CHAPTER1

AccountingforPartnershipFirms
Fundamentals
AccordingtoSection4oftheIndianPartnershipAct,1932:
"Partnershipistherelationshipbetweenpersonswhohaveagreedtotheshare
theprofitsofabusinesscarriedonbyalloranyoneofthemactingforall"
FeaturesofPartnership
1. Theremustbeatleasttwopersonstoformavalidpartnership.Section11of
theIndianPartnershipAct,1932restrictthe (maximum)numberofpartnersto10
forcarryingonbankingbusinessand20forotherkindofbusiness.
2. Partnershipcomesintoexistencebyanagreement(eitherwrittenororal)
amongthe partners.Thewrittenagreement amongtehpartners iscalled
PartnershipDeed.
3. APartnershipcanformedforthepurposeof carryingatsharingtheprofits
orlossesofthebusiness
4. Anagreementbetweenthepartnersmustbeaimedat sharingtheprofitsor
lossesofthebusiness.
5. Apartnershipcanbecarriedonbyalloranyoneofthemactingforall.
PARTNERSHIP DEED
Thepartnershipdeedisawrittenagreementamongthepartnerswhichcontains
thetermsofagreement.Apartnershipdeedshouldcontainthefollowingpoints:
1. Nameandaddressofthefirm.
2. Nameandaddressesofthepartners.
3. Natureofthebusiness
4. TermsofPartnership
5. Capitalcontributionbyeachpartner.
6. Interestoncapital
7. Drawingsandinterestondrawings.
8. Profitsharingratio
9. Interestonloan.
10. Partner'sSalary/commissionetc.
11. Methodforvaluationofgoodwill
5

Accountancy& XII

12. Accountingperiodofthefirm
13. Rightsanddutiesofpartners.
BenefitsofPartnershipdeed
(1)Helpstoavoiddisputeinfuture
(2)Itisanevidenceinthecourt
(3)Facilitatesfunctioningofbusinessbyavoidingmisunderstanding
RULES APPLICABLEIN THE ABSENCEOF PARTNERSHIP DEED
ProfitsharingRatio

Equal

InterestonCapital

NoInterestonCapitalistobeallowedto
anyPartner

InterestonDrawings

NointerstonDrawingsistobecharged
fromanyPartner

SalaryonCommissionto
aPartner
InterestonloanbyaPartner

NotAllowed
Interestisallowed@6%perannum

DISTRIBUTIONOFPROFITSAMONGPARTNERS
AProfitandLossAppropriationAccountispreparedtoshowthedistribution
ofprofitsamongpartners aspertheprovisionofPartnershipDeed(orasperthe
provisionofIndianPartnershipAct,1932intheabsesnceofPartnershipDeed).Itis
anextensionofProfitandLossAcccount. Itisnominalaccount.
TheJournalEntriesregardingProfitandLossAppropriationAccountareasfollows:
1.

2.

FortransferofbalanceofProfitandLossAccount
ProfitandLossA/c
Dr.
ToProfitandLossAppropriationA/c
(BeingnetprofittransferredtoP&LAppropriationA/c)
ForInterestonCapital
1.ForallowingInterestoncapital
InterestonCapitalA/c
ToPartners'Capital/CurrentA/cs
(Beinginterestoncapitalallwoed@___%p.a)
2.FortransferringInterestonCapitaltoProfitandLossAppropriation
A/c:
6

Accountancy& XII

ProfitandLossAppropriationA/cDr.
ToInterestonCapitalA/c
(BeinginterestoncapitaltransferretoP&LAppropriationA/c)
3.

ForSalaryofCommissionpayabletoapartner
i.

ForallowingSalaryorCommissiontoapartner:
Partner'sSalary/CommissionA/c

Dr.

ToPartner'sCapital/CurrentA/cs
(Beingsalary/commissionpayabletoapartner)
ii.

FortransferringPartner'sSalary/CommissionA/ctoProfitandLoss
AppropriationA/c:

ProfitandLossappropriationA/c

Dr.

ToPartner'sSalary/CommissionA/c
4.

FortransferofReserves:
ProfitandLossAppropriationA/c

Dr.

ToReserveA/c
(Beingreservecreated)
5.

ForIntereston Drawings:
1.Forcharginginterestonapartner'sdrawings:
Partner'sCapital/CurrentA/c

Dr.

ToInterestonDrawingsA/c
(Beinginterestondrawingscharged@____%p.a.)
2. FortransferringInterestondrawingstoProfitandLossAppropriation
A/c:
Dr.
InterestonDrawingsA/c
ToProfitandLossAppropriationA/c
(BeinginterestondrawingstransferredtoP&LApprpriationA/c)
6.

For transfer to Profit (i.e. Credit Balance of Profit and Loss

Appropriation Account
7

Accountancy& XII

ProfitandLossAppropriationA/c
ToPartnersCapitalA/cs
(Beingprofitsdistributedamongpartners)

Dr.

SPECIMENOFPROFITANDLOSSAPPROPRIATIONACCOUNT
ProfitandLossAppropriationAccount
Fortheyearendingon________________
Dr.
Particulars

ToInterestonCapital
A
B
ToPartner's Salary/
Commission
To Reserves
To Profits transferred to
capitalA/cof:
A
B

Cr.
`

Particulars
ByProfitLossA/c
(NetProfitstransferredfrom
P&LA/c)
ByInterstonDrawings
A
B

PARTNERSCAPITALACCOUNTS
Partner'sCapitalAccounts: Itisanaccountwhichrepresentsthepartner'sinterstin
thebusiness.
Incaseofpartnershipbusiness,aseparatecapitalaccountismaintainedforeach
partner.Thecapitalaccountsofpartnersmaybemaintainedbyfollowinganyofthe
followingtwomethods:
(1) FixedCapitalAccounts
(2) FluctuatingCapitalAccounts
1. FixedCapitalAccounts
Underthismethodthefollowingtwoaccountsaremaintained:
1. CapitalAccount
This accountwill always show acredit balance. Balance of Capital account
remainsfixedandonlythefollowingtwotransactionsarerecordedintheFixedCapital
Accounts:

AdditionalCapitalIntroduced

CapitalWithdrawnorDrawingsoutofCapital
8

Accountancy& XII

Dr.
Particulars
ToCash/BankA/c
(CapitalWithdrawn)
ToBalancec/d
(Closingbalance)

Partner'sCapitalA/cs
X
Y
`
` Particulars
ByBalanceb/d
(OpeningCr.Balance)
ByCash/BankA/c
(AdditionalCapital
Introduced)

Cr.
Y
`

X
`

2. CurrentAccount
TheCurrentaccountmayshowadebitorcreditbalance.Alltheusual
adjustments such as Interest on Capital, partner's salary/commission,
drawings(outofprofits),interestondrawingsandshareinprofitsorlosses
etc.arerecordedinthisaccount
Dr.

Partner'sCapitalA/cs
X
Y
Particulars
`
` Particulars
ToBalanceb/d
ByBalanceb/d
(OpeningDr.Balance)
(OpeningCr.Balance)
To Drawings
ByInterestonCapital
(out of Profits)
ByPartner'sSalaryor
To Interest on Drawings
Commission
ToProfitandLossA/c
ByProfitandLoss
(Shareinlosses)
AppropriationA/c
ToBalancec/d
(ShareinProfits)
(ClosingcreditBalance)
ByBalancec/d
ClosingDr.Balance

X
`

Cr.
Y
`

Note:
1. Debit balance of CurrentAccount is shown inAssets side of Balance
Sheet.
2. CreditbalanceofCurrentAccountisshowninLiabilitiessideofBalance
Sheet.
3. Balance of CapitalAccounts are always shown in Liabilities side of
BalanceSheetas thisaccountwillalwaysshowa creditbalancewhen
capitalisfixed

Accountancy& XII

2. FluctuatingCapitalAccounts:
Inthismethodonlyoneaccounti.e.,CapitalAccountofeachandeverypartner
ispreparedandalltheadjustmentsuchasinterestoncapital,interestondrawings
etc.arerecordedinthisaccount.Underthismethod,Capitalaccountmayshow
adebitorcreditbalanceandthebalanceofthisaccountchangesfrequentlyfrom
timetotimethereforeitiscalledfluctuatingCapitalAccount
Dr.

Partner'sCapitalA/cs
X
Y
Particulars
`
` Particulars
ToBalanceb/d
ByBalanceb/d
(OpeningDr.Balance)
(OpeningCr.Balance)
ToCash/BankA/c
ByCash/BankA/c
(CapitalWithdrawn)
(AdditionalCapital
To Drawings
Intoduced)
(out of profits)
ByInterestonCapital
To Interest on Drawings
ByPartner'sSalaryor
ToProfitandLossA/c
Commission
(Shareinlosses)
ByProfitandLoss
ToBalancec/d
AppropriationA/c
(ClosingcreditBalance)
(ShareinProfits)
ByBalancec/d
(ClosingDr.Balance)

X
`

Cr.
Y
`

INTERESTONCAPITAL
Interestonpartnerscapitalwillbeallowedonlywhenithasbeenspecificallymentioned
inthepartnershipdeed.InterestonCapitalcanbetreatedaseither:
a. AnAppropriationofprofitor
b. AChargeagainstprofits
A. InterestonCapital:AnAppropriationofProfits:
InCaseofLosses
InterestonCapitalisNOTALLOWED
InCaseofSufficientProfits
InterestonCapitalisALLOWEDIN
FULL
IncaseofInsufficientProfits
InterestonCapitalisallowedonlyto
theextentofprofitsintheratioof
interestoncapitalofeachpartner
B.InterestonCapital:AsaChargeagainstProfits:
InterestonCapitalisalwaysallowedinfullirrespectiveofamountofprofits
orlosses
10

Accountancy& XII

JOURNAL
a. IncaseofSufficientProfits
ProfitandLossAppropriationA/c
Dr.
ToInterestonCapitalA/c
(BeinginterestoncapitaltransferredtoP&LAppropriationA/c)
b. IncaseofInsufficientProfitsorLosses
ProfitandLoss/ProfitandLossAdjustmentA/cDr.
ToInterestonCapitalA/c
(BeinginterestoncapitaltransferredtoP&LAdjustmentA/c)
Note :
InterestonCapitalisalwayscalculatedontheOPENINGCAPITAL. If
OpeningCapitalisnotgiveninthequestion,itshouldbeascertainedasfollows:
Particulars

CapitalattheEnd
Add:1.Drawings

xxxxxx

__________

2.InterestonDrawings

xxxxxx

3.LossesduringtheYear

xxxxxx

__________

(xxxxxx)
(xxxxxx)

()

Less:1.AdditionalCapitalIntroduced
2.Profitsduringtheyear

OpeningCapital

__________

Foradditionalcapitalinterestiscalculatedforperiodforwhichcapitalisutilisede.gif
additionalcapitalisintroducedon1Aprilinfirmwhereaccountsareclosedon31st
December
Interest=AmountintroducedxRate/100x9/12
asmoneyisutilisedfor9months
INTERESTONDRAWINGS
InterestondrawingsinchargedbythefirmonlywhenitisclearlymentionedinPartnership
Deed.Itiscalculatedwithreferencetothetimeperiodforwhichthemoneywas
withdrawn.
Case1:WhenRateofInterestonDrawingsisgivenin%
InterestonDrawingsiscalculatedwithaflatrateirrespectiveofdateofdrawings.
11

Accountancy& XII

Case2:WhenRateofInterestonDrawingsisgivenin%p.a.
1.

When date of Drawings is not given

InterestonDrawing=TotalDrawingsxRate/100x6/12
Note : Interest is calculated for a period of 6 months
2. When date of Drawings is given
InterestonDrawing=TotalDrawingsxRate/100xTimeLeftafter
drawings/12
Case3:Whendifferent amount arewithdrawnondifferent date:
WehavethefollowingtwomethodstocalculatetheamountofInterestonDrawing:
1. Simple Interest Method
Inthismethod,interestondrawingiscalculatedforeachamountofdrawing
indivduallyofthebasisofperiodsforwhich
2. Product Method
Inthismethod,theamountsofdrawingsaremultipliedbytheperiodforwhich
itremainedwithdrawnduringtheperiod,Interestfor1monthiscalculatedon
thesumoftheseproducts.
Wecanexplaintheabovementionedtwomethodswiththehelpofanexample.
Example :
AarushiandSimranarepartnersinafirm.Duringtheyearendedon31stMarch2011
Aarushimakesthedrawingsasunder:
DateofDrawing
Amount (`)
01082010
5,000
31122010
10,000
31032011
15,000
PartnershipDeedprovidedthatpartnersaretobechargedinterestondrawings@12%
p.a.CalculatetheinterestchargeabletoAarushiDrawingbyusingSimpleInterestMethod
andProductMethod.

SOLUTION
Dateof
Withdrawal
01.08.2010
31.12.2010
31.03.2011

1.SimpleInterestMethod
Amountof
Monthstill
Drawings(`)
March31,2011
5,000
10,000
15,000

08
03
00

12

Interest@12%p.a
(`)
400
300
000
700

Accountancy& XII

Dateof
Withdrawal

2.ProductMethod
Amountof
Monthsforwhich
Drawings(`)
amounthas
withdrawntill
December31,2011

01.08.2010
31.12.2010
31.03.2011

40,000
30,000
00000
70,000
InterestonDrawing=TotalProductxRate/100xTime/12(inmonths)
=70,000x12/100x1/12
=` 700
Case4:Whenanequalamountiswithdrawnregularly
InterestonDrawingcanbecalculatedusingeitherProductMethodorDirectMethod
(i.e.,ShortCutMethod)
DirectMethodwillbeusedonlyifallthefollowingthreeconditionsaresatisfied:
1.Amountshouldbesamethroughouttheperiod
2.DateofDrawingsshouldbesamethroughouttheperiod
3.Drawingsshouldbemadethroughouttheperiodregularlywithoutanygap.
InterstonDrawing=TotalProductxRate/100xT/12
T=Time(inmonths)forwhichinterestistobecharged
T=Timeleftafterfirstdrawing+Timeleftafterlastdrawing/2
ValueofTunderDifferentcircumstanceswillbeasunder:
Monthly
Quarterly
HalfYearly Monthly
Drawingsfor Drawingsfor DrawingsforDrawingsfor
12Months
12Months
12Months 06Months
Whendrawingare
madeintheBeginning
ofeachperiod

5,000
10,000
15,000

Product
(`)

08
03
00

6.5 7.5 9

3.5

Whendrawingare
madeintheMiddleof
eachperiod

6
13

Accountancy& XII

Whendrawingare
madeintheEndof
eachperiod
Illustration:

5.54.5

32.5

CalculateinterestondrawingsofMr.X@10%p.aifhewithdrew` 1000permonth(i)In
thebegnningofeachMonth(ii)Inthemiddleofeachmonth(iii)atendofeachmonth.
TotalAmountwithdrawn= `1000x12=12,000
(i)Interestondrawing=AmountxRate/100x6.5/12
=12,000x10/100x6.5/12= ` 650
(ii)Interestondrawing=AmountxRate/100x6/12
=12,000x10/100x6/12=`600
(iii)Interestondrawing=AmountxRate/100x5.5/12
=12,000x10/100x5.5/12= `550
Illustration 2
CalculateinterestondrawingofVimalifthewithdrewRs.48000inyearwithdrawnevenly
(1) at beginning of each Quarter (ii) in the middle of each Quarter (iii) at end of each
Quarterrateis10%P.A.
Solution
CaseIDrawingmadeonbegnningofeachQuarter
Interestondrawing=AmountxRate/100x7.5/12
=48,000x10/100x7.5/12=Rs.3,000
CaseIIDrawingmadeinmiddleofeachquarter
Interestondrawing=AmountxRate/100x6/12
=48,000x10/100x6/12=Rs.2,400
CaseIIIDrawingsmadeatendofeachquarter
Interestondrawing=AmountxRate/100x4.5/12
=48,000x10/100x4.5/12=Rs.1800
SimilarlyInterestcanbecalculatedbyfollowingfarmulas
HalfyearlyDrawingsforyearwhen
(a)Drawingsaremadeinthebegnningofeachperiod(halfyear)
Interestondrawing=AmountxRate/100x9/12
(b)Drawingsaremadeinthemiddleofeachperiod(halfyear)
Interesondrawing=AmountxRate/100x6/12
(c)Drawingsaremadeattheendofeachperiod(halfyear)
Interestondrawing=AmountxRate/100x3/12
For monthlydrawings for6 months
(a)Drawingsaremadeinbeginningofeachmonth
Interst=AmountxRate/100x3.5/12
(b)Whendrawingsaremadeinthemiddleofeachmonth
Interest=AmountxRate/100x3/12

14

Accountancy& XII

(c)Whendrawingsaremadeattheendofeachmonth
Interest =Amount x Rate/100x 2.5/12
INTERESTONPARTNERSLOAN
Itisachargeagainstprofits.Itisprovidedirrespectiveofprofitsorloss.Itwillalsobe
providedintheabsenceofPartnershipDeed@6%perannum.
Thefollowingentriesarepassedtorecordtheinterestonpartnersloan
i.
ForallowingInterestonloan:
InterestonPartners LoanA/c
Dr.
ToPartnersLoanA/c
(Beinginterestonloanallowed@___%p.a.)
ii.
FortransferringInterestonLoantoProfitandLossA/c:
ProfitandLossA/c
Dr.
ToInterestonLoanA/c
(BeinginterestonloantransferredtoP&LA/c)
ItisalwaysDEBITEDtoProfitandLossA/c
RentpaidtoapartnerisalsoachargeagainstprofitsanditwillalsobeDEBITEDto
ProfitandLossA/c.
Q.1.AandBenteredintopartnershipon1stApril,2010withoutanypartnershipdeed.They
introduced capitals of Rs. 5, 00,000 and Rs. 3, 00,000 respectively. On 31st October,
2010,Aadvanced Rs.2,00,000by wayofloanto thefirmwithoutany agreementasto
interest.
TheProfitandLossAccountfortheyearended31032011showedaprofitofRs.
4,30,000butthepartnerscouldnotagreeupontheamountofinterestonLoantobe
chargedandthebasisofdivisionofprofits.PassaJournalEntryforthedistributionofthe
ProfitsbetweenthepartnersandpreparetheCapitalA/csofboththepartnersandLoanA/
cofA.

SOLUTION:
ProfitandLossAppropriationAccount
Fortheyearendingon31stMarch,2011
Dr.
`

Particulars
To Profits transferred to
CapitalA/cof:
A2,12,500
B2,12,500

Particulars

ByProfitandLossA/c
Rs.
(Net Profits 4,30,000
Less:Intereston
4,25,000 A'sLoan
(5,000)
4,25,000

15

Cr.
`

4,25,000
4,25,000

Accountancy& XII

Dr.

Cr

Partner'sCapitalA/cs

Date
Particular
A
B
31.03.2011 To
Balance
7,12,500 5,12,500
c/d

Date
01.04.2010
31.03.2011

Particular
A
ByBankA/c 5,00,000
By Profit and
Loss
Appropriation
A/c
2,12,500
7,12,500

7,12,500 5,12,500

B
3,00,000

2,12,500
5,12,500

JOURNAL
Date

Particulars

L.F.

31.03.2011 ProfitandLossAppropriationA/c
ToA'sCapitalA/c
ToB'sCapitalA/c
(Beingprofitdistributedamongthe
partners)
Dr.
Date
2011
March,
31

Dr

Particulars

A'sLoanA/c
Amount
Date

ToBalancec/d

2,05,000

Debit
Rs.
4,25,000

2,12,500
2,12,500

Particulars

2010
Oct., 31 ByBankA/c
2011
March,31 ByIntereston
LoanA/c

2,05,000

Credit
Rs.

Cr.
Amount
Rs.
2,00,000

5,000
2,05,000

Note:InterestonA'sLoan=LoanAmountxRate/100xTimeLeftafterLoanTaken/12
=2,00,000x6/100x05/12
= Rs.5,000
PASTADJUSTMENTS
If,afterpreparationofFinalAccountsoffirm,itisfoundthatsomeerrorsoromissionin
accounts has occurred than such errors or omissions are rectified in the next year by
passing anadjustment entry.
Astatementispreparedtoascertaintheneteffectofsucherrorsoromissionsonpartner's
capital/current accounts inthe following manner.

16

Accountancy& XII

Particulars
A.Amounttobegiven(CREDITED)
*InterestonCapital
(Notallowedorprovidedatalowerrate)
*Partner'sSalaryorCommissionetc.
(Omittedtoberecorded)
*ActualProfits
(Tobedistributedincorrectratio)
TOTAL A
B.Amountalreadygiventobetakenbacknow
(DEBITED)
*InterestonCapital
(Ifgivenatahigherrate)
* Interest on Drawings
(if not charged)
*Profitsalreadydistributedinworngratio
(debited now)
TOTALB
NetEffect(AB)

Date

A
Rs.

B
Rs.

C
Rs.

+/

+/

+/

+IndicatesAmounttobeCreditedtoPartner'sCapitalAccount
indicatesAmounttobeDebitedtoPartner'sCapitalAccount
JOURNAL
Particulars
L.F.
Debit
Rs.
Partner'sCapitalA/c(Amounttobe
Dr
Debited)
ToPartners'CapitalA/c(Amountto
beCredited)
(Beingadjustmententrypassed)

Credit
Rs.

DuringPastadjustmentitisnotcompulsorythatcapitalaccountsofallpartner'sare
affected.Morethanonepartner'sCapitalAccountmaybedebitedorcreditedbutamount
ofdebit&creditsholdbeequal
Q.1:ManojSahilandDipankararepartnersinafirmsharingprofitsandlossesequally.The
haveomitted interestobCapital@10% perannumfor threeyearsendedon 31stMarch,
2011.TheirfixedCapitalonwhichinterestwastobecalculatedthroughoutthewere:
Manoj
Rs.3,00,000
Sahil
Rs.2,00,000
Dipankar Rs.1,00,000
Givethenecessaryadjustingjournalentrywithworkingnotes.
17

Accountancy& XII

SOLUTION:

Date

BooksofManoj,SahilandDipankar
JOURNAL
Particulars
L.F.
Dipankar'sCurrentA/c
ToManoj'sCurrentA/c
(Beingadjustmententrypassed)

Dr.

Debit Credit
Rs.
Rs.
30,000
30,000

STATEMENTSHOWINGADJUSTMENT
Particulars
A.Amounttobegiven(Credited)
InterestonCapital

Manoj
Rs.

Sahil
Rs.

Dipankar
Rs.

90,000
TotalA 90,000

60,000
60,000

30,000
30,000

B.Amountalreadygiventobetakenback
now(DEBITED):
ExcessProfittakenbackfromtehpartnersin
theirprofitsharingratio
60,000 60,000
60,000
(Rs.90,000+60,000+30,000 = 1,80,000)
TotalB 60,000 60,000
60,000
NetEffect(AB)
30,000
Nil
30,000
Credit
Debit
Hint:Asclosing balancesheetisgivensobeforecalculation ofinterestopeningcapital
shouldbecalculated
Q2.A and B are partners in a firm sharing profits and losses in the ratio of 3:2. The
followingwastheBalanceSheetofthefirmason31032011:
BALANCESHEET
ASON31032011
Liabilities
` Assets
`
Capitals:
Rs.
SundryAssets
80,000
A
60,000
B
20,000
80,000
80,000
80,000
The profits Rs.30,000 for the year ended 31032011 were divided between the partners
withoutallowinginterestoncapital@12%p.a.andsalarytoARs.1,000permonth.During
theyearAwithdrewRs.10,000andBRs.20,000.
Pass the necessary adjustment entryand show your working clearly
18

Accountancy& XII

The profits ` 30,000 for the year ended 31032011 were divided between the partners
withoutallowinginterestoncapital@12%p.a.andsalarytoA `1,000permonth.During
theyearAwithdrew `10,000andB `20,000.
Pass the necessary adjustment entryand show your working clearly
BooksofAandB
JOURNAL
Date
Particulars
L.F.
Debit Credit
`
`
B'sCapitalA/c
Dr.
30,000
ToA'sCapitalA/c
30,000
(BeinginterestoncapitalandsalarytoAnot
Charged, now rectified)
WorkingNotes:
1.CalculationofOpeningCapital:AsClosingBalanceSheetisgivensobeforecalculation
ofinterestopeningcapitalshouldbecalculated
Particulars
A
B
`
`
CapitalattheEnd
60,000
20,000
Add:1.Drawings
10,000
20,000
70,000
40,000
Less:Profitsduringtheyear
(18,000)
(12,000)
OpeningCapital
52,000
28,000
2.CalculationofNetEffect
STATEMENTSHOWINGADJUSTMENT
Particulars
A
`
A.Amounttobegiven(CREDITED)
InterestonCapital
6,240
(Not provided)
SalarytoA
12,000
(Not provided)
TOTALA
18,240
B.Amountalreadygiventobetakenbacknow
(DEBITED):
LosstothefirmduetoInterestonCapitalandSalaryto
Abedebitedtothepartnersin
theirprofitsharingratio
12,960
(Rs.18,240+3,360=21,600)
TOTALB
12,960
NETEffect(AB)
5,280
Credit
19

B
`
3,360

3,360

8,640
8,640
5,280
Debit

Accountancy& XII

GUARANTEEOFPROFITSTOAPARTNER
Guaranteeisanassurancegiventothepartnerofthefirmthatatleastafixedamountshall
begiventohim/herirrespectiveofhis/heractualshareinprofitsofthefirm.Ifactualshare
inprofitsislessthantheguaranteedamountinthatcasethedeficitamountshallbeborne
eitherbythefirmorbyanypartnerasthecasemaybe.
Note:Guaranteetoapartnerisgivenforminimumshareinprofits.Iftheactualsharein
profitsismorethantheminimumguaranteedamountthentheactualprofitswillbeallowed
tothepartner
Case:1.WhenguaranteeisgivenbyFIRM(i.e.,byallthePartnersofthefirm)
1.GuaranteedamounttoapartneriswritteninProfitandLossAppropriation
A/c
2. Remaining profits are distributed among the remaining partners in their
remaining ratio.
Case2:Whenguaranteeisgivenbyapartnerorpartnerstoanotherpartner
1. Calculatethe sharein profitsforthe partnerto whomguarantee isgiven
2. If sharein profitsis morethan the guaranteedamount, distributethe profits
as perthe profitand loss sharingratio inusual manner.
3. If share in profits is less than the guaranteed amount, find the difference
betweentheshareinprofitsandthe guaranteedamountandthedifferenceis
known as Deficiency.
Deficiency isdistributed amongthe partneror partnerswho guaranteedin a
certainratioandsubtractedfromhisortheirrespectiveshares.
Q.AandBwerepartnersinafirmsharingprofitsandlossesintheratioof3:2.Theyadmit
Cfor1/6thshareinprofitsandguaranteedthathisshareofprofitswillnotbelessthenRs.
25,000. Total profits of the firm were Rs. 90,000. Calculate share of profits for each
partner when:
1.Guaranteeisgivenbyfirm.
2.GuaranteeisgivenbyA
3.GuaranteeisgivenbyAandBequally.
SOLUTION:
Case1.WhenGuaranteeisgivenbyfirm
ProfitandLossAppropriationAccount
Fortheyearendingon31STMarch,2011
Dr.
Cr.
Particulars
`
Particulars
`
ToA'sCapitalA/c
ByProfitandLossA/c
(3/5 of Rs.65,000)
39,000
90,000
ToB'sCapitalA/c
(2/5 of Rs.65,000)
26,000
ToC'sCapitalA/c
(1/6ofRs.90,000 orRs.
25,000 whichever is more
25,000
90,000
90,000
20

Accountancy& XII

Case2.WhenGuaranteeisgivenbyA
ProfitandLossAppropriationAccount
Fortheyearendingon31STMarch,2011
Dr.
Particulars
`
Particulars
ToA'sCapitalA/c
ByProfitandLossA/c
(3/6 of Rs.90,000)
45,000
(Net Profits)
Less:Deficiency
BorneforC
(10,000) 35,000
ToB'sCapitalA/c
(2/6 of Rs.90,000)
30,000
ToC'sCapitalA/c
(1/6 of Rs.90,000
15,000
Add:Deficiencey
RecoverfromA
10,000 25,000
90,000
Case3.WhenGuaranteeisgivenbyAandBequally
ProfitandLossAppropriationAccount
Fortheyearendingon31STMarch,2011
Dr.
Particulars
`
Particulars
ToA'sCapitalA/c
ByProfitandLossA/c
(3/6 of Rs.90,000)
45,000
(Net Profits)
Less:Deficiency
BorneforC
(1/2of10,000)
5,000 30,000

ToB'sCapitalA/c
(2/6 of Rs.90,000)
30,000
Less:Deficiency
BorneforC
(1/2of10,000)
5,000
25,000
ToC'sCapitalA/c
(1/6 of Rs.90,000
15,000
Add:Deficiency
RecoverfromA
5,000
Deficiency
RecoverFromB
5,000 25,000
90,000

21

Cr.
`
90,000

90,000

Cr.
`
90,000

90,000

Accountancy& XII