CHAPTER 1 : FUNDAMENTALS OF PARTNERSHIP BY RAKESH RAJPUT

In India, any contract of Partnership is governed by the Indian Partnership Act, 1932. Section - 4 of
the aforesaid Act defines partnership as:
"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."
Persons who have entered into partnership are individually known as 'PARTNERS',
'PARTNERS' and
collectively as a 'FIRM'. The name under which the business of a firm is carried on is called the
'FIRM NAME'.

Following are the few features of a partnership:

1. Agreement between Partners: A Partnership Come into Existence by an Agreement between
two or more individuals.
Proposal + Acceptance = Agreement
This Agreement May be Written or Oral. A written Agreement between Partners is Called
“Partnership Deed”
In order to avoid controversies, it is always good, if the partners have a copy of the written agreement.
2. Two or More Persons: In order to manifest a partnership, there should be at least two persons
possessing a common goal.
The Minimum Number of Partners is two. However Maximum Number of Partners Can be 50.
{Mentioned in Companies Miscellaneous Rule 2014}.
3. Sharing of Profit: There should be an agreement among the
partners to share the profits of the business Here sharing of loss is
implied. However Sharing of Profit is not conclusive Evidence of As Per Indian Contract Act a
Partnership. Person can’t come into
Agreement if He/She is
4. Legal Business Motive: It is important for a firm to ccarry some
(i) Minors
kind of Legal business and should have a profit gaining motive. A
Business which is Forbidden by Law is Call Illegal Business. . (ii) Persons disqualified by
5. Unlimited Liabilities : All partners are jointly and severally law
responsible for all activities carried out by the ppartnership.  Alien enemy
In other words in all cases where the assets of the firm are not  Convicts:
sufficient to meet the obligations of creditors of the firm, the  Insolvent
private assets of the partners can also be attached.  Foreign sovereigns
6. Mutual agency and diplomats
 Partnership business may be carried on by all the partners or  Prisoner of War
by any of them acting for all.
 Each partner whether participating in management or not will be held liable for the acts of other
partners in ordinary course of business.
 So, every partner plays a double role as an agent as well as pr principal
incipal at the same time.
Accordingly, in the ordinary course of the business of the firm, a partner acting as an agent
makes the other partner's liable for his act. He becomes a principal himself when similar actions
of other partners make him liable.

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7. Registration: Under the Act, registration of a firm is not compulsory. However, if the firm is not
registered, certain legal benefits cannot be obtained.
The effects of non-registration
registration are
are-
(i) The firm cannot take any action in a court of law against an anyy other parties for settlement of
claims and
(ii) In case of a dispute among partners, it is not possible to settle the disputes through a court of
law.
8. Not a Separate Legal Entity:
The firm does not have a personality of its own. The business gets terminated in case of death,
bankruptcy or lunacy of any one of the partners.
9. Transfer of Interest: A partner cannot transfer his interest in the firm to outsiders unless all other
partners agree unanimously. A partner is an agent of the firm and is ineligible to transfer his interest
unilaterally to outsiders.

General Partnership: In this type of partnership, each partner has right to take decision about the
working and management of the firm.
General partnership is further bifurcated into two categories:
a) Partnership at will: Usually when a partnership is created, it is upon the partners to decide
till when they want the partnership to exist. Hence, whenever a partnership is created without
a specific
pecific time limit of its closure, its termed as partnership at will. The dissolution of
partnership is the matter of mutual consideration when need arises and is not pre pre-decided. It is
upon the partners to decide mutually till what period of time they wan wantt the partnership to be
functioning.
b) Particular partnerships: This is the type of partnership that is created with an aim to carry
out a specific undertaking. When partnership is created for a project of a temporary contract
contract-
based work or a specific busin
business
ess only, they are termed as particular partnerships. Once the
objective of the business is achieved or the act for which the partnership was created in
fulfilled, the partnership will be dissolved. However, the partners have the discretion to come
to an agreement
greement in case they wish to continue the said partnership. But in the absence of this,
the partnership ends when the task is complete. For example, a partnership for the construction
of a building or partnership for producing a movie.
Limited Liability Partnership
artnership (LLP): A limited partnership unlike general partnership is a corporate
form of business organization. Here, the liabilities are limited to each partner according to their
agreed contribution to the business. The personal property of a partner ca cannot
nnot be attached to pay
back the firms debts. This hybrid organization is governed under the Limited Liability Partnership
Act, 2008 and not under Partnership Act.
Unregistered Partnership Firm: An unregistered firm is established by execution of an agree agreement by
the partners. The unregistered partnership firm allows the Partners to carry on the business in manner
stated and provided in the agreement.
Registered Partnership Firm: The Partnership Firm is to be registered with the Registrar of Firm
(ROF) having ng jurisdiction over the place of business of the Firm. The registration application
involved payment of registration fee to R ROF,F, varied from state to state according to the State Law.
The registered partnership firm is preferred in many cases due to the benefits offered by a registered
partnership firm.

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 Types of Partners

Active or Working Partner: This is the partner that is actively involved in the management and other
important functional aspects of the partnership firm.
Dormant or Sleeping Partners: As the name suggests a dormant partner is the one that is not
interested in daily management or functional aspects of the partnership firm, but he may be consulted
while taking major decisions for the firm. The partnership of this partner may not be known to the
outsiders, but they invest in the firm by contributing a chunk of capital to the firm.

Nominal Partner: A person who does not have any real interest in the business or the working of the
firm nor he has any rights in the profits is a nomi
nominal
nal partner of the firm. He just lends his name to the
firm, so that it could advantage from his/her reputation and name and is treated
like an actual partner.
Partner by estoppels or holding out:
If a person expressly declares by his words or conduct, hholds olds out to another that he is a partner, he
would not be able to back out from it later. Hence such a person would thus become liable to third
parties in clearing out the debts of the firm when a situation arises.
Partner in profits only: In certain situa
situations,
tions, a partner joins the partnership firm with a clarification
that he/she would share only profits as a partner and would not be liable for any losses. However, he
shall be liable like all other partners since the liability of the partners is joint and several. So if the
firm incurs any loss and the other partners become insolvent, the third party may hold this partner
liable.
Sub-partner: When a partner agrees to share his profits derived from the firm with a third party, that
person is known as a sub- partner. He cannot represent himself as a partner in the original firm. He
does not have any rights against the original firm neither he is liable for the acts of the firm. He can
claim the agreed share of profits form the contracting partner only.
Minor as a partner: Under
nder the Indian Partnership Act, a minor can be introduced as a partner as long
as it is only to enjoy the benefits. A minor partner has access to the accounts of the firm and is
entitled to share his profits.

Rights of Partner Duties of Partner

 Involvement in thehe conduct & management  To be bound to carry on the business of the
of the business. firm diligently.
 To be consulted in the matters of the  Every partner must be faithful to other
partnership, related to business.
 Free access to all records, books of partner(s).
accounts, to examine & copy them.  A partner should not engage in competition
 Share profits equally, unless otherwise against the firm, if he does so, he should
agreed in partnership deed. account for the profits made in the competing
 Joint ownership of partnership property. business.
 Not to allow the admission of a new
 No partner can assign his interest in the
partner.
 Can claim interest of 6% p.a. on Loan or as business to any other person.
otherwise agreed in the partnership deed.  A partner should act within the expressed or
 During adverse circumstances, to act implied authority.
according to his prudence and should be  A partner should indemnify for the loss caused
compensated
ensated for the expenses incurred by by his willful neglect or any breach of
him, etc.
agreement.
 In case of emergency, to act as a man of
prudence.

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 Legal Status of Firm

A firm is not a separate legal entity. In other words firm is not a legal person, it is merely a collection
of partners. Hence, firm does not acquire an identity different from its partners. In this connection
following points are worth mentioning:
a) A firm cannot hold property in its own name.
b) A firm cannot sue and be sued in its own name.
c) Assets of the firm are the joint property of the partners.
d) All partners are jointly and severally i.e., individually liable for all the business obligations of
the firm.

Partnership Deed

The document containing the partnership agreement among partners is called Partnership
Deed.
It contains the terms and conditions which are agreed upon by all the partners. So, an agreement may
be written or oral but when it's written, it's called a deed.
It also contains the rights, duties, powers and obligations of the partners. Sometimes it is also ccalled
the Articles of the firm. It contains :
 A new partner cannot be
Name, nature & place (head office) of business;
admitted into the
Names & address of all the partners; business unless all
Duration of partnership; existing partners agree to
Amount of capital contribution by each partner; it.
Rules regarding banking transactions;  Each partner has a right
Profit sharing ratio; to participate in conduct
Interest on capital, drawings & loan of partners; of business.
Accounting period.  Each partner has a right
to inspect the books of
Settlement of accounts on dissolution of the firm;
accounts and also take
Methods of settling disputes amongst the partners etc.; copy of the same
Method for valuation of assets in case of reconstitution;
Method for valuation of goodwill in case of reconstitution of partnership;
Rules applicable for accounting treatment on retirement, admission & death of partners,
change in profit sharing ratio;

Why We Need A Written Partnership Deed?

Though, it is not mandatory (compulsory) for every firm to have a Partnership Deed, but, still for
the following reasons it is important:
a) It avoids any misunderstandings amongst the partners as all the necessary legalities have been
laid down before hand in the deed.
b) All the disputes may be settled easily, as the deed can be readily referred to.
c) For smooth functioning and obtaining stability in the functioning of business transactions.
Hence, it is the best course and desirable option to have a written agreement whic
which should be duly
signed and registered under the Act.

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 Provisions of “The Indian Partnership Act 1932”
In Absence Of Partnership Deed
Accounting Issues Rules Apply
Interest on Capital No interest on capital is to be allowed.
Interest on Drawings No interest on drawings is to be charged.
Salary or Remuneration No salary or remuneration is to be allowed to any partner.
Commission No commission is to be allowed to any partner.
Profit Sharing Ratio Profit or losses are to be shared equally by all partners.
Interest on Loan Interest on loan is to be allowed @ 6% per annum.

Q.No.1. Rocky , Rimpa and Shilpi are Partners Shilpi wants to Retire from Day to Day Operation of
the firm and Wanted to Work further as Dormat Partner. Rocky and Shilpi has given their Consent
for the same. State with Reason, in Light of Indian Partnership Act 1932 , whether Shilpi can Work
as Dormant Partner or not.
Q.No.2. Pushpa , Puneet and Purnima are Partners sharing Profit and Losses in 3:2:1. Due to Earth
Quick Purnima Lost her House and nd She ask for the help from other Partners. Firm has Advanced
Loan of ₹7,00,000 to Purnima. But they were not agreed on Interest on Loan. In Light of Partnership
Act 1932 state how much Interest shall be charged on Loan.
Q.No.3. A and B are two partners. If A does an act, A is an Agent and B is the Principal. Similarly,
Do if B does an act, B is an Agent and A is the Principal. Here, it should always be noted that for the
act of an agent principal is also liable. Which Features of Partnership it is?
Q.No.4. Samrpan , Samarth and Sukanya are Partners sharing Profit and Losses in 3:2:1. Sunknaya
Died in an Car Accident, Her Daughter Pratishtha ( Who is 16 year old) wants to Join as
Replacement of Sukanya. State the Provisions of Partnership Act that how Pr Pratishtha
atishtha can be
Admitted in Firm?
Q.No.5. KK and RK Bought a 4BHK Flat in Vasundhra Gaziabaad at a Cost of ₹60,00,000. Now
they Let out the house for a monthly rent of ₹20,000
20,000 Which they Distribute Equally. State with
Reason weather it is a partnership or not.
Q.No.6. Kuldeep , Mandeep and Sandeep are Partners sharing profit and Losses in 3:2:2. They wants
to Expand their business and For that agreed to admit more Partners. What is the Maximum numbers
of Partners they can admit in Firm.
Q.No.7. A, B & C were re partners in a firm with fixed capitals of Rs.10,000, Rs.20,000 and Rs.30,000
respectively. The profit for the year was Rs.9,000. In the absence of partnership deed state the profit
that would be divided amongst A, B and C.
Q.No.8. A and B are partners.. A spends twice the time that B devotes to business. A claims that he
should get a salary of Rs.3,000 per month for his extra time spent. They do not have any partnership
agreement. What should be done in the this situation?
Q.No.9. Saurabh Jain and Saurabh rabh Aggarwal were partners in a firm without any partnership deed.
Saurabh Jain has invested Rs.2,00,000 and Saurabh Aggarwal has invested Rs.1,00,000 as capital.
Saurabh Jain wants interest on capital @ 12% p.a. whereas Saurabh Aggarwal wants it to be 115%
p.a. What should be done in the this situation?

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Q.No.10. Ramaiya , Kanhaiya , Vashtavaiya has Started a Business of Selling Crackers without
obtaining any license from Deputy Commissioner of Delhi. They Invested ₹15,00,000 and Earn 25%
on It. Which they ey have distributed among them in Equal Proportion. Comment with Reason Weather
it is Partnership or Not?
Q.No.11. “A A firm is not a separate legal entity
entity”. State with reason that Given Statement is True or
False.
Q.No.12. S, R and T are Partners sharing Profit and Losses in 3:2:1. S is Dormant Partners and
wants to inspect book of accounts. Others Partners disagree on this. How will solve the dispute.
Q.No.13. Registration of Firm is Compulsory or Not?
Q.No.14. Trisar , Ivanka and Krishna are Partners in a Sabse Achcha Coaching Center. Trisar Has
started a His own venture in Same Locality with Inse bhi Achcha Coaching Center and Earn Profit of
₹15,00,000. Ivanka and Krishna Claims that being in the Partnership Trisar has Started a
Competitive Business and has to Surrendered all the Earning of Such Business to Partnership Firm.
Trisar Did not agreed on That. In this Situation how will You Solve the Dispute.
Q.No.15. There are 41 Partners in A firm. They Wants to Admit Mr. Saksham as New Partner. More
than 80% Partners Voted in Favor of Admission of Mr. Saksham However Many of Them not
Agreed on that. Here Mr. Saksham has Got Majority Voting For Admission in Firm. Whether He
will be admitted or Not.
Q.No.16. Samrpan , Samarth and Sukanya are Partners shar sharing
ing Profit and Losses in 3:2:1. Sunknaya
Died in an Car Accident, Her Daughter Pratishtha ( Who is 16 year old) wants to Join as
Replacement of Sukanya. Even after 8 month of Attaining Majority Pratishtha has Not Given Her
Consent to Firm. During the Period Firm Suffered a Huge Loss Due to Negligence of Sales
Department. Now Pratishtha Claims that she was Minor Partner and Has not yet Given Consent to be
Continue as Partner So Now will Not Continue as Part Partner.
ner. And Since she was a Minor Partner in
Firm Hence she will Not Share any loss of the Firm. Are the Arguments of Pratishtha is Correct ?
State with reason.
Q.No.17. X and Y are partners in a firm sharing profits in the ratio of 2:1. They had advanced to the
firm a sum of Rs.60,000 in their profit sharing ratio on July 1, 2014.
The partnership deed is silent on the question of interest on loan from partners. At what Rate Interest
on Loan Shall be Provided.
Q.No.18. Sumit , Parul and Ginni are Partners sh sharing
aring Profit and Losses in 3:2:1. Ginni was
Guaranteed a Minimum Profit of Rs. 60,000 in Firm. What should be Gurantee Ratio to Compensate
Deficiency.
Q.No.19. If any Partner give guarantee to Firm to Earn a Minimum Amount of Profit and Fails to
Earn similar
ilar amount. What Journal Entry Will You pass to Recover Deficiency in Earning by
Partner.
Q.No.20. What are the circumstances when Fixed Capital account may Change ?
Q.No.21.. Why We Do not Record Manager Commission , Interest on Partner’s Loan and Rent paid
to Partner in Profit and Loss Appropriation Account.
Q.No.22. State the circumstance when partners' capital and partners' current account are opened.
Q.No.23. State the rate at which interest on drawing is charged
charged.
Q.No.24. In the case of fixed Capital Accounts, were will you record fresh capital introduced by a
partner.
Q.No.25. State with reason that Following Statement are true or False
(a) Interest on partners loans is credited to capital account.
(b) Interest on capital
ital is treated as a charge, if nothing is specified.
(c) If a partner draws a fixed amount on the first day of every month, interest on total amount
is charged for 6½ months.
(d) Profit & Loss Appropriation is an extension to the Balance Sheet.

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 Interest on Drawings
Drawings
Drawings is the amount withdrawn or goods
taken by the proprietor for personal use.

Drawings out of Profit Drawings out of Capital

Drawings out of profit reduces working Drawings out of Capital reduces Capital
Capital of firm. Hence to Discourage of Firm. Interest on Drawings Shall not
Partners to Withdraw Firm may Charge be charged on this kind of Drawings
Interest on Drawings.

Important Points Regarding Interest on Drawings

 No Interest on Drawings is Charged if Deed is Silent
 However Partners’ mutually can agree upon Charging Interest on Drawings on Drawings Made
out of Profit
 In Case any Dispute Regarding IOD No Interest Shall be Charged

If Firm Charges Interest on Drawin

Drawings gs Following Accounting Treatments shall be made
Journal Entries
Date Particular LF Debit Credit
Partners’ Capital/Current A/c … Dr
To Interest on Drawings A/c
( Being ………………………………..)
Interest on Drawings A/c …..Dr.
To Profit and Loss Appropriation A/c
( Being ………………………………..)
OR
Partners’ capital / current A/c ….Dr.
To Profit and Loss Appropriation Accounts
Dr Profit & Loss Appropriation A/c Cr.
Particular Amount Particular Amount
To Interest on Drawings
Partner’s Capital/Current A/c
( individually )
Dr Partner’s Capital/Current A/c Cr.
v Particular P1 P2 Particular P1 P2
To Interest on Drawings
To Drawings
Note 1. : In Case Firm Maintaining Fixed Capital Method, Interest on Drawings Shall be transferred
to Partner’s Current account instead of Partners Capital Account
Account.

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Q.No.1. A partner draws Rs. 1,000 per month. Under the Partnership Deed, interest is to be charged
@ 15% p.a. Calculate interest that should be charged to the partner if the drawings are made:
a) In the beginning of the month,
b) At the end of the month
c) In the middle off the month, or
d) At the end of the month for last 9 Months. {Ans: (i) ₹975 (ii) ₹825 (iii)₹900 (iv) ₹450}
Q.No.2. Calculate interest on drawings of Mr. Siddhant @ 10%p.a. for the year ended 31st March,
2022 in each of the following alternative cases:
Case 1. If he withdrew ₹6,000
6,000 in the beginning of each quarter.
Case 2. If he withdrew ₹12,000
,000 at the end of each quarter.
Case 3. If he withdrew ₹9,0000 in the middle of each quarter
quarter. {Ans: (i) ₹1500
1500 (ii) ₹1800 (iii)₹1800}
Q.No.3. Calculate the Interest on Drawings of Ram @ 66%% p.a. for the year ended 31St March. 2012,
if he withdrew 2,000 p.m. in the beginning of each month. {Ans: ₹780}
Q.No.4. Calculate the Interest on Drawings of Ram @ 9% p.a. for the year ended 31st March. 2012,
if he withdrew 2,000 p.m. at the end of every month. {Ans: ₹990}
Q.No.5. Calculate the Interest on Drawings of Ram @ 10% p.a. for the year ended 31St March.
2012, if he withdrew 3,000
,000 p.m. during the middle of each month. {Ans: ₹1800}
Q.No.6. Calculate the Interest on Drawings of Ram @ 8% % p.a. for the year ended 31St March. 2012,
if he withdrew 6,000 in the beginning of each quarter. {Ans: ₹1200}
Q.No.7. Calculate the Interest on Drawings of Ram @ 6% % p.a. for the year ended 31St March. 2012,
if he withdrew 5,000
,000 at the end of each quarter. {Ans: ₹450}
Q.No.8. Calculate the Interest on Drawings of Ram @ 10% p.a. for the year ended 31St March.
2012, if he withdrew 6,000 per quarter at mid of each Quarter. {Ans: ₹1200}
Q.No.9. Calculate the Interest on Drawings of Ram @ 5% % p.a. for the year ended 31St March. 2012,
if his drawings during the year were 24,000. {Ans: ₹600}
Q.No.10. Calculate the Interest on X’s ddrawings @ 6% p.a if he withdrew ₹4,0004,000pm at beginning of
st
each month for 1 6 months in the year. {Ans:₹1140}
Q.No.12. Calculate the Interest on X’s drawings @ 8% p.a if he withdrew ₹4,0004,000pm at beginning of
each month for Last 6 months in the year. {Ans:₹ 400}
Q.No.13. Calculate the Interest on X’s drawings @ 10% p.a. if he withdrew ₹4,0004,000pm at beginning
of each month for First 6 months and at end of each month for last 6 months in the year. {Ans:₹ 2400}
Q.No.14. Calculate the Interest on Drawings of Ram @ 6% % p.a. for the year ended 31St March.
2012. If he withdrew the following amounts as follows:
April 30 ₹ 6,000, June 30 ₹4,000,
4,000, October 1 ₹8,000, December 31 ₹ 3,000, February 1 ₹5,000,
{Ans:₹ 875}
Q.No.15. Rishi is a partner in a firm. He withdrew the following amounts du during
ring the year ended
March 31, 2022.
May 01, 2021 ₹12,000
12,000 July 31, 2022 ₹6,000
September 30, 2022 ₹9,000
9,000 November 30, 2022 ₹12,000
January 01, 2023 ₹8,000
8,000 March 31, 2023 ₹ 7,000
Calculate interest on drawings @ 9% p.a. (Ans : Interest on Drawing Rs. 2,295)
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 Interest on Capital
Interest on Capital: No partner is entitled to claim any interest on the amount of capital contributed
by him in the firm as a matter of right.
However, interest can be allowed when it is expressly agreed to by the partners. Thus, no interest on
capital is payable if the partnership
tnership deed is silent on the issue.
Further the interest is payable only out of the profits of the business and not if the firm incurs losses
during the period.
A Quick Analysis
IOC Accounting Treatment
No Deed Not Allowed
Expressly Agreed for (a) Profit is More than IOC
IOC but not mentioned  Allowed at Full Value
Charged Against Profit (b) Profit is Less then IOC
 Profit shall be Allowed as Appropriation in Ratio of IOC
Charged Against Profit Full Value of IOC is allowed in P& P&LL A/c and Balance shall be
Transferred to P&L Appropriation A/c
Calculation of Opening Capital
In Case of Fixed Capital In Case of Fluctuating Capital
Closing Capital xxxx Closing Capital xxxx
Add: Withdrawal Out of Capital xxxx Add: Withdrawal Out of Capital xxxx
Less : Further Capital (xxxx) Add: Withdrawall out of Profit xxxx
Opening Capital xxxx Less : Profitt Credited to Capital A/c (xxxx)
Less : Further Capital (xxxx)
Add: Interest on Drawings xxxx
Less: Interest on Capital xxxx
Less: Salary/Commission xxxx
Opening Capital xxxx
Journal Entries
Date Particular LF Debit Credit
Interest on Capital A/c … Dr xxxx
xxxx
To Partners’ Capital/Current A/c
Profit and Loss Appropriation A/c …..Dr.
To Interest on Capital A/c xxxx
xxxx
OR
Profit and Loss Appropriation A/c ….Dr.
Xxxx
To Partners’ capital / current Accounts xxxx
Dr Profit & Loss Appropriation A/c Cr.
Particular Amount Particular Amount
To Interest on Capital
Partner’s Capital/Current A/c
( individually )
Dr Partner’s Capital/Current A/c Cr.
v Particular P1 P1 Particular P1 P1
By Interest on Capital
Note 1. : In Case Firm Maintaining Fixed Capital Method, Interest on Capital Shall be transferred to Partner’s Current
account instead of Partners Capital Account

Note 2. : if, Interest on Capital is Charge against Profit Than IOC Shall be transferred to Profit & Loss A/c
instead of Profit & Loss Appropriation A/c

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Q.No.1. X and Y started business on 1st April, 2020 with capitals of ₹5,00,000 and ₹3,00,000
respectively. On 1st May 2020, X introduced an additional capital of ₹1,00,000 and Y withdrew
₹50,000 from his capital. On 1st October 2020, X withdrew ₹2,00,000 from his capital and Y
introduced ₹2,50,000. Interest on capital is allowed @ 6% p.a. calculate the interest on capita
capital for the
year ending 31st March, 2021. {Answer : X-X 29500 ; Y-22750}
Q.No.2. Sunflower and Pink Rose started partnership business on April 01, 2020 with capitals of
₹2,50,000 and ₹1,50,000,
1,50,000, respectively. On October 01, 2020, they decided that their capitals should
be ₹2,00,000
2,00,000 each. The necessary adjustments in the capitals are made by introducing or
withdrawing cash. Interest on capital is to be allowed @ 10% p.a. Calculate interes
interest on capital as on
March 31, 2021. {Ans : interest on Capital Sunflower’s ₹22,500
22,500 Pink Rose’s ₹17,500}
Q.No.3. On March 31,2020 after the close of accounts, the capitals of Mountain, Hill and Rock
stood in the books of the firm at ₹₹4,00,000, ₹3,00,000 and ₹2,00,000,
2,00,000, respectively. Subsequently, it
was discovered that the interest on capital @ 10% p.a. had been omitted. The profit for the year
2019-20 amounted to ₹1,50,000
1,50,000 and the partner’s drawings had been Mountain: ₹20,000, Hill
₹15,000 and Rock ₹10,000.
10,000. Calculate interest on capital.
{ Ans: Mountain 37,000 Hill 26,500 Rock 16,000 }
Q.No.4. Ram and Mohan are partners in a business. Their capitals at the end of the year were
₹72,000 and ₹24,000
24,000 respectively. During the year 2015
2015-16,
16, Ram's drawings and Mohan's drawings
were ₹12,000 and ₹18,000
18,000 respectively. Profit (before charging interest on capital) during the year
was ₹48,000.
48,000. Calculate interest on capital @ 5% p.a. for the year ended 31
31st
st March, 2016.
[Ans.: Interest on Ram's Capital
Capital— Rs. 3,000; Mohan's Capital—Rs.
Capital 900]
Q.No.5. From the following Balance Sheet of Lambu and Chhotu, calculate interest on capital @ 8%
p.a. for the year ended 31st March. 20
2023:
Balance Sheet as at 31st March, 2023
Liabilities ₹ Assets ₹
Lambu's Capital A/c 2,00,000 Fixed Assets 3,00,000
Chhotu’s Capital A/c 1,50,000 Drawings — Lambu 50,000
General Reserve A/c 90,000 Other Assets 60,000
4,00,000 4,00,000
During the year, Lambu's drawings were ₹50,000
50,000 and Chhotu's drawings were ₹70,000. Profit for the
year was ₹1,50,000 out of which ₹₹90,000 is transferred to General Reserve.
[Ans.: Interest on Lambu's Capital
Capital—₹13,600
₹13,600 ; Interest on Chhotu's Capital—₹
Capital 15,200}
Q.No.6. Simran and Bindu are partners in a firm sharing profits and losses in the ratio of 3 : 2. On
31st March, 2019 after closing the books of account, their Capital Accounts stood at ₹4,80,000 and
₹6,00,000 respectively. On 1st May, 2018, Simran introduced an additional capital of ₹1,20,00
₹1,20,000 and
Bindu withdrew ₹60,000 from his capital. On 1st October, 2018, Simran withdrew ₹2,40,000 from
her capital and Bindu introduced ₹3,00,000. Interest on capital is allowed at 6% p.a. Subsequently, it
was noticed that interest on capital @ 6% p.a. had be
been
en omitted. Profit for the year ended 31st
March, 2019 amounted to ₹2,40,000 and the partners' drawings had been: Simran –₹1,20,000 and
Bindu – ₹60,000. Compute the interest on capital if the capitals are a fixed.
{Ans: Simran = ₹35,400 ;Bindu = ₹27,300 }

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Q.No.7. Kulvinder and Virmani are partners in a firm sharing profits and losses in the ratio of 3:2.
3:
On 31st March, 2019 after closing the books of account, their Capital Accounts stood at ₹4,80,000
and ₹6,00,000 respectively. On 1st May, 2018, Kulvinder introduced an additional capital of
₹1,20,000 and Virmani withdrew ₹60,000 from his capital. On 1st October, 2018, Kulvinder
withdrew ₹2,40,000 from her capital and Virmani introduced ₹3,00,000.
Interest on capital is allowed at 6% p.a. Subseque
Subsequently,
ntly, it was noticed that interest on capital @ 6% p.a.
had been omitted. Profit for the year ended 31st March, 2019 amounted to ₹2,40,000 and the partners'
drawings had been: Kulvinder –₹1,20,000
₹1,20,000 and Virmani – ₹60,000. Compute the interest on capital if
the capitals are fluctuating. { Ans: (i)
i) Kulvinder =33960 ; Virmani =25140}
Q.No.8. A and B are partners sharing profit and losses in 3:2. The firm maintains fluctuating Capital
account and the balance of the same as on 31st March 2022 amounted to ₹3, 3, 20,000 and ₹2,80,000
for A and B respectively. Their drawings during the year were A A-₹60,000
60,000 and ₹59,500. As per
partnership deep , interest on Capital @10% p.a. on Opening capital had been provided to them.
Calculate Opening capital of partners and Int
Interest
erest on Capital given that their profit was ₹1,80,000.
Show your working capital clearly.
{Ans:
Ans: Opening Capital A
A-2,76,700 B-2,62,800
2,62,800 ; Interest on Capital A - 27,670 ; B- 26,280}
Q.No.9. Akku and Kannu are partner sharing profit and losses in 3:2. Their Capital after all
Calculation as on 31st March 2022. ₹6, 50, 000 and ₹4, 50,000. During the Year 2020-21
2020 they had a
Profit of ₹3, 50,000. Which was Distributed among Partners in 3:2 after providing the followings.
(i) Salary to Akku ₹50,000p.a. and Kannu ₹40,000p.a.
(ii) Commission to Kannu ₹70,000
(iii) Interest on Capital 20% on Opening Capital.
Calculate Interest on Capital. {Ans:
Ans: Interest on Capital Akku -96,000 ; B- 54,000}
Q.No.10. On 31st March, 2022 after the close of the accounts, the capital accounts of X and Y stood
4,00,000 and ₹5,00,000 respectively. On 1St May 2021, X introduced an
in the books of the firm at ₹4,00,000
additional capital of ₹1,00,000
1,00,000 and Y withdrew ₹50,000
50,000 from his capital. On 1st October 2021, X
withdrew ₹2,00,000
2,00,000 from his capital and Y introduced ₹2,50,000.
2,50,000. Interest on capital is allowed @
6% p.a. Subsequently, it was discovered that interest on capital @ 6% p.a. had been omitted. The
profits for thee year ended 31st March, 2022 amounted to ₹2,00,000
2,00,000 and the partners drawings had
been: X ₹1,00,000 and Y ‘₹50,000.
50,000. The profit sharing ratio of X and Y was 3:2.
Required: Calculate the interest on Capital if the Capitals are fluctuating.
{Ans: Interest on Capital of X =28,300; Interest on Capital of Y =20,950}
Q.No.11. X and Y are partners sharing the profits and losses in the ratio of 2 : 3 with capitals of
₹20,000 and ₹10,000 respectively. The partnership deed provides for Interest on Capital @
6% p.a and the trading profits for the year are ₹2,100. Show the distribution of profit/loss for
the year 2021-2222 by preparing the relevant account.
{Ans: Interest on Capital X – ₹1200 ; Y – ₹600 ; Share in Profit X -₹120
- Y- ₹180}
Q.No.12.. X and Y are partners sharing the profits and losses in the ratio of 2 : 3 with capitals of
₹20,000 and ₹10,000 respectively. The partnership deed provides for Interest on Capital
@ 6% p.a. and the trading loss for the year are ₹1,500. Show the distributiondistribu of profit/loss
for the year 2011-12
12 by preparing the relevant account. {Ans: Share in Loss X -₹120 Y- ₹180}
Q.No.13. X and Y are partners sharing the profits and losses in the ratio of 2:3 with capitals of
₹20,000 and ₹10,000 respectively. T They
hey were agreed upon providing for Interest on Capital @ 6%
p.a and the trading profits for the year are ₹1,500. However Deed is Silent for Interest on Capital.
Show the distribution of profit/loss for the year 2021
2021-22
22 by preparing the relevant account.
{Ans: Interest on Capital X – ₹1000; Y – ₹500 }
Q.No.14. X and Y contribute ₹40,000
40,000 and ₹20,000
20,000 respectively. They decide to allow interest on
capital @ 6% p.a. Their respective share of profits is 3:2 and the business profit (before interest) for
the year is ₹3,360.
3,360. X has also advanced a Loan of ₹6,000
6,000 at an agreed rate of 6% p.a. Show
distribution
bution of profits where there is a clear agreement that the interest on capitals will be allowed
even if it involves the firm in loss. {Ans: Share in Loss X -₹360
- Y- ₹240}
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Q.No.15. X and Y are Partners sharing Profit and Losses in 5:3. X has Introduced ₹6,00,000 as his
Capital but Y has Not Contributed any Amount as Capital. X is Dormant Partner whereas Y
Contributed full time in Business hence He is Allowed ₹5000
5000 p.m. as Salary. Interest
I on Capital is
allowed 8% p.a. During the Firm had a Profit of ₹90,000.
90,000. Show the distribution of Profit when
Deed is Silent. {Ans: Interest on Capital X – ₹40,000 ; Salary of Y – ₹50,000 }

Interest on Partner’s Loan

Interest on Partners Loan to the Firm
When a partner gives loan to the firm he is entitled to receive interest on such loan as per the terms
of partnership deed. However, sometimes there is no partnership deed or deed is silent on the interest
on loan. In such a case, if dispute aris
arises,
es, he is entitled to receive interest on loans @ 6% per annum.
Nature of Interest on Partner's Loan. Interest on partner's loan is a charge against the profits and
not an appropriation of profits. It means interest on loan should be given irrespective of the fact
whether there are profits or not.
Accounting Treatment. Interest on partner's loan is a charge against the profits and hence it should
be debited to Profit & Loss Account and not to Profit and Loss Appropriation Account. Further,
Interest on Partner's
tner's Loan is to be credited to Partner's Loan Account and not to Partner's Capital or
Current Account.
The following journal entries shall be passed:
(i) For providing interest on Partner's Loan
Interest on Partner's Loan A/c Dr.
To Partner's Loan A/c
(Being interest on loan providing to partner's loan)
(ii) For charging interest on Partner's Loan
Profit and Loss A/c Dr.
To Interest on Partner's Loan A/c
(Being interest on partner's loan charged to profit and loss account
account)

Q.No.1. A and B are partners in a firm sharing profits in the ratio of 3 : 2. They had advanced to the
firm a sum of Rs.40,000 as a loan in their profit sharing ratio on October 1st 2021. The partnership
deed is silent on the question of interest on loan from partners. Compute the interest payable by the
ssuming the firm closes its books on March 31st .
firm to the partners, assuming
(Ans.: Interest on Loan : Rs.1,200)
Q.No.2. M and N are partners in a firm. M has given a loan of Rs.8,000 to the firm on 1st July 2024.
The partnership deed is silent upon the question of provision of interest on partner's loan. Compute
the amount of interest payable on the loan advanced by M to the firm assuming the books are closed
on 31st March each year. (Ans.:
ns.: Interest on Loan : Rs.360)
Q.No.3. Sanchit and Dushyant are partners in a firm sharing profits in the ratio of 3:2. They had
advanced to the firm a sum of Rs.30,000 as a loan in their profit sharing ratio on October 1st , 2021.
The partnership deed is silent on the question of interest on loan from partners. Compute the interest
payable by the firm to the partners, assuming the firm closes its books on March 31st every year.
(Ans.: Sanchit : Rs.540; Dushyant : Rs.360)

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Q.No.4. Kunal and Jatin are partners in a firm sharing profits in the ratio of 3:2. They had advanced
to the firm a sum of Rs.80,000 as a loan in their profit sharing on October 1st , 2021. The partnership
deed in silent on the question of interest on loan from partners. Compute the interest payable by the
firm to the partners assuming the firm closes its books on March 31st every year.
(Ans.: Kunal — Rs.1,440; Jatin — Rs.960)

In a Partnership
ip firm, partners' capital accounts may be maintained either on Fixed capital method or
Fluctuating capital method.
Maintenance of Capital Accounts
I. Fixed Capital Method
II. Fluctuating Capital Method

I. FIXED CAPITAL METHOD

 Sometimes, partners decide that their capital should not be altered and remain fixed during
the complete life span of partnership. For this purpose two accounts of each and every partner
are to be opened viz. Partners' Capital Account and Partners' Current Account.
 All the usual adjustments viz. interest on capital or drawings, salary or commission, share in
profit or loss etc. are made in a separate account called the Partners' Current Account and in
the Partners' Capital accounts, transactions relating ttoo capitals only are to be shown, e.g.
opening capital, closing capital, capital introduced and withdrawn during the year by the
partners.
 The balances of the capital accounts which shall always have credit balance will be shown in
the Balance Sheet on the Liabilities side.
 The balances of current accounts may show a debit or credit balance. The credit balance of
current account will be shown on the liability side and debit balance (if any) on assets side of
the balance sheet.
Important Note
It should be noted very carefully that drawing, being a usual transaction in partnership business,
shall be shown in current accounts but permanent capital withdrawal being a rare case shall be
shown in capital accounts on debit side of the Partners' Capital Accounts.
FORMAT OF CAPITAL ACCOUNTS
Dr (When Capitals are Fixed) Cr
Date Particulars X Y Z Date Particulars X Y Z
Rs. Rs. Rs. Rs. Rs. Rs.
To Cash A/c x x x By Balance b/d x x x
(Permanent Capital By Cash A/c (Fresh Capital x x x
withdrawn) x x x introduced)
To Balance c/d
X X X X X X
By Balance b/d X X X

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 FORMAL OF CURRENT ACCOUNTS
Date Particulars X Y Z Date Particulars X Y Z
Rs. Rs. Rs. Rs. Rs. Rs.
To Balance b/d X X X By Balance b/d X X X
To Drawings A/c X X X By Interest on Capitals X X X
To Interest on Drawings X X X By Commission X X X
To P&L Appro. A/c X X X By Salary X X X
(Loss transferred) By P&L App. A/c X X X
To Balance c/d X X X (Gain transferred)
By Balance c/d X X X
X X X X X X
To Balance b/d X X X By Balance b/d X X X
II. FLUCTUATING CAPITAL METHOD
 Fluctuating Capital method is a method of preparing capital account in which amount of
capital contributed by each partner may or may not change. In this case only one account i.e.
capital account of each and every partner is prepared and all the adjustmen
adjustments relating to
partners are incorporated into this account only.
 The balance of this account can be either debit or credit, as the case may be.
 Hence, the nature of this account is similar to the Current account prepared under Fixed
Capital Account. Rather,
er, it is a mixed form of capital account and current account prepared
under Fixed Capital Account method.
FORMAT OF CAPITAL ACCOUNT
(When capitals are fluctuating)
Particulars Rs. Particulars Rs.
To Balance b/d xxx By Balance b/d xxx
To Drawings A/c xxx By Cash / Bank A/c ( Further capital) xxx
To Cash / Bank A/c xxx By Interest on Capital A/c xxx
(withdraw of Capital) By Commission A/c xxx
To Interest on Drawings xxx By Salary A/c xxx
To Profit and Loss Adjustment A/c xxx *By Profit & Loss Appropriation A/c xxx
(Loss transferred) (Profit transferred)
To Balance c/d xxx By Balance c/d xxx
xxx xxx
To Balance b/d xxx By Balance b/d xxx
DIFFERENCE BETWEEN PARTNERS' CAPITAL AND CURRENT ACCOUNTS
Basis of Distinction Capital Account Current Account
1. Usual Adjustments It does not show the usual It shows all the usual
adjustments viz: interest on adjustments either on debit or
capital/ drawings, salary, profits credit side.
etc. when capitals are fixed.
2. Capitals It shows the capital contributed by It does not shows the capitals
Contribution each partners. contributed by the partners.
3. Closing Balance It always show credit balance, It may have either credit or
when capital are fixed. debit balance.

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 DIFFERENCE BETWEEN FIXED & FLUCTUATING CAPITAL ACCOUNTS
Basis of Distinction Fixed Capital Fluctuating Capital
1. Capital Contribution The amount of capital contributed The amount of capital contributed
by each partner shall remain the may or may not change during the
same except in certain cases. partnership.
2. No. of Accounts Two accounts are prepared i.e. Only one account is maintained i.e.
fixed capital account and current partners' capital account.
account.
3. Treatment of Usual All usuals adjustments like interest All adjustments are made in capital
Adjustments on drawings/capital, salary etc. are account.
made in current account.
4. Capital Balance Capital Account prepared under Some times it may shows a debit
this method always shows credit balance
balance.
Important Note
Interest on Partner's Loan should be credited to his Loan Account and not to Capital/Current
Account.
PROFIT & LOSS APPROPRIATION ACCOUNT
Profit & Loss Appropriation Account is a nominal account. In fact, it is an extension of the Profit and
Loss Account and is credited with the net profits and interest on drawings and debited with interest
on capital, salary to partners etc. The balance (if any) wi
will
ll be distributed among the partners in their
agreed ratio.
JOURNAL L ENTRIES RELATING TO THE P&L APPROPRIATION ACCOUNTS
The various journal entries regarding Profit and Loss Appropriation Account are as follows:
(I) TRANSFER OF BALANCE OF PROFIT AND LOSS ACCOUNT
(a) If Profit and Loss Account shows a credit balance (Net Profit):
Profit and Loss A/c Dr.
To Profit and Loss Appropriation A/c
(Being transfer of net profit to Profit & Loss Appropriation A/c)
(b) If Profit and Loss Account shows a debit balance (Net Loss):
Profit and Loss Appropriation A/c Dr.
To Profit and Loss A/c
(Being transfer of net loss to Profit & Loss Appropriation A/c)
(II) INTEREST ON CAPITALS
(a) For Crediting interest on capital to partners' capital accounts
Interest on Capital A/c Dr.
To Partners' Capital/Current A/c
(Being interest on capital at % p.a. allowed to partners)
(b) For transferring interest on capital to Profit and Loss Appropriation Acco Account
Profit and Loss Appropriation A/c Dr.
To Interest on Capital/Current A/c
(Being interest on capital an expense transferred to profit and loss Appropriation account)
NET ENTRY:
Profit and Loss Appropriation A/c Dr.
To Partners' Capital/Current A/c
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 (Being Interest on Capital allowed to partners)
(III) PARTNERS' SALARY/COMMISSION
(a) For crediting salary/commission to partners' capital accounts
Salary / Commission A/c Dr.
To Partners' Capital/Current A/c
(Being Rs.___ salary / commission allowed to ___ partner for _____ months)
(b) For transferring partners' salary/commission to P P&L Appropriation Account
Profit and Loss Appropriation A/c Dr.
To Salary / Commission A/c
(Being Salary / Commission transferred to Profit and Loss Appropriation Account)
NET ENTRY:
Profit and Loss Appropriation A/c Dr.
To Partners' Capital/Current A/c
(Being Salary/Commission allowed to partners)
(IV) INTEREST ON DRAWINGS
(a) For charging interest on drawings
Partners' Capital/Current A/c Dr.
To Interest on Drawings A/c
(Being interest on drawings at ______% p.a. allowed)
(b) For transferring interest on drawings to Profit and Loss Appropriation Account
Interest on Drawin
Drawings A/c Dr.
To Profit and Loss Appropriation A/c
(Being interest on drawings transferred to Profit and Loss Appropriation A/c)
NET ENTRY :
Partners' Capital/Current A/c Dr.
To Profit and Loss Appropriation A/c
(Being interest on drawings charged)
(V) FOR TRANSFER OF RESERVE
Profit & Loss Appropriation A/c Dr.
To Reserve A/c
(Being transfer of profit to reserve)
(VI) SHARE OF PROFIT
Profit and Loss Appropriation A/c Dr.
To Partners' Capital/Current A/c
(Being distribution of profit among partners)

PROFORMA OF PROFIT & LOSS APPROPRIATION ACCOUNT

for the year ending .........
Particulars Rs. Particulars Rs.
To Partners' Capital/Current A/c xxx By Net Profit xxx
To Partners' Capital/Current A/c xxx (Profit shown by Profit & Loss A/c)
(Commission) By Partners' Capital/Current A/c xxx
To Partners' Capital A/c xxx (Interest on drawings )
(Interest on capital)
To General Reserve A/c xxx

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To Profits transferred to:
Partners' Capital/Current A/c xxx
xxx xxx

MUST REMEMBER
(i) Profit & Loss Appropriation Account is a nominal account
(ii) Interest on partner's loan being a charge against the profit, so it should be debited to Profit
and Loss Account instead of Profit & Loss Appropriation Account.
(iii) Profit and Loss Appropriation Account shows how the profits are appropriated or distributed
but it never shows the loss. In other words it may either have credit balance or no balance but
it never have a debit balance.

DISTINCTION BETWEEN PROFIT & LOSS ACCOUNT AND PROFIT & LOSS
APPROPRIATION ACCOUNT
Basis Profit & Loss Account Profit & Loss Appropriation
Account
1. Stage This account is prepared after the This account is prepared after the
Trading Account. Profit & Loss Account.
2. Basis Except interest on partners' loan, Preparation of this account is solely
preparation of this account is not based on partnership agreement.
based on partnership agreement.
3. Purpose This account is prepared to know the This account is prepared to distribute
profits of the business. the profits as shown by Profit & Loss
A/c among the partners.
4. Items In this account all items relating to In this accounts item which are
the business and are charge against appropriation in nature can be
the profit shall be shown. recorded.
5. Balance This account has no opening as well This account may have opening as
as closing balances. well as closing balances.

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