and Building Motor Vehicle Machinery Cost 220,000 200,000 130,000 60,000 Acc. Dep
NBV
30,000 190,000 40,000 160,000

20,000
50,000 500,000 Furniture
110,000 20,000 40,000 500,000
Current Dushara Nathashi Idshani Diyon

Bank Loan Creditors Bank Overdraft
Current Assets 30,000 25,000 20,000 15,000 Inventory Debtors (-) Pro. Doubt. Debt. 90,000 Prepaid Insurance Cash in hand 60,000 20,000 30,000 700,000 55,000 -5,000 50,000 10,000 50,000 90,000
200,000
700,000
On the balance sheet day Idshani retired from the business. And the remaining partners decided to carry out the business, sharing profits equally. At the retirement the following revaluation process were done. Land and Building 220,000 Motor Vehicle 150,000 Machinery 25,000 Furniture 15,000 At the retirement it was calculated the goodwill to Rs. 50,000. And the decided to not to open a goodwill account and do all the adjustment regarding goodwill in the revaluation account itself.
Page 44
STICK to the BASICS
On the same day it was paid 50% of the amount payable to Idshani. And transferred the balance to a Loan account.
Required. 1. Journal entries to record revaluation and goodwill 2. Revaluation account 3. Capital accounts of partners 4. Loan account of Idshani 5. Adjusted Balance Sheet of the new paernership as at 1 st January 2011.
Disposal of the amount due to the retiring/deceased partner
The outgoing partner's account is settled as per terms of partnership deed, i.e. in lump sum immediately or in various installments with/without interest as agreed or partly cash immediately and partly in installments at the agreed intervals. The sum payable to the retiring/deceased partner includes Balance in his capital/current account; Share of accumulated profits (losses) and reserves; Share in the gain/loss on revaluation of assets and reassessment of liabilities; Share of goodwill; Share in the profits of current year; Interest on capital, salary, etc. from the date of last balance sheet to the date of retirement (if applicable) will be credited to him, drawings and interest on drawings will also be debited for the required time period to the concerned partner's capital account.
Capital Adjustment
There is no obligatory on the partners to contribute in proportion to their profit sharing ratio. But at the time of retirement of a partner, the remaining partners may decide to change their capital contributions. In such a situation, the sum of balances in the capitals of continuing partners will be worked out which will be the total capital of the new firm. To ascertain the new capital of the continuing partners, we can follow the three bases which were used at an entrance. Strongest basis Weakest basis Common basis
STICK to the BASICS
Exercise No: 49 (Capital Adjustment) A, B and C are partners in a firm sharing profits in the ratio of 3 : 2 : 1. B retires. After making all adjustments relating to revaluation, goodwill and accumulated profits, etc. the capital account of A showed a credit balance of Rs. 90,000 and that of C Rs. 10,000. A and C decided to share profits and losses to th ratio of 3: 1. It was decided to adjust the capitals of A and C in their profit sharing ratio. You are required to calculate the new capital of the partners according to the following bases. 1. Strongest Basis 2. Weakest Basis 3. Common basis Exercise No: 50 (Capital Adjustment) P, Q and R are partners sharing profits in ratio of 40%, 30% and 30% respectively. After all adjustments, on P's retirement with respect to general reserve, goodwill and revaluation the balances in their capital accounts stood at Rs. 70,000, Rs. 60,000 and Rs. 50,000. It was decided that amount payable to P will be brought in by Q & R in such a way so as to make their capitals in proportionate to their profit sharing ratio. Calculate the amount to be brought in by Q and R and record necessary journal entries for the same. Also record necessary entry for payment to P.
Exercises
I. II. III. IV. V. VI. VII. VIII.
1. State whether each of the following statements is true or false:
Gain or loss on revaluation of assets at the time of retirement is a capital profit. In the event of death, gain or loss on revaluation account is transferred to the continuing partners in the new profit sharing ratio. At the time of retirement/death the undistributed profits/loss and reserves are distributed among existing partners in their old profit sharing ratio. A partner can retire from the firm with the consent of all other partners. In the event of death, the combined share of profit of continuing partners will decrease. The amount due to the retiring partner will always be settled in cash. The firm is under obligation to pay an agreed rate of interest for the unpaid balance to the retiring partner. A joint life policy matures in the event of death or at the time of retirement of a partner.
Page 46
STICK to the BASICS
IX. X.
Surrender value of the joint life policy is equal to the total amount of premium paid till that date. A family member of the retiring partner will automatically become the new partner in a reconstituted firm.
2. Thilakasiri, Padmasiri and Dayasiri were partners sharing profits and losses in proportion of , 1/8, 10/16. Calculate the new profit sharing ratio between continuing partners if, (a) Thilakasiri retires, (b) Padmasiri retires, (c) Dayasiri retires. Also calculate their gaining ratio in each of the above situation. 3. Johnson, Gonson and Samson are partners without any partnership deed. Johnson retire, calculate future ratio of continuing partners if they agreed to acquire his share (i) in the ratio 5 :3 (ii) equally. Also mention their gaining ratio. 4. Haal, Pol and Parippu are partners sharing profits as 20%, 30% and 50%. Haal decide to retire with the consent of other partners and sold her share to Pol. Goodwill was valued at 50,000. Reserve fund stood in the balance sheet at Rs. 30,000 at the time of his retirement. You are required to record necessary journal entries to record above ajustment on Haals retirement. Also prepare his capital account to find out the amount due to her when her capital balance in the balance sheet was Rs. 100,000 before any above adjustment.
5. Ranjith, Sarath and Milton were carrying on business in partnership sharing profits in the ratio of 3 : 2 : 1, respectively. On March 31, 2009, Balance Sheet of the firm stood as follows.
Balance Sheet of R, S and M as at March 31, 1999
Capitals R S M Sundry Creditors
Building 20,000 Patent 7,500 Stock 12,500 Debtors 16,000 Bank

56,000
23,000 8,000 12,000 7,000 6,000

56,000
Page 47
STICK to the BASICS
Sarath retired on the above mentioned date on the following terms: a) Buildings to be appreciated by Rs. 8,800. b) Provision for bad debts be made @ 5% on debtors. c) Goodwill of the firm be valued at Rs. 9,000. d) Rs. 5,000 be paid to Sarath immediately and the balance due to him treated as a loan carrying interest @ 10% per annum. Record necessary journal entries and prepare the balance sheet of the reconstituted firm.
Sometimes, change in profit sharing ratio takes place without any change in the number of partners. When such change takes place, one or more partners purchase interest in the business from the other partner/ partners. Therefore the aggregate amount of gain by one or more partners is equal to the aggregate amount of sacrifice made by other partners. The required adjustments in regard to the profit sharing ratio, revaluation of assets and liabilities, treatment of goodwill or reserves or partners capitals are same as what is done in case of admission or retirement of a partner. Exercise No: 51 (Change in profit sharing ratio) Sudda, Kalla and Raththa are partners in a firm sharing profit in the ratio of 3:3:2. They decided to share profits equally with effect of April 1, 2009. On that date, the Profit and Loss account showed the credit balance of Rs. 24,000. Instead of closing the Profit and Loss account, it was decided to record an adjustment entry reflecting the change in the profit sharing ratio. You are, therefore, required to record the necessary journal entry to give effect to the same.
Page 48
STICK to the BASICS
Exercise No: 52 (Distribution of General Reserve and Profits) Anusha, Budhdhika and Charitha are partners sharing profits in the ratio of 3:2:1. On April 1, 2009, they decided to share the profits equally. On that date there was a credit balance of Rs. 60,000 in their profit and loss account and a balance of Rs. 30,000 in general reserve. Record the necessary journal entry in the books of the firm. The partners decided to distribute the profits and the general reserve before bringing the new profit sharing ratio into force. Exercise No: 54 (Change in profit sharing ratio) Sangakkara and Mahela are partners in a firm sharing profits in the ratio of 3:2. They decided to share future profits equally. On the date of change in the profit sharing ratio the profit and loss account showed a debit balance of Rs. 20,000. Record the necessary journal entry for the distribution of the balance in the profit and loss account immediately before the change in the profit sharing ratio.
Revaluation of assets and reassessment of liabilities
Exercise No: 55 (Change in profit sharing ratio) Ranjani and Sumana are partners in a firm sharing profit in the ratio of 3:2. Their Balance Sheet as at March 31, 2009 was as follows: Balance Sheet of Ranjani and Sumana As at March 31, 2009 45,000 Building 30,000 Plant 30,000 Cash 105,000
Rajans Capital Sumans Capital Creditors
60,000 30,000 15,000 105,000
The goodwill of the firm has been valued at Rs. 30,000 and the building at Rs. 75,000 on March 31, 2009. The partners decide to share profits equally with effect from April 1, 2003. You are required to record the necessary accounting entries to be made in the books of the firm on account of change in the profit sharing ratio.
Page 49
STICK to the BASICS
Exercise No: 56 (Preparation of Balance Sheet of the new firm) Indika, Darshana and Ruwantha are partners in a firm sharing profit in the ratio of 2:2:1. Their Balance Sheet as at March 31, 2010 was as follows: Balance Sheet of Indika, Darshana and Ruwantha As at March 31, 2010 Capital Indika Darshana Ruwantha General Reserve Creditors Bills Payable Land 100,000 Building 50,000 Plant 25,000 Stock 20,000 Debtor 50,000 Cash 25,000 270,000 50,000 50,000 100,000 50,000 15,000 5,000 270,000
Indika, Darshana and Ruwantha decided to share the profit equally, with effect from April 1, 2010. For this purpose it was agreed that: The goodwill of the firm should be valued at Rs. 30,000. Land should be revalued at Rs. 80,000 and building should be depreciated by 6%. Creditors amounting to Rs. 400 were not likely to be claimed and hence should be written off. You are required to:a) Record the necessary journal entries to give effect to the above agreement, without opening revaluation account; b) Prepare the capital account of the partners; and c) Prepare the balance sheet of the firm after reconstitution.
Exercises
1. A, B and C are partners of a firm sharing profits in the ratio of 8 : 7 : 6. Now they decide to share future profits in 5 : 3 : 2 ratio. Calculate the gain or sacrifice of the partners on the change in profit sharing ratio. 2. X, Y and Z are partners in a firm sharing profits in 3 : 2 : 1 ratio. They decided to share profits equally with effect from April 1, 2003. For this purpose, the goodwill of the firm has been valued at Rs. 200,000. Calculate the amount of gain or sacrifice of each partner.
STICK to the BASICS
3. Gold, Silver and Copper are partners in a firm sharing profits equally. They have decided to share profit in future in the ratio of 2 : 3 : 5. For this purpose the goodwill of the firm is valued at Rs. 150,000. Record the necessary journal entry to give effect to the new arrangement. 4. Sangeetha, Ganga and Padmini are partners in a firm sharing profits in the ratio of 5 : 4 : 3. They decided to share the future profits in the ratio of 2 : 2 : 1. The goodwill of the firm for this purpose is valued at Rs. 180,000. Record necessary adjustment entry for the same. Now at this moment we have discussed about that partnership business are RECONSTITUTED when a PARTNER COMES IN TO THE BUSINESS, GOES OUT OF THE BUSINESS and when the PROFIT SHARING RATIO CHANGES. Further we have discussed that we have identify the impacts of those special adjustments in a partnership such as Adjustment of goodwill Adjustment of revaluation etc. This reconstitution is possible to befall in any time of an accounting period. It may be in the BEGINNING of the accounting period, at the END of the accounting period or DURING the period. Lets contemplate the entrance of a partner as an example. As it is explained above this ENTRANCE may be arisen in the beginning, at the end or during the accounting period. Although it is not a difficult task for us to prepare final accounts when the entrance is done in the beginning and at the end, it may be a slightly compound assignment when such reconstitution is befalling DURING THE YEAR. Lets assume that A and B were carrying out a partnership sharing profits 3: 2. In the middle of the year C comes in to the business and new profit sharing ratio is 2: 2: 1. Accordingly it is obvious that the profit is distributed among three partners after the reconstitution. Therefor when we prepare the final accounts we must have a system to recognize how the profits are generated throughout the year. There we have three distinct ways to develop a solution for this situation.
Page 51
STICK to the BASICS
1. Separating the income statement from the TRADING ACCOUNT 2. Separating the income statement from the PROFIT AND LOSS ACCOUNT 3. Separating the income statement from the APPROPRIATION ACCOUNT
1. Separating the ACCOUNT
income
statement
from
the
TRADING
In order to start the separation from the trading account it should available all the information needed in the problem. Then it is possible to find out Gross Profit and Net profit distinctly for the time periods. The following items are the most significant in order to start the separation from the trading account. Following stocks should be available. Opening stock, closing stock and the stock at the reconstitution. The division of the Purchases and sales over the year. The division of the other income and expenses over the year.
2. Separating the income statement from the PROFIT AND LOSS ACCOUNT
When the information provided is not sufficient to start the separation from the trading account we can start it from the Profit and Loss account. For an example when the absence of the distribution of purchases during the period we cannot divide the trading account. In such occasions what is possible is to prepare a common trading account to cover the whole year and start the separation from the P & L account by distributing the Gross Profit among the accounting period. The following items are the most significant in order to start the separation from the P & L account.
The basis of distributing gross profit throughout the year. (Commonly used is the Sales Ratio. __________________________________________________________________ __________________________________________________________________ The basis of distribution of other income and expenses in between the periods. Office and administration- Time Ratio Selling & Distribution- Sales Ratio Financial & Other- Actual base ratio
Page 52
STICK to the BASICS
3. Separating the income statement from the APPROPRIATION ACCOUNT
When all the information of dividing income statement is not available we have to distribute the calculated Net profit among partners starting from the appropriation account. For that we can use old and new constitutions of the partnerships.
Sales Ratio
This is the ratio on which the sales is distributed over the accounting period.
Ex:- Total sales of A and B partnership for the year ended 31.12.2009 was Rs.500,000. On 1st of July 2009 C is admitted as a new partner to the business. Calculate the sales ratio if the value of sales before the admission is 300,000. First 6 months 300,000 3 Sales Ratio= 3: 2 Last 6 months 200,000 2
Time Ratio
This is the ratio of months consists in two periods.
Actual Base Ratio
There may be incomes and expenses which befallen on exact period. In such instance we do not want to distribute the relevant income or expense during the accounting periods.
Lets Start the big work..
Page 53

Partnership

Загружено:

Сведения о документе

Исходное описание:

Авторское право

Доступные форматы

Поделиться этим документом

Поделиться или встроить документ

Параметры публикации

Этот документ был вам полезен?

Это неприемлемый материал?

Авторское право:

Доступные форматы

Partnership

Загружено:

Авторское право:

Доступные форматы

Accounting with Mahesh Dilhan Fernando

STICK to the BASICS

Mahesh Dilhan Fernando B.B.A. (Business Finance) (Special) University of Colombo

Accounting with Mahesh Dilhan Fernando

STICK to the BASICS

HOW A PARTNERSHIP CAN BE FORMED?

Mahesh Dilhan Fernando B.B.A. (Business Finance) (Special) University of Colombo

Accounting with Mahesh Dilhan Fernando

STICK to the BASICS

Contents of Partnership Deed

Types of Partnerships 1. UNLIMITED PARTNERSHIP:

PARTNERSHIP STATUES AND CASES

Mahesh Dilhan Fernando B.B.A. (Business Finance) (Special) University of Colombo

Accounting with Mahesh Dilhan Fernando

STICK to the BASICS

Pate vs Pate Garner vs Murray Inland revenue act

know him as a partner of the business.

4. SECRET PARTNER:-A partner whose partnership is hidden from the public.

Mahesh Dilhan Fernando B.B.A. (Business Finance) (Special) University of Colombo

partners capItal accounts

FLUCTUATING CAPITAL METHOD

FORMAT UNDER FLUCTUATION CAPITAL METHOD

Interest on drawings Share of loss (if)

Commissions & Bonus Share of Profit

FIXED CAPITAL METHOD

Accounting with Mahesh Dilhan Fernando

STICK to the BASICS

Format under fixed capital method A

Partners Capital Account

Note : A Partners' Capital Account usually shows a credit balance. It can,

partners current account

Mahesh Dilhan Fernando B.B.A. (Business Finance) (Special) University of Colombo

Accounting with Mahesh Dilhan Fernando

STICK to the BASICS

STRUCTURE OF THE CURRENT ACCOUNT

Mahesh Dilhan Fernando B.B.A. (Business Finance) (Special) University of Colombo

Accounting with Mahesh Dilhan Fernando

STICK to the BASICS

Profit and Loss Appropriation Account:

Structure of Profit and Loss Appropriation Account

XXXX XXX XXX XXX

Interest on Drawings A B C XXX

Transfers to reserves Share on Profits A B C XXX XXX XXX

XXX XXXX XXXX

Mahesh Dilhan Fernando B.B.A. (Business Finance) (Special) University of Colombo

Accounting with Mahesh Dilhan Fernando

STICK to the BASICS

1,60,000 14,510 2,500

8,900 290,910 290,910

Mahesh Dilhan Fernando B.B.A. (Business Finance) (Special) University of Colombo

Accounting with Mahesh Dilhan Fernando

STICK to the BASICS

Capital Account Current Account (Cr.)

Mahesh Dilhan Fernando B.B.A. (Business Finance) (Special) University of Colombo

Accounting with Mahesh Dilhan Fernando

STICK to the BASICS

CALCULATION OF INTEREST ON CAPITAL

Journal entries to record Interest on Capital

Journal entries to record Partners Salary

Journal entries to record Transfers to reserves

Mahesh Dilhan Fernando B.B.A. (Business Finance) (Special) University of Colombo

Accounting with Mahesh Dilhan Fernando

STICK to the BASICS