S.Y.J.C.

(COMMERCE) BOOK-KKEPING & ACCOUTANCY

PARTNERSHIP FINAL ACCOUNTS
Compiled by: Prof. Bosco Fernandes

Partnership Final Accounts are prepared in a much similar way as sole

Proprietorship final accounts.
They include Trading A/c, Profit & Loss A/c and the Balance Sheet.
Final accounts are prepared for the following purposes:-
i. To find out the gross profit or loss for the period.
ii. To find out the net profit or loss for the period.
iii. To know the financial position of the business as on a particular date.
iv. To prepare various statements to plan for the future.
v. To know how much are the debtors and creditors of the firm.
vi. To know the sources of funds (liabilities) and the application of funds (assets).
vii. To calculate various ratios for analysis.
viii. To provide audited financial statements and other documents to the bank for
obtaining loans.
ix. To value goodwill of the firm in cases of admission, retirement or death of a
partner and on dissolution of the firm.
x. To find the tax payable and make advance tax payments.

Preparation of Final Accounts

Final accounts of a partnership firm are similar to that of a sole trader.
Only difference is that the profit is distributed among the partners whereas in a
sole proprietorship it is added to the proprietor’s capital. First a trial balance is to
be prepared from all the debit and credit balances of all the ledger accounts. From
this, trading and profit & loss accounts are generated. Finally, a balance sheet is
prepared to reflect the position as at period end. A trading account shows the
gross profit or loss whereas a profit & loss account reflects the net position of the
business.

I. Trading Account
It records all transactions related to goods and direct expenses. If the credit
side is greater than the debit side, the gross profit thus arrived at is transferred to

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 the credit side of profit & loss account. On the other hand, if the debit side is
greater than the gross loss is transferred to the debit side of the profit & loss
account.

(Name of the Partnership Firm)

Dr. Trading Account for the year ended 31st March…….. Cr.

Amt. Amt. Amt. Amt.

Particulars Particulars
(Rs.) (Rs.) (Rs.) (Rs.)
To Opening Stock xxx By Sales xxx
To Purchase xxx Less: Sales Return (R. I.) xxx xxx
Less: Purchase Return (R. O) xxx xxx By Goods Destroyed by fire/theft xxx
By Goods withdrawn for personal xxx
To Wages xxx
use (i.e. Drawing)
To Wages and salaries xxx By Goods distributed as free sample xxx
To Freight xxx By Closing Stock xxx
To Carriage inward xxx By Gross Loss xxx
To Octroi xxx
To Import Duty xxx
To Customs Duty xxx
To Works Manager Salary xxx
To Power, Fuel and Oil xxx
To Coal, Gas, Water xxx
To Royalty xxx
To Factory Rent xxx
To Factory Insurance xxx
To Motive Power xxx
To Heating and Lighting xxx
To Trade Expenses xxx
To Gross Profit xxx
xxx xxx

II. Profit & Loss A/c

Profit & Loss A/c is also a nominal account like a Trading A/c and is an
extension thereof. It reflects the net profit or loss that the business has earned for
the period. If the total of the credit side is greater than that of the debit side then the
net profit is transferred to the credit side of partners’ accounts in the profit sharing
ratio. On the other hand, if the debit side total is greater than the credit side total,
then the net loss is transferred to the debit side of partners’ accounts in the profit
sharing ratio.
When fixed capital method is followed, the net profit/loss is transferred to
the current accounts of partners and when fluctuating capital method is followed then
the net profit/loss is transferred to the capital accounts of the partners.

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 Name of the firm
Dr. Profit and Loss Account for the year ended 31st March…. Cr.
Amt. Amt. Amt. Amt.
Particulars Particulars
(Rs.) (Rs.) (Rs.) (Rs.)
To Gross loss b/d (Transferred from By Gross Profit b/d (Transferred xxx
xxx
Trading A/c) from Trading A/c)
To Salaries xxx By Interest received xxx
To Salaries and Wages xxx By Discount Received xxx
To Unproductive Wages xxx By Commission received xxx
To Office expenses xxx By Dividend received xxx
To Sundry expenses xxx By Rent received xxx
To Printing Stationary xxx By other Receipt xxx
To Postage and Telegram xxx By Profit on sale of Asset xxx
To Telephone charges xxx By Interest on Investments xxx
To Legal charges xxx By Old R.D.D xxx
To Electricity charges xxx Less: New Bad debts xxx
To Audit Fees xxx Less: Old Bad Debts xxx
To Bank charges xxx Less: New R.D.D. xxx xxx
To Interest paid xxx By Interest on Drawings xxx
To Warehouse rent By Net Loss transferred to
partner’s capital/current
xxx
accounts) X xxx
Y xxx xxx
To Rent, Rates and Taxes to
xxx
Insurance
To Trade expenses xxx
To Travelling expenses xxx
To Discount allowed xxx
To Advertisement xxx
To Export duty xxx
To Carriage outward xxx
To Packing charges xxx
To Conveyance xxx
To Bad debts xxx
Add: New Bad Debts xxx
Add: New R.D.D. xxx
xxx
Less: Old R.D.D. xxx xxx
To Provident Fund contribution xxx
To Repairs and renewals xxx
To Interest on Capital xxx
To Salary to partners xxx
To Commission to partners xxx
To Interest on partners loan xxx
To Net Profit transferred to
Partner’s Capital/current
accounts
X xxx
Y xxx xxx
xxx xxx

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III. Balance Sheet
Unlike the three earlier accounts, a balance sheet is not an account. It is a
statement which shows the financial position of the firm as on a particular date. It
comprises of sources of funds or the liabilities, which also includes the credit
balances of partners’ capital/current accounts. The other half of the statement is
made up of application of funds or in other words, the assets, which may
sometimes include the debit balances of partners’ capital/current accounts.

M/s …………..
Balance Sheet as on ………….

Amount Amount Amount Amount

Liabilities Assets
Rs. Rs. Rs. Rs.
Partner’s Capital A/c
X Goodwill xxx
xxx
Y
xxx xxx
Partner’s Current A/c
X Patents xxx
xxx
Y xxx xxx
Reserve Funds xxx Copyrights xxx
Bank Loan xxx Trademarks xxx
Partner’s Loan xxx Land & Building xxx
Sundry Creditors xxx Leasehold Property xxx
Bills Payable xxx Plant & Machinery xxx
Bank Overdraft xxx Furniture & Fixtures xxx
Outstanding expenses xxx Vehicles xxx
Income received in advance xxx Investments xxx
Interest accrued on investments xxx
Loans and advances xxx
Sundry Debtors xxx
Bills receivable xxx
Closing Stock xxx
Loose Tools xxx
Stationary xxx
Prepaid Expenses xxx
Income receivable xxx
Bank xxx
Cash at hand xxx
Partner’s Current A/c xxx
(debit balance)
xxx xxx
Contingent Liability xxx

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Adjustments in Final Accounts:
We prepare final accounts based on information provided by the trial
balance. But sometimes, there is additional information that is given along with
the trial balance for which no entries have been passed. We need to consider the
effects of such adjustments when we are preparing our final accounts based on
the double entry system. Every adjustment outside of a trial balance has
minimum 2 effects. If all the effects necessary for an adjustment are not given,
then the final accounts will not tally. Also, some adjustments are hidden or are
silent such as Wages (6 months) or 10% Bank Loan. In such cases it is important
that effects for these are also given when preparing the final accounts.
Important
 Reserve for Doubtful Debts/ Provision for Doubtful Debts/ RDD
Firms make provisions for expected losses based on their past experience.
Provision for bad debts or doubtful debts is made to cover for possible losses from
debtors going bad.
If RDD already exists in the trial balance, then the same is credited to the profit &
loss account since this is the old RDD and needs to be reversed. The effects for
RDD appearing as an adjustment are as follows -
a. Profit & Loss A/c – Debit side (add to old bad debts)
b. Balance Sheet – Asset Side (Deduct from Sundry Debtors)
The Reserve for Doubtful Debts is created out of the current year’s profits and
hence the same needs to be debited to the profit & loss account. Also, since they
effectively reduce the amount of debtors that the firm expects to realize, we show
them as a deduction from sundry debtors in the balance sheet.
Dr. Profit & Loss Account for the year ended...... Cr.

Particulars Amt. Amt. Particulars Amt. Amt.

(Rs.) (Rs.) (Rs.) (Rs.)
To Bad Debts xxx By Old RDD xxx
Add: New Bad Debts xxx Less: Old Bad Debts xxx

Add: New RDD xxx Less: New Bad Debts xxx

xxx Less: New RDD xxx xxx

Less: Old RDD xxx xxx
xxx xxx

Note: If Old RDD is more than the total of the old bad debts, new bad debts and the
new RDD, then it is shown on the credit side of the profit & loss account so as to
avoid a negative figure on the debit side of the profit and loss account.

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 Adjustments in Final Accounts:

Adjustments Effect I Effect II

1. Closing Stock Balance Sheet Asset Side Trading A/c Credit side
2. Outstanding Expenses Add to that particular expenses Balance Sheet Liability Side
on the debit side of
Trading/Profit and Loss A/c
3. Prepaid Expenses Balance Sheet Asset side Deduct from that particular
expenses on the debit side of
Trading/profit and loss A/c
4. Income received in advance Deduct from that particular Balance Sheet Liability Side
(Pre- received Income) income on the credit side of
Profit and Loss A/c
5. Income receivable Balance Sheet Asset Side Add on that particular Income
(Outstanding Income) on the credit side of profit and
loss A/c
6. Bad Debts (Additional or New Show to the Debit side of profit Deduct from Sundry debtors in
Bad debts) and loss A/c (Add to old Bad Balance Sheet Asset Side
Debts)
7. Provision for Doubtful Debts Show to the debit side of profit Deduct from Sundry Debtors in
(Reserve for Doubtful Debts, and loss A/c (Add to old bad Balance Sheet Asset Side
New R.D.D.) debts)
8. a. Reserve For Discount on Show to the debit Side of Profit Deduct from Sundry Debtors
Debtors and loss A/c (Add to discount Balance Sheet Asset Side
received)
b. Reserve for Discount on Deduct from sundry creditors in Show to the credit side of profit
Creditors Balance Sheet Liability Side and loss A/c (Add to discount
received)
9. Depreciation Show on the debit side of the Deduct from that particular
profit and loss A/c asset in Balance Sheet Asset
side
10. a. Interest on Capital Show to the debit side of profit Partner’s capital/ current A/c/
and loss A/c credit side or add to capitals
b. Interest on Drawing Show to the debit side of Show to the credit side of profit
partner’s capital/current A/c or and loss A/c
Less from capital
c. Interest on loan taken Show to the debit side of profit Add to loan taken in the
and loss A/c Balance Sheet
liability side
11. Interest on Investment and loan Balance sheet asset side Show to the credit side of profit
given and loss A/c
12. a. Insured Goods destroyed i. Balance sheet asset side Trading A/c – credit side (gross
by Fire/accident (claim amount) amount)
ii. Profit and loss A/c (loss
amount)

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 b. Uninsured Goods Profit and loss A/c debit side Show to the credit side of
destroyed by Fire/ Trading A/c
accident
Goods Stolen Profit and Loss A/c debit side Show to the credit side of
Trading A/c
13. Goods distributed as free Profit and loss A/c debit side Show to the credit side of
samples (Add in advertisements) trading A/c
14. Goods withdrawn by Partners Partners’ capital/ current A/c Show to the credit side of
for personal use debit side trading A/c or Deduct from
purchase A/c
15. a. Unrecorded Purchases Add to purchase on the debit Add to creditors on the Liability
side of Trading A/c Side of Balance Sheet
b. Unrecorded Sales Add to debtors on the asset side Add to Sales on the credit side
of the Balance Sheet of Trading A/c
16. a. Capital Expenditure Add to that particular asset in Deduct from that particular
included in revenue expenditure Balance Sheet Asset side revenue expenses on the debit
side of Trading or profit and loss
A/c
b. Revenue expenditure Add to that particular revenue Deducted from that particular
included in capital expenditure expenditure Asset in Balance Sheet
17. Bills Receivable Dishonoured Add the amt. of bill dishonored Deduct the Amount of bill
to sundry debtors in the dishonored from Bills Receivable
Balance Sheet asset side
18. Bills Payable Dishonoured Deduct the amt. of bill Add the Amount of bill
dishonored from Bills payable dishonored to sundry creditors
in the Balance Sheet liability
side
19. Deferred expenses of Advertisement related to current Remaining Amount of
Advertisement paid for 3 years year debited to profit and loss advertisement is shown on asset
A/c side of the Balance Sheet as
Prepaid Advertisement
20. Revenue receipts included in Add to furniture on the asset Add to Sales on the credit side
capital receipts e.g. sales of goods side of the Balance Sheet of Trading A/c
included in sale of furniture
21. Commission to partners as Show to the debit side of profit Show to the credit side of
percentage of gross profit/sales and loss A/c Partner’s capital /currents A/c
or add to partner’s capital A/c

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 OBJECTIVES /SHORT ANSWERS

 Answer one sentence only.

1. What is a Balance Sheet?

Ans. A Balance sheet is a statement which shows financial position of all assets and liabilities of
the business on a particular date.

2. State the meaning of debit balance of Trading Account?

Ans. Debit balance of trading account indicates gross loss of the business for a particular year.

3. When is partner’s current account opened?

Ans. Partner’s capital account is opened if partners adopt fixed capital method.

4. To which account Gross Profit transferred?

Ans. Gross profit is transferred to the credit side of profit & loss account.

5. What is closing stock?

Ans. Stock of goods in hand at the end of the accounting year is called as closing stock.

6. What is Final Accounts?

Ans. Final accounts are accounts which are prepared at the end of the financial year by the
partnership firm, consisting of trading a/c, profit & loss a/c and balance sheet

7. How is closing stock valued?

Ans. Closing stock is valued at cost price or market price whichever is lesser.

8. What do you mean by direct expenses?

Ans. Expenses which are directly related to production of goods and purchases of goods are called
as direct expenses.

9. What do you mean by indirect expenses?

Ans. Expenses which are not directly related to production of goods and purchases of goods are
called as indirect expenses.

10. What do you mean by accrued income?

Ans. Income which is due for current accounting year but not yet received is known as outstanding
income.

11. What is a Trial balance?

Ans. A list of debit and credit balances of all ledger accounts is called as Trial balance.

12. What are Bad Debts?

Ans. The amount which is irrecoverable from debtor is called as bad debts.

13. In the absence of partnership deed, what is profit sharing ratio of the partners?
Ans. In the absence of partnership deed, profit and losses are shared equally by the partners.

14. What do you mean by carriage inward?

Ans. Transport expenses incurred to carry the goods purchased by the firm are called as carriage
inward.

15. What do you mean by freight?

Ans. Expenses which are paid to railways or airways for carrying goods are called as freight.

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16. What are tangible assets?
Ans. Tangible assets are those which are of permanent nature and can be seen by our eyes.

17. What are intangible assets?

Ans. Intangible assets are those which cannot be seen by our eyes but have realisable value.

18. What are contingent liabilities?

Ans. A liability which may or may not occur in future, depending on happening of certain events is
called as contingent liabilities.

19. What do you mean by Pre- received incomes?

Ans. Income which is not related to the current accounting year but related to the future period is
known as pre-received incomes.

20. What are fictitious assets?

Ans. Fictitious assets are those which are intangible in nature and do not have realisable value.

21. What are outstanding expenses?

Ans. Expenses which are due but not paid in the current accounting year is known as outstanding
expenses

 Write a word, term or phrase which can substitute each of the following statements.

1. A statement showing financial position of the business on a particular date. Answer: Balance
Sheet

2. The amount which is not recoverable from debtors. Answer: Bad debts

3. Stock in hand at the end of the accounting year. Answer: Closing stock

4. The transport expenses incurred to carry the goods purchased by the firm. Answer: Carriage
inward

5. Income which is received before its due date. Answer: Pre-received income

6. The debit balance of Trading Account. Answer: Gross Loss

7. The credit balance of Trading Account. Answer: Gross Profit

8. A provision which is created on sundry debtors. Answer: Reserve for Doubtful Debts

9. The amount withdrawn by the partners from the business for their personal use. Answer:
Drawings

10. The accounts which are prepared at the end of each financial year. Answer: Final Accounts

11. Expenses which are paid before due. Answer: Prepaid expenses

12. The statement showing list of all ledger balances. Answer: Trial Balance

13. The credit balance of Profit and Loss Account. Answer: Net profit

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14. Expenses which are due but not paid at the end of the year. Answer: Outstanding expenses

15. Assets which are held in the business for a long period. Answer: Fixed assets

16. Goods returned to suppliers. Answer: Purchase returns

17. An amount paid for the permission to use patents & copyrights. Answer: Royalty

18. An account to which net loss is transferred in a partnership firm. Answer: Partners Capital A/c

19. Concession given by firm to customer. Answer: Discount allowed

20. Concession given by suppliers to firm. Answer: Discount received

21. Example of fictitious asset. Answer: Preliminary expenses

22. An account prepared by producer to find cost of production. Answer: Manufacturing A/c

23. Expenses which are paid off in one year but benefit is availed for number of years. Answer:
Deferred expenses

24. Assets which are not real assets of the business. Answer: Fictitious assets

 Fill in the blanks with the appropriate alternative given in the brackets.

1. The gross profit is transferred to __________ account.

(a) trading (b) profit and loss (c) capital (d) current
Answer: profit and loss

2. Wages paid for installation of machinery should be debited to __________ account.

(a) machinery (b) wages (c) trading (d) profit and loss
Answer: Machinery

3. All indirect expenses are debited to ___________ account.

(a) trading (b) capital (c) profit and loss (d) current
Answer: profit and loss

4. A statement showing financial position of the business is called as _______.

(a) Balance sheet (b) trial balance (c) capital (d) trading a/c
Answer: balance sheet

5. To find out net profit or net loss of the business ___________ account is prepared.
(a) trading (b) capital (c) current (d) profit and loss
Answer: profit and loss

6. A _____________ is an intangible asset.

(a) goodwill (b) stock (c) building (d) cash
Answer: Goodwill

7. Trading account is prepared on the basis of ____________ expenses.

(a) indirect (b) direct (c) revenue (d) other
Answer: Direct

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8. The interest on drawings is transferred to __________ side of the profit and loss account.
(a) debit (b) credit (c) asset (d) liability
Answer: Credit

9. Final accounts are prepared on the basis of __________ and adjustments.

(a) trial balance (b) capital a/c (c) trading A/c (d) profit & loss A/c
Answer: trial balance

10. ____________ is the list of all ledger balances.

(a) balance sheet (b) trial balance (c) trading A/c (d) profit & loss A/c
Answer: Trial balance

11. Return outward is deducted from _____________.

(a) purchases (b) sales (c) capital (d) debtors
Answer: Purchases

12. The withdrawals of partner from the business for their personal use is called as _________.
a) capital (b) profit (c) drawings (d) cash
Answer: Drawings

13. Income received in advance is shown on the ___________.

(a) debit (b) credit (c) asset (d) liability
Answer: Liability

14. Prepaid expenses are shown on the _________ side of the Balance sheet.
(a) assets (b) liability (c) debit (d) credit
Answer: Assets

15. Profit & Loss Account is _____________ account.

(a) Real (b) nominal (c) income (d) Personal
Answer: Nominal

16. _____________ is a financial statement.

(a) Income (b) Trading a/c (c) balance sheet (d) Profit & loss a/c
Answer: Balance Sheet

17. A provision made for debts irrecoverable from the debtors is called _______.
(a) bad debts (b) reserve for discount on debtors
(c) reserve for doubtful debts (d) additional new bad debts
Answer: reserve for doubtful debts

18. _____________ is notional loss of the business.

(a) Uninsured goods (b) goods destroyed by fire (c) depreciation (d) loss from sale of asset
Answer: depreciation

19. _____________ a/c prepared by producers to find cost of production.

(a) Manufacturing (b) Trading (c) Purchase (d) Profit & loss
Answer: Manufacturing a/c

20. Wages & salaries are debited to _____________ account

(a) Profit & loss (b) trading a/c (c) expense a/c (d) salary a/c
Answer: Trading a/c

~~~~~ #ALL THE BEST# ~~~~~

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