Partnership Notes

Paper 6: Financial Accounting Partnership Accounting
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Definition
Partnership is defined by the Indian Partnership Act, 1932, Section 4 as follows:
“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.”
Here are the key characteristics:
1. Number of Partners: A minimum of two partners is required, and the maximum is
capped at 50. For a Limited Liability Partnership (LLP), there is a requirement of at
least two partners, but there is no upper limit on the number of partners.
2. Partnership Agreement: A formal document, known as a Partnership Deed, outlines
the terms and conditions of the partnership.
3. Lawful Business Purpose: The partnership must be established to conduct lawful
business activities, excluding non-profit or charitable operations.
4. Profit Sharing: The Partnership Deed must specify how to distribute profits and losses
among the partners.
5. Management: Any or all partners can manage the business, acting on behalf of each
other and the partnership.
Every Partner has the right:

a. to participate in the management of the business.
b. to be consulted about the affairs of the business.
c. to inspect the books of account and have a copy of it.
d. to share profits and losses with others in the agreed ratio.
e. to receive interest on the loan advanced by him to the firm at an agreed rate of
interest. Where the rate is not agreed upon, interest is paid at the rate of 6% p.a. as
per the provisions of the Indian Partnership Act, of 1932.
f. to act according to his best judgment in case of emergency and be indemnified for the
expenses incurred by him.
g. not to allow the admission of a new partner (Unanimous consent).
h. to retire from the firm after giving proper notice for the same.
i. to get indemnified against the expenses incurred by him on the business or incurred by
him on behalf of the firm.
Importance of Partnership Deed:

a. An important legal document.
b. Defines the relationship between the partners.
c. Governs the rights, duties, and liabilities of each partner and therefore, avoids and
settles possible disputes among the partners.
d. In case of any dispute among partners, a partnership deed is considered as the basis
for settlement of such dispute.
CMA Intermediate New Syllabus CA Hardik Mishra

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e. Not essential but desirable to have a Partnership Deed
f. Where there is no partnership deed, provisions of the Indian Partnership Act, 1932
will be applied.
Rules applicable in the absence of a partnership deed or specific clause

Profit sharing ratio Equal
Interest on capital Not Allowed
Interest on Drawings Not charged
Salary and commission Not Allowed
Interest on Partner’s Loan 6% p.a.
Interest on Partner’s Loan to the firm:
Loan given to firm
Interest on loan to partner
The rate of interest on partners’ loan is specified in the Partnership Deed and If the
Partnership Deed is silent, interest shall be paid @6%p.a. on loan.
Journal Entries passed are as follows: for payment of interest

1. To provide Interest on Partners’ Loan: intrest a/c ---dr
to bank a/c
Interest on Partner’s Loan A/c …Dr.
To Partners’ Loan A/c
2. To close the Interest on Partners’ Loan A/c:
Profit and Loss A/c …Dr. (Because it is a charge against profit)
To Interest on Partners’ Loan A/c
Profit and loss Appropriation A/c

For the Year Ended……...
Particulars Amount Particulars Amount
To Profit and loss A/c (loss from P&L A/c) By Profit and loss, A/c
To Interest on capitals (Profit from P&L A/c)
To partners salaries
To partners Commission By Interest on Drawings
To Reserves
To Profit T/s to Partners capital A/c

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In case where the total amount of appropriations is more than the amount of profit available
Partners: A and B
Profit Available for Distribution: ₹40,000
Partnership Deed Stipulations:
Partner A: Salary ₹20,000; Interest on Capital ₹10,000
Partner B: Salary ₹15,000; Interest on Capital ₹5,000
Steps to Determine Profit Distribution

Step 1: Calculate Individual Appropriations
Partner A's Total Appropriation = 20000 + 10000 = 30000
Partner B's Total Appropriation = 15000 + 5000 = 20000
Step 2: Calculate Total Appropriation for All Partners

Total Appropriation = Partner A's Total + Partner B's Total = 30000 + 20000 = 50000
Step 3: Calculate the Ratio of Appropriations

Partner A's Ratio = ₹30,000 / ₹50,000 = 0.6
Partner B's Ratio = ₹20,000 / ₹50,000 = 0.4
Step 4: Distribute Available Profits Based on Calculated Ratios

Partner A = 0.6 × ₹40,000 = ₹24,000
Partner B = 0.4 × ₹40,000 = ₹16,000
Partners’ Capital Accounts

In a partnership firm, separate Capital Accounts are maintained for each partner as each of
the partners is the owner and has separate transactions with the firm.
In a partnership firm, Partners' Capital Accounts can be maintained using one of two
methods:
Fixed Capital Accounts Method: Under this method, each partner has two separate accounts:
Capital Account: Shows the fixed amount of capital invested by the partner. It only changes
when additional capital is introduced or capital is withdrawn by the partner.
Current Account: Records all other transactions related to the partner, such as drawings,
interest on capital, salary, commission, and share of profit or loss.
Fluctuating Capital Accounts Method: Only a single Capital Account is maintained for each
partner. This account reflects all transactions including the partner's capital contributions
and withdrawals, as well as drawings, interest, salaries, commissions, and share of profits or
losses. The balance of this account increases or decreases over time based on these
transactions.

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Format of partner’s capital accounts under fixed capital method (Personal Account)
Particulars X Y Particulars X Y
To cash/bank A/c (Capital By balance b/d
withdrawn)
To balance c/d By cash/bank A/c (Additional
capital)
Partner’s current accounts

To balance b/d (in case of debit By balance b/d (in case of credit
balance) balance)
To drawings (drawings against By interest on capital
profit)
To interest on drawings By commission

To profit and loss (loss) By salaries
To balance c/d (credit) By profit and loss appropriation
A/c (share of profit)
By balance c/d (debit)
Format of partners’ capital account under fluctuating capital method

To balance b/d (in case of debit By balance b/d (in case of credit
balance) balance)
To cash/bank (capital withdrawn) By cash/bank (capital
introduced)
To drawings (drawings against By interest on capital
profit)
To interest on drawings By commission

To profit and loss (loss) By salaries
To balance c/d (credit) By profit and loss appropriation
A/c (share of profit)
By balance c/d (debit)

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Calculation of commission payable to partners
a. Percentage of net profit before charging such commission
Net Profit (before commission) * Rate of Commission
100
b. Percentage of net profit after charging such commission

Net Profit (before commission) * Rate of Commission
100+Rate of commission
Salary or Commission, is an appropriation of profit, therefore, accounting treatment will be

as follows:
1. On allowing Salaries/Commissions to Partners:
Partners’ Salaries/Commissions A/c …Dr.
To Partners’ Current A/cs (when capitals are fixed)
To Partners’ Capital A/cs (when capitals are fluctuating)
2. On closure of Salaries/Commissions A/cs:
Profit and Loss Appropriation A/c …Dr.
To Partners’ Salaries/ Commissions A/c
Interest on partners’ drawings

Interest on drawings is charged from partner only when drawings are made out of profits
not out of capitals.
How to calculate interest on drawings
Case 1: When rate of interest is given as flat rate (%)
Interest on drawings = Amount of drawings x rate of interest
Note: Don’t consider time factor in this case
Case 2: when the rate of interest is given as % p.a.

Interest on drawings = amount of drawings x rate of interest x time factor
Note: If Time of drawings not given, take it as 6 months
Case 3: when equal amounts of drawings are made at equal interval.

Interest on drawings = amount of drawings x rate of interest x average time factor
Note: average time factor = month left after first drawings + months left after last drawings
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Case 4: when a different amount is withdrawn at different intervals.

Interest on drawings = calculate interest on drawings for each amount withdrawn as
case 2

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Journal Entries to record interest on drawings are as follows:
1. In case of Fixed Capital Accounts:
a. Partners’ Current A/cs …Dr.
To Interest on Drawings A/c
(Being the interest charged on partners’ drawings)
b. Interest on Drawings A/c …Dr.

To Profit and Loss Appropriation A/c
(Being the interest on drawings transferred to Profit and Loss Appropriation A/c)
2. In case of Fluctuating Capital Accounts:

a. Partners’ Capital A/cs …Dr.
To Interest on Drawings A/c
(Being interest charged on partners’ drawings)
b. Interest on Drawings A/c …Dr.

To Profit and Loss Appropriation A/c
(Being the interest on drawings transferred to Profit and Loss Appropriation A/c)
Interest on capital
Interest on capital is an amount paid by the partnership firm to each partner based on the
capital they have contributed to the firm. It is typically agreed upon in the partnership deed
(the formal agreement between partners).
Interest on capital can be treated as appropriation of profits or charge against profit.
Appropriation of profits
In case of losses: Not allowed.
In case of profits: Allowed
Charge against profits

In case of losses: Allowed.
In case of profits: Allowed
Journal Entries for recording Interest on Capital in case of appropriation of profits:

i. In case of Fixed Capital Accounts:
a. Interest on Capital A/c …Dr.
To Partners’ Current A/cs
(Being the interest on capital allowed to partners)

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b. Profit and Loss Appropriation A/c …Dr.
To Interest on Capital A/cs
(Being the interest on capital transferred to Profit and Loss Appropriation Account)
ii. In case of Fluctuating Capital Accounts:

a. Interest on Capital A/c …Dr.
To Partners’ Capital A/cs
(Being the interest allowed on partners’ capitals)
b. Profit and Loss Appropriation A/c …Dr.
To Interest on Capital A/cs
(Being the interest on capital transferred to Profit and Loss Appropriation Account)
Journal entries for interest on capital in case of charge against profits:

Interest on partner’s capital A/c Dr.
To partner’s capital A/c
(Being interest on partner’s capital provided)
P&L A/c Dr.

To Interest on partner’s capital A/c
(Being interest on partner’s capital transferred P&L A/c)
Interest on partner’s capital is calculated on opening capital

In case of fixed capital
Calculation of opening capital
Capital at the end of the year
(+) withdrawal of capital
(-) additional capital introduced during the year
Capital at the beginning of the year
In case of fluctuating capital

Calculation of opening capital
Capital at the end of the year
(+) drawings against capital
(+) drawings against profits
(+) interest on drawings
(+) share of loss for the year if already debited
(-) additional capital introduced during the year
(-) partner’s salary/ Remuneration
(-) interest on capital
(-) share of profit for the year if already credited

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Past adjustments
Past adjustments refer to corrections or alterations that need to be made to the accounts
due to errors or omissions in the recording of transactions in previous accounting periods.
These adjustments might also be required when new agreements are reached regarding the
interpretation or implementation of terms in the partnership deed that were not previously
applied or misunderstood.
Steps to do past adjustments

Step 1: reverse the entry which was previously passed through profit and loss adjustment
account.
Step 2: after all corrections the balance in profit and loss adjustment account is distributed
between the partners in there PSR.
Guarantee of profits
When a partnership firm guarantees a minimum profit to an existing or incoming partner, it
generally serves as an incentive or a means to attract and retain talent or capital. This
guarantee can be structured in two primary ways:
1. Guarantee by the Firm

In this arrangement, the partnership firm as a whole guarantees a minimum amount of
profit to the guaranteed partner. This means that if the partner’s actual share of profit
(based on the profit-sharing ratio) falls short of the guaranteed amount, the firm is
responsible for compensating for the shortfall. Firm means that all the remaining partners
shall compensate for the shortfall in their PSR.
Example:
Suppose a new partner, C, is admitted to a firm with a guarantee of a minimum profit of
₹20,000 annually. If C’s share of the firm’s profit based on the agreed profit-sharing ratio
amounts to only ₹15,000, the firm will contribute the additional ₹5,000 to ensure C receives
the guaranteed ₹20,000 i.e. 5000 shortfall will be borne by A and B in their PSR.
2. Guarantee by One or More Existing Partners

In this scenario, one or more of the existing partners agree to ensure that the new or existing
guaranteed partner receives a certain minimum amount of profit. If the profits allocated to
the guaranteed partner according to the profit-sharing ratio are insufficient, the
guarantor(s) will make up the difference in their agreed ratio.

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Example:
Partner A and Partner B are in a firm, and they admit Partner C with a profit guarantee.
They agree that if C’s share of profit doesn’t reach ₹20,000, B will make up for the shortfall.
If C’s share ends up being ₹15,000, B could agree to contribute ₹5000 to make up the
additional ₹5,000 needed.
Meaning of Goodwill
Goodwill is good name or the reputation of the business, which is earned by a firm through
the hard work and honesty of its owners. If a firm renders good service to the customers, the
customers who feel satisfied will come again and again and the firm will be able to earn more
profits in future.
In Accounting we can say goodwill is the future earning capacity of the business.
Features of Goodwill
1. It is an intangible asset.
2. It is helpful in earning excess profits.
3. Its value is liable to constant fluctuations.
4. It is valuable only when entire business is sold: Goodwill cannot be sold in part. It can be
sold with the entire business only. The only exception is at the time of admission or
retirement of the partner.
5. It is difficult to place an exact value on goodwill: This is because its value may fluctuate
from time to time due to changing circumstances which are internal and external to business.
Goodwill is divided into two categories.

I. Purchased Goodwill: Purchased goodwill means goodwill for which a consideration has been
paid e.g. when business is purchased the excess of purchase consideration of its net assets i.e.
(Assets – Liabilities) is the Purchased Goodwill. It is separately recorded in the books because
as it is purchased by paying in form of cash or kind.
Characteristics
(i) It arises on purchase of a business or brand.
(ii) Consideration is paid for it so it is recorded in books.
(iii) Shown in balance sheet as on asset.
(iv) It is amortised (depreciated).
(v) Value is a subjective judgment & ascertained by agreement of seller & purchaser. It is
approximate value and cannot be sold separately in the market or in parts.
II. Self-generated Goodwill also called as inherent goodwill. It is an internally generated

goodwill which arises from a number of factors that a running business possesses due to which
it is able to earn more profits in the future.

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Features
(i) It is generated internally over the years.
(ii) A true cost cannot be placed on this type of goodwill.
(iii) Value depends on subjective judgment of the value.
(iv) As per Accounting Standard 26 (Intangible Asset), it is not recorded in the books of
accounts because consideration in money or money’s worth has not be paid for it.
Factors Affecting the Value of Goodwill

1. Efficient management.
2. Quality of products.
3. Location of business.
4. The Longevity of the business.
5. Monopolistic and other Rights.
6.Other factors:
(i) Good industrial relations.
(ii) Favourable Government regulations
(iii) Stable political conditions
(iv) Research and development efforts
(v) Effective advertising to establish brand popularity
(vi) Popularity of product in terms of quality.
Situation where goodwill valuation is Required: -

1. When profit sharing ratio changes
2. On admission of a partner
3. On Retirement or death of a partner
4. When amalgamation of two firms taken place
5. when partnership firm is sold.
Method of valuation of goodwill:

It is very difficult to assess the value of goodwill, as it is an intangible asset. In case of sale of a
business, its value depends on the mutual agreement between the seller and the purchaser of
the business. Usually, there are three methods of valuing goodwill:
1. Average profit method
2. Super profit method
3. Capitalization method
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Average Profit Method
Goodwill = Average Profits x Number of years of purchase
Number of years of purchase means for how many years the firm will earn the same amount
of profits in future.
Average Profits = Total Profits
Number of years
Adjustments while calculation of goodwill: -
(i) Abnormal income of a year should be deducted out of the net profit of that year.
(ii) Abnormal loss of a year should be added back to the net profit of that year.
(iii) Income from investments should be deducted out of the net profits of that year because
this income is not earned from business operations.
Weighted Average Profit Method: This method is a modified version of average profit method.
In this Method each year’s profit is assigned a weight. The highest weight is attached to profit
of most recent year.
Eg: 2011-1, 2012-2, 2013-3, 2014-4.
Each year profits are multiplied by assigned weights. Products are added & divided by total
number of weights.
Weighted Average Profit: = Total Product of Profits
Total of Weights
Goodwill = Weighted Average Profit x No. of years of purchase.
Weighted average profit method is considered better than the simple average profit method
because it assigns more weightage to the profits of the latest year which is more likely to be
earned in future. This method is preferred when profits over the past years have been
continuously rising or falling.
Super profit Method: In this method goodwill is calculated on the basis of surplus (excess)
profits earned by a firm in comparison to average profits earned by other firms. Super Profit
are the excess of actual profit over normal profits. Where Normal profits are profits earned
by similar business.
Goodwill = Super Profit x Number of years of purchase
Super Profit = Average profit – Normal profits
Normal Profit = Investment (Capital Employed) Normal Rate of return
100
Capital Employed = Capital + Free Reserves – fictitious Assets (if any),
or
All Assets – (Goodwill, fictitious assets, and non-trade Investment) – Outsider’s Liabilities
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Capitalised Method Under this method, goodwill can be calculated in two ways:
(A) Capitalisation of Average Profit Method:
1. Calculate capitalized value of the firm
Capitalised value of the firm = Average Profits * 100
Normal rate of return
2. Calculate the value of capital employed
Net Assets or Capital employed = Total assets – Outside liabilities
3. Calculate Goodwill
Goodwill = Capitalized value of average profits – Capital Employed
(B) Capitalisation of Super Profit Method:

1. Calculate Super Profit
Super Profit = Average profit – Normal Profit
2. Calculate Goodwill
Goodwill of the firm = Super Profits * 100
Normal rate of return.
Calculation of gaining/sacrificing ratio

Gaining/sacrificing ratio = New PSR – old PSR = (+) Gain/ (-) Sacrifice
Goodwill adjustment (self generated goodwill)

In the following cases goodwill adjustment is required
1. Change in PSR
2. Admission
3. Retirement
4. Death
Case 1: Entry for goodwill adjustment in case of change in PSR

Gaining partner A/c Dr.
To sacrificing partner A/c
(being adjustment for goodwill made)
Case 2: Entry for goodwill adjustment in case of admission

Cash/bank A/c Dr. (if incoming partner brings his share of goodwill in cash)
Incoming partner A/c Dr. (if incoming partner does not bring G/w in cash)
(G/w x Gain) Gaining partner A/c Dr. (if any old partner gain due to change in PSR)
To Sacrificing partner’s A/c
(Being goodwill adjustment made at the time of admission of partner)
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Case 3: Retirement/death of a partner
Gaining partner’s A/c Dr
To retiring partner/deceased partner A/c
(being goodwill adjustment made at the time of retirement/death of a partner)
Reconstitution of partnership firm

Any change in agreement of partnership or profit-sharing ratio is called reconstitution
of partnership firm.
Apart from adjustment for goodwill, following Adjustments at the time of reconstitution of
partnership firm are also needed to be done
1. Revaluation of assets and reassessment of liabilities
2. Distribution of free reserves and surplus
3. Writing of goodwill/fictitious assets (ex: advertisement suspense) appeared in the books
Revaluation of assets and reassessment of liabilities

(i) Increase in the value of an Asset and decrease in the value of a liability result in profit.
Assets A/c Dr. /unrecorded asset A/c Dr.
To Revaluation
(ii) Decrease in the value of any asset and increase in the value of a liability gives loss.
Revaluation A/c Dr.
To Assets A/c
(iii) For increase in the value of liabilities.
Revaluation A/c Dr.
To Liabilities A/c /unrecorded liabilities A/c
(iv) For decrease in the value of Liabilities
Liabilities A/c Dr.
To Revaluation A/c
(v) For revaluation expenses
Revaluation A/c Dr.
To cash (paid by firm) /partner’s capital A/c (paid by partner)
(vi) When Revaluation account shows profit
Revaluation A/c Dr.
To Partner’s Capital A/c
(Profit credited to old Partner’s Capital A/c in old ratio)
(vii) In case of Revaluation Loss
Partner’s Capital A/c’s Dr.
To Revaluation A/c
(Loss debited to old Partner’s Capital A/cs in old ratio)
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Distribution of free reserves and surplus
Free reserves/surplus A/c Dr.
To Partner’s capital A/c
(Being distribution of free reserves in old PSR to old Partner’s)
Writing off goodwill/fictitious assets

Partner’s capital A/c Dr.
To Goodwill A/c
To Fictitious Assets A/c
(Being goodwill/fictitious assets appeared in the books written off )
Workmen compensation reserve

The Workmen Compensation Reserve is a specific financial provision made by businesses,
including partnership firms, to cover potential future liabilities arising from compensation
claims made by employees under the Workmen's Compensation Act or similar labour laws.
Example:
Workmen compensation reserve as appeared in balance sheet = 100000
Pass journal entry in following cases
Case 1: workmen compensation is nil or no information regarding workmen compensation
Workmen compensation A/c Dr. 100000
To partner’s capital A/c (Old partners Old PSR) 100000
(Being workmen compensation reserve is distributed)
Case 2: workmen compensation is 80000

To partner’s capital A/c (Old partners Old PSR) 20000
To workmen compensation liability A/c 80000
Case 3: workmen compensation is 130000

Revaluation A/c Dr. 30000
To workmen compensation liability A/c 130000
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Investment fluctuation reserve
The Investment Fluctuations Reserve is a specific accounting provision used by businesses,
including partnership firms, to manage the impact of fluctuations in the market values of
their investment portfolios.
Example:
Investment fluctuations reserves 60,000
Investment at cost 4,00,000
Pass journal entry in following cases
Case 1: When investment’s market value is not given

Investment fluctuations reserve A/c Dr. 60000
To Partner’s capital A/c 60000
(being IFR distributed to old partners in old psr)
Case 2: when investment’s market value is 4,00,000



To Investments A/c 30000
(being IFR is utilised for reduction in value of investment)

Revaluation A/c Dr. 30000
To Investments A/c 90000
(being IFR is utilised for reduction in value of investment)
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Reconstitution adjustments without affecting the book value of assets and liabilities
Step 1: prepare revaluation account to find out profit and loss on revaluation.
Step 2: find out amount to be adjusted = profit and loss on revaluation + free reserves and
surplus – goodwill/fictitious assets
step 3: now adjust the amount calculated in step 2 in gaining/sacrificing of partner’s.
Admission of a partner
Sometimes for the requirement of additional capital, technical support or to improve
managerial efficiency, a continuing partnership firm, in consensus with all the partners,
decides to admit a new partner in their business.
Section 31(1) of the Indian Partnership Act, 1932 provides that a person can be admitted
as a new partner only with the consent of all the existing partners, unless otherwise agreed
upon.
This is a form of reconstruction of partnership, as because whenever a new partner is
admitted to a firm, the partnership between/among the existing partners comes to an end
which begins a new partnership.
Usually the following accounting adjustments are required at the time of such admission:
1. Computation of New Profit-Sharing Ratio
2. Revaluation of Assets and Liabilities
3. Distribution of Reserves, Accumulated Profits and Losses
4. Adjustment for Goodwill
5. Adjustments regarding Capital Contribution of new partner and the Capitals of the
existing partners
6. Adjustment for Life Policy: Adjust surrender value in gaining /sacrificing ratio
Adjustment of capital
When the new partner’s capital is not given (he has to bring in the proportionate
capital/according to his share of profit).
Following steps are taken:
1. Calculate the capitals of old partners after making all the adjustments.
2. Calculate the total capital of the new firm as follows:
Total capital = Combined capitals of old partners after making all the adjustments x
Reciprocal of combined share of old partners in the new firm.
3. Calculate the Capital of new partner as follows:
New Partner’s Capital = Total capital (as per step 2 above) x share of new partner
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When new partner’s capital is given (the capitals of old partners are adjusted on the basis of
new partner's capital).
Following steps are taken:
1. Calculate Total Capital of the New Firm:
Total capital of the new firm = New Partner's capital × reciprocal of new partner’s share
2. Calculate the new capitals of old partners by dividing the total capital of the new firm in
the new profit sharing ratio.
3. Show these capitals as closing capitals in the capital accounts and calculate the surplus or
deficiency, as the case may be. (As given in the question.)
Note: In case of the absence of any specific instruction the deficiency /surplus is adjusted by
bringing in or withdrawing cash and not through current account.
Retirement of a partner
After retirement of a partner, the other partners may continue the business. For paying off
the retiring partner(s), some specific adjustments are required to be done in the books of the
firm. These are discussed as follows:
1. Calculation of new profit-sharing ratio and gaining ratio,
2. Distribution of reserves and accumulated profits and losses,
3. Revaluation of assets and liabilities,
4. Adjustment for goodwill,
5. Adjustment for JLP: Adjust surrender value in gaining /sacrificing ratio.
6. Settlement of final balance of the retiring partner,
7. Adjustment of existing partners’ capital accounts.
Adjustment of capital
Three cases regarding adjustment of capital accounts
(a) When total capital of the new firm is given.

Following steps are to be taken in this case:
1. Calculate the proportionate capital of each of the remaining partners by multiplying the
total capital of new firm with the share of the remaining partners.
2. Calculate actual capitals of partners after all adjustments relating to goodwill, revaluation,
accumulated profits/losses etc.
3. Calculate the surplus or deficiency of actual capital over proportionate capital by
comparing the capitals calculated in step 1 and step 2 above.
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4. Adjust the surplus/deficiency through cash or partner’s current account as per the
instruction given in the question otherwise to bring cash in case of deficiency and to return
cash in case of surplus.
(b) When total capital of the new firm is not given:

1. Calculate total capital of new firm by taking the actual combined capitals of continuing
partners after all the adjustments relating to goodwill, revaluation, accumulated
profits/losses etc.
2. Calculate the proportionate capital of each of the remaining partners by multiplying the
total capital of new firm with the share of the remaining partners.
(c) When retiring partner is to be paid through cash brought in by the continuing partners in
such a way as to make their capitals proportionate to the new profit-sharing ratio:
1. Calculate actual capitals of remaining partners after all adjustments relating to goodwill,
revaluation, accumulated profits/losses etc.
2. Add to above combined capitals, the capital of retiring partner after all adjustments
mentioned above.
3. Deduct the bank balance which is allowed to be utilised/ Add the bank balance which is
required to be maintained.
4. Calculate the proportionate capital of the remaining partners separately by multiplying
the total capital with their new share.
Death of a partner
If a continuing partner dies, then it leads to reconstitution of partnership firm.
In the event of death of a partner, the other partners may decide to continue the business
which requires certain adjustments to be made in the books of accounts of the existing
partnership firm which are as follows:
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1. Calculation of new profit-sharing ratio and gaining ratio,
2. Distribution of reserves and accumulated profits and losses,
3. Revaluation of assets and liabilities,
4. Adjustment for goodwill,
5. Adjustment for Joint Life Policy (JLP),
6. Adjustment for interim period’s profit/loss,
7. Settlement of final balance of the deceased partner to his Executor.
Adjustment for interim period’s profit/loss:

Unlike Admission and Retirement, the date of which are generally pre-planned, the death of
a partner can take place anytime during the Accounting Period. In such case, the amount of
profit or loss, starting from the opening date of the accounting period ending up to the date
of death, is to be determined (which is called as the interim period’s profit or loss) and the
share of the deceased partner in such Profit/Loss is to be duly accounted for. For this purpose,
generally a temporary account is opened in the books of the firm called P/L Suspense A/c when
PSR of partners is not changing and if PSR changes then gaining/sacrificing ratio is used.
Normally two approaches are there to estimate the profit or loss for the interim period:
(i) On Time Basis: Here the average profit of last periods is considered, which is apportioned
between the pre-death period and the post-death period.
(ii) On Sales Basis: Under this approach, the rate of profit on sales earned in the last year is
computed and is applied to the interim period’s sales.
Joint life policy

In a partnership business, the sudden death of a partner can financially strain the firm due to
the need to immediately settle any amounts owed to the deceased's estate. To mitigate this
risk, firms often take out life insurance policies on their partners, either individually or jointly.
These policies, especially joint life policies (JLPs), cover all partners under a single plan and pay
out upon the death of any one partner or at the policy's maturity.
The insurance premiums paid by the firm for JLP are considered an asset in which all partners
have a proportionate stake. This asset is particularly relevant during changes in the firm's
constitution (e.g., admission of a new partner, retirement, etc.) and upon a partner's death.
The policy's maturity value (or sum assured) is what the firm receives upon a partner's death
or at the end of the policy period. Alternatively, a firm may choose to surrender the policy
before maturity, receiving the policy's surrender value, which increases over time and represents
its fair value.
There are two main accounting approaches for JLPs:
Method A: The JLP is not treated as an asset in the firm's books.
Method B: The JLP is recognized as an asset in the firm's books.
19

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Example:
Premium Surrender value Sum assured
20000 0 200000
20000 15000 200000
20000 30000 200000
20000 50000 200000
20000 70000 200000
Case 1: when JLP is treated as expenses.

Year 1
Joint life insurance premium A/c Dr. 20000
To bank A/c 20000
(Being JLP Premium paid)
P&L A/c Dr. 20000

To Joint life insurance premium 20000
(Being JLP Premium transferred to p&l)
Year 2
To bank A/c 20000
P&L A/c Dr. 20000

Policy Surrender
Bank A/c Dr. 15000
To JLP A/c 15000
(Being surrender value received on policy surrendered)
JLP A/c Dr.

To Partner’s capital A/c (old partner’s old psr)
(Being JLP Surrender value distributed to old partner’s in old PSR)
Note: The reason for surrender value distributed to old partners because JLP premium debited
to p&l A/c ultimately reduced the distributable profits available for partners therefore when
policy is surrender or matured it is distributed to old partners in their old psr.
20

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Case 2: When JLP Surrender value is treated as asset
Year 1
To bank A/c 20000
P&L A/c Dr. 20000

Year 2
To bank A/c 20000
P&L A/c Dr. 5000

JLP A/c Dr. 15000 (Because it is certain to be received)
Year 3
To bank A/c 20000
P&L A/c Dr. 5000

JLP A/c Dr. 15000
Policy surrendered
Bank A/c Dr. 30000
To JLP A/c 30000
(Being policy surrender value received)
Note: In this case due to creation of JLP(asset A/c) the amount of premium which needed to
be debited to p&l A/c is reduced and because of that the profit is increased by the amount
debited to JLP A/c and ultimately credited to partner’s capital A/c through p&l.
21

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Case 3: When JLP Asset A/c and JLP Reserve A/c is created
Year 1
To bank A/c 20000
P&L A/c Dr. 20000

Year 2
To bank A/c 20000
P&L A/c Dr. 5000

JLP A/c Dr. 15000 (Because it is certain to be received)
P&l Appropriation A/c Dr. 15000

To JLP Reserve A/c 15000
(Being JLP reserve created equivalent to surrender value)
Policy surrendered
Bank A/c Dr. 15000
To JLP A/c 15000
(Being surrender value received)
JLP Reserve A/c Dr. 15000

(Being JLP Reserve distributed to old partners in old psr)
Note: JLP Reserve is created to postpone the distribution of the surrender value amount until
the JLP surrenders or matures.
22

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Dissolution of partnership firm
Dissolution of Partnership refers to the end of the existing relationship between the partners
in a business, but it doesn't necessarily mean the business itself stops operating. The
partnership can be reconstituted with remaining or new partners, and the business can
continue under a new arrangement.
Dissolution of Partnership Firm means the complete winding-up of the partnership business.
This includes settling all debts, distributing assets to partners, and ceasing all business
activities, effectively ending the firm as a legal entity. (Current chapter)
Accounts to be prepared
1. Realization A/c
2. Partner’s capital A/c
3. Bank A/c
Realization Account
A Realisation Account is used during the dissolution of the partnership firm. It's an account
created to handle all transactions related to the closing of the firm.
The Realisation Account is used to:
➢ Consolidate and record the disposal of the firm's assets.
➢ Pay off the firm's liabilities.
➢ Determine the gain or loss on the dissolution of the firm's assets and liabilities.
Realization A/c
Particulars Amount Particulars Amount
To fixed Assets (Tangible + Intangible) By investment fluctuation reserve
including goodwill (investment present)
To debtors By provision for bad debts
To current assets (all the other assets By noncurrent liabilities (all the
of the firm except fictitious assets, other liabilities of the firm except
loans to partners, and cash or bank partners' loan account &
balance) partners' capital account)
To bank (payment of liabilities) By current liabilities
To partner’s capital A/c (liability By bank (sale of assets)
taken over)
To bank (dissolution expenses paid) By partner’s capital A/c (asset
taken over)
To partner’s capital A/c (profit on By partner’s capital A/c (loss on
realization) (B/f) realization) (B/f)
23

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Note: if question is silent about sale of any asset, then assume that the asset is not sold, and
its value is zero but if question is silent about any liability, then also you have to pay it.
Dissolution expenses
Who will bear: Not Mentioned Who will pay: Not Mentioned
Bear by firm Paid by firm
Note: If any creditor accepts any asset in full settlement of its claim, then no entry is
required (profit /loss on settlement is auto adjusted).
Note: partner’s wife loan is treated as outsiders’ liability.
Note: Workmen compensation reserve is transferred to realization account equivalent to

workmen compensation liability and if some amount remaining it will be distributed to
partners. Journal entries as follows:
1. Workmen compensation reserve A/c Dr.
To realization A/c (Amount of WCL or WCR whichever is lower)
To partner’s capital A/c (If Any WCR remaining)
2. Realization A/c Dr. (WCL)

To bank A/c
Note: Employees provident fund is a liability.
Note: If any Unrecorded asset found then

Bank A/c Dr.
To realisation A/c
Note: If any unrecorded liability found then

Realization A/c Dr.
To Bank A/c
Note: If any unrecorded asset set off against unrecorded liability, then no entry is required.
Insolvency of partner
If a partner becomes insolvent and fails to pay his debit balance of Capital A/c either wholly
or in part, the unrecoverable portion is a loss to be borne by the solvent partners.
24

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Garner vs murray
Justice Joyee held in the case of Garner vs. Murray that the loss arising due to the insolvency
of a partner must be distinguished from an ordinary loss (including realization loss). Unless
otherwise agreed, the decision in Garner vs. Murray requires –
(i) That the solvent partners should bring in cash equal to their respective shares of the loss
on realization;
(ii) That the solvent partners should bear the loss arising due to the insolvency of a partner in
the ratio of their Last Agreed Capitals.
Conditions for Applicability of garner vs murray

1. Atleast one partner of the firm becomes insolvent at the time of dissolution.
2. Atleast two partners are solvent with the credit balance in their capital account.
That means the partner who is solvent but having negative capital balance or nil capital
balance not required to contribute any amount.
Last agreed capital

In case of fixed capital method: consider opening balance of capital account.
In case of fluctuating capital method: consider opening capital with all adjustments except
realization profit/loss.
If all the partners are insolvent

Since all partners are insolvent, creditors cannot expect to be paid in full. In such a case Sundry
Creditors should not be transferred to Realization Account. Cash in hand together with the
amount realized on sale of assets and surplus from private estate of partners, if any, less
expenses will be applied in making payment to the creditors. The balance of Creditors Account
represents the deficiency to be borne by them which to be transferred to a Deficiency Account.
The balance of Capital Accounts should also be transferred to the Deficiency Account to close
the books.
The following entries required to be passed:
(i) To, pay-off the creditors
Creditors A/c Dr. (Total Creditors)
To, Bank A/c (Amount paid)
To, Deficiency A/c (Amount unpaid)
(ii) When deficiency is transferred

Deficiency A/c Dr.
To, Partners’ Capital A/c (Balancing figure of partner’s capital A/c)
25

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Note: If more than 1 liabilities are there in case of all partners becomes insolvent then the
deficiency to be borne by liabilities in the ratio of their outstanding amount. (Illustration 29)
Return of Premium to a partner on dissolution before expiry of term (Illustration 30)

Conditions:
(i) A partner was admitted in the partnership firm for a fixed term period,
(ii) Such partner had paid a premium for goodwill at the time of admission.
(iii) The partnership firm has dissolved.
Exceptions: The partner will not be entitled to any claim under any of the following
(i) the firm is dissolved due to death of a partner
(ii) the dissolution is due to the misconduct of the partner claiming refund
(iii) dissolution is in pursuance of an agreement containing no provision for the return of the
premium or any part of it.
Amount of Refund: the amount to be repaid will be determined having regard to the terms
upon which the admission was made and to the length of the period agreed upon and the
period that has expired.
Liability of other partners: the amount of refund payable shall be borne by the other partners
in their profit-sharing ratio.
Piecemeal Distribution
The order of the payment will be as follows:
(i) Realisation expenses
(ii) For provision for expenses that are to be made: Adjust the balance at the time of last
realisation – If actual > Estimated, then deduct the amount
If actual < estimated, then add the amount
(iii) Preferential creditors (say, Income Tax or any payment made to the Government)
(iv) Secured creditors – The amount realized from the disposal of assets by which they are
secured. If surplus realised, then use the funds for other liabilities or, If deficiency arise
from sale of asset then remaining secured creditors are treated as unsecured.
(v) Unsecured creditors – in proportion to the amount of debts, if more than one creditor
(vi) Partners’ loan – if there is more than one partner – in that case, in proportion to the
amount of loan
(vii) Partners’ capital – the order of payment may be made by any one of the following two
methods:
(a) Surplus Capital Method/ Proportionate Capital Method/ Highest Relative Capital
Method
(b) Maximum Possible Loss Method
26

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Surplus Capital Method/ Proportionate Capital Method/ Highest Relative Capital Method
Particulars M N P
a. Adjusted capital 55000 37500 31500

b. Profit sharing ratio 5 3 2
c. Per Unit Capital (a ÷ b) 11000 12500 15750
d. Capital should be (lowest per unit capital x PSR) 55000 33000 22000
e. Surplus capital (a – d) 0 4500 9500
f. Profit sharing ratio - 3 2
g. Per unit capital (e ÷ f) - 1500 4750
h. Capital should be (lowest per unit capital x PSR) - 4500 3000
i. Surplus capital (e – h) - - 6500
Note: After all realisation payments the final balance is realization profit/loss.
Payment Order
Funds Available 50000
(-) Payment to P 6500

Remaining funds 43500
(-) Payment to N & P (4500 + 3000) 7500
Remaining funds 36000
(-) Payment to M, N & P in PSR 36000
Note: If any partner taken over any asset, then deduct the value of asset taken over by the
partner from capital balance of that partner and because of such asset taken over the piecemeal
distribution got disturbed. so, to correct the same prepare a separate table to show the correct
distribution order if asset is not taken over by partner.
Total amount available for distribution assuming asset is not taken over by partner but the
same is sold in open market at same value = 90500 (Illustration 31)
Particulars M N P
a. Amount payable in the month of asset taken over - 4500 3000
b. Remaining [(90500 – 7500) in 5:3:2] 41500 24900 16600
c. Total amount payable (a + b) 41500 29400 19600
d. Amount already paid - 4000 10000
e. Amount to be paid 41500 25400 9600
Maximum Loss Method

Step 1: All steps are same till payment to outsiders and partner’s loans then at the time of
distribution to partner’s the maximum loss is computed.
Step 2: Maximum loss = All Partner’s capital balances – Amount available for payment
27

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Step 3: Maximum loss shall be shared among the partners in their PSR as if there will be no
further realization.
Step 4: If any of the partner capitals, after step (3) is negative, that partner shall be treated
like an insolvent partner.
Step 5: The deficiency of the insolvent partner as per step (4) shall be shared by the other
solvent partners (i.e. those partners who has positive capital balances) in their capital
contribution ratio as per Garner vs. Murray Rule.
Step 6: Repeat the step 4 and 5 until the amount available for distribution becomes equal to
positive balance of partners’ capital.
Example: Amount available for distribution 4000

Particulars X Y Z
a. Capital balance 55000 37500 31500
b. Maximum loss = 124000 – 4000 = 120000 in 5:3:2 60000 36000 24000
c. Balance (a – b) (5000) 1500 7500
d. Distribution of X loss to Y & Z in capital ratio (37500:31500) 5000 (2717) (2283)
e. Balance (c – d) - (1217) 5217
f. Distribution of Y loss to Z - 1217 (1217)
g. Balance (e – f) - - 4000
h. Payment to Z - - (4000)
i. Capital Balance after payment (a – h) 55000 37500 27500
Note: After all realisation payments the final balance is realization profit/loss.
Note: If any contingent liability (Bills discounting) is there then make a provision for the same
before making payment for partners’ capital.
Amalgamation of partnership firms
It can also be formed in any of the following ways.
(A) When two or more sole proprietors forms new partnership firm;
(B) When one existing partnership firm absorbs a sole proprietorship;
(C) When one existing partnership firm absorbs another partnership firm;
(D) When two or more partnership firms form new partnership firm.
The amalgamation is used to be done to avoid competition amongst them and to maximize
the profit of the firm/firms.
(A) When two or more sole proprietors form a new partnership firm
When two or more sole proprietorship businesses amalgamate to form a new partnership
firm, the existing sets of books will be closed and a new set of books of accounts to be opened,
recording all assets, liabilities and transactions of the partnership.
28

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Steps to be taken for the existing books.
Step 1: Prepare the Balance Sheet of the business on the date of dissolution.
Step 2: Open a Realisation Account and transfer all assets and liabilities, except cash in hand
and cash at bank, at their book values.
However, cash in hand and cash at bank are transferred to Realisation Account only when
they are taken over by the new firm.
Step 3: All undistributed reserves or profits or losses (appearing in the balance sheet) are to
be transferred to Proprietor’s Capital Accounts.
Step 4: Calculate Purchase Consideration on the basis of terms and conditions agreed upon by
the parties.
The purchase consideration is calculated as = Agreed values of assets taken over - Agreed
values of liabilities assumed
Step 5: Credit Realisation Account by the amount of Purchase Consideration.
Step 6: If there are any unrecorded assets or liabilities, they are to be recorded.
Step 7: The Profit or loss on relisation (balancing figure of Realisation Account) to be

transferred to the Capital Account of the proprietor.
Step 8: To ensure that all the accounts of the Sole Proprietor’s business are closed.
Additional Journal entries in realization A/c under amalgamation

For the amount of purchase consideration
New Firm A/c Dr.
To, Realisation A/c
(Purchase consideration due from the new firm)
Unrecorded asset: Taken over by new firm

Asset A/c Dr.
To Proprietor’s capital A/c
(Being Unrecorded asset recorded)
Realization A/c Dr.

To Asset A/c
(Being unrecorded asset transferred to realization A/c)
29

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Unrecorded liability: Taken over by new firm
Proprietor’s capital A/c Dr.
To liability A/c
(Being unrecorded liability recorded)
Liability A/c Dr.

To Realization A/c
(Unrecorded liability transferred to realization A/c)
For settlement of purchase consideration by the New firm

Capital in New Firm A/c Dr.
To, New Firm A/c
(Settlement of purchase consideration)
For final adjustment

Proprietor’s Capital A/c Dr.
To, Capital in New Firm A/c
To, Bank A/c (if any)
(Final adjustment to close the books of account)
Accounting Entries in the Books of the New Firm

Assets A/c Dr. [Acquired value]
Goodwill A/c Dr. [Purchase consideration > Net assets] (b/f)
To, Liabilities A/c [Assumed value]
To, Partners’ Capital A/c [Purchase consideration]
To capital Reserve [Purchase consideration < Net assets] (b/f)
(Being business of proprietor taken over by firm)
(B) When an existing partnership firm absorbs a sole proprietorship

When a sole proprietorship is taken over by an existing firm, the original business of the sole
proprietor is dissolved and compensated by a share of the partnership firm which is acquiring
it. In this case, assets and liabilities of the sole proprietorship business are taken over by the
partnership firm at agreed values. The procedures for closing the books of account of the sole
proprietorship are same as explained earlier. However, the following points are to be noted:
1. The capital of the new partner (the sole proprietorship) is equal to the purchase
consideration agreed upon.
2. Before amalgamation, all the assets and liabilities of the firm may be revalued. Any
profit or loss on revaluation is transferred to the Partners’ Capital Accounts in the old
profit-sharing ratio.
30

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3. Goodwill of the partnership firm is to be adjusted by crediting the Partners’ Capital
Accounts in their old profit-sharing ratio.
Conversion of Partnership Firm into a Company and Sale of Partnership Firm to a Company
The existing partnership firm is dissolved and all the books of account are closed. Broadly, the
procedure of liquidation of the partnership business is same as what has already been explained
in “Amalgamation of Partnership”
The Purchase Consideration is satisfied by the Company either in the form of cash or shares or
debentures or a combination of two or more of these. The shares may be equity or preference
shares. The shares may be issued at par, at a premium or at a discount. For the partnership,
the issue price is relevant which may form a part of the purchase consideration.
Additional entries in the books of firm apart from already discussed in amalgamation
Purchase consideration due
Purchasing company, A/c Dr.
To realization A/c
(Being PC due)
For Settlement of purchase consideration by the company

Shares in Purchasing Co. Dr.
Debentures in Purchasing Co. Dr.
Cash A/c Dr.
To, Purchasing Company A/c
For final adjustment

Partners’ Capital A/cs Dr.
To, Shares in Purchasing Co. A/c
To, Debenture in Purchasing Co. A/c
To, Cash A/c
Accounting Entries in the books of the Purchasing Company

For assets and liabilities taken over:
Assets A/c Dr. (Agreed Value)
Goodwill A/c Dr. (Balancing figure)
To, Liabilities A/c (Agreed Value)
To, Firm A/c (Purchase Consideration)
To Capital Reserve (Balancing figure)
31

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For discharge of Purchase Consideration:
Firm A/c Dr (Purchase Consideration)
To, Share Capital A/c (Face value of shares issued)
To, Securities Premium A/c (if any)
To, Debentures A/c
To, Bank A/c
Accounting of Limited Liability Partnership

Limited Liability Partnership is a specific form of business organisation consisting of partners
whose liability is limited to the capital contribution made by them. It is a combination of both
partnership and company and has the characteristics of both these forms of organisations.
Unlike a partnership, the partners of a limited liability partnership have limited liability (similar
to that in the company) which implies that personal assets of the partners will not be not used
for paying off the debts of the organisation.
In India, all limited liability partnerships are governed by the Limited Liability Partnership Act,
2008 which came into effect from April 1, 2009.
The provisions of Indian Partnership Act, 1932 shall not apply to a limited liability partnership.
Nature of Limited Liability Partnership

The nature of a limited liability partnership can be understood from the following:
A limited liability partnership is a body corporate formed and incorporated under a statute.
It has a legal entity separate from that of its partners.
Any change in the partners of a limited liability partnership would not affect the existence,
rights or liabilities of the limited liability partnership.
Features of Limited Liability Partnership

Some of the important features of a limited liability partnership registered in India are:
A limited liability partnership is a body corporate.
It is formed and incorporated under the Limited Liability Partnership Act, 2008.
Any individual or body corporate may be a partner in a limited liability partnership.
Every limited liability partnership shall have at least two partners.
Every limited liability partnership shall have at least two designated partners who are
individuals and at least one of them shall be a resident in India.
Every limited liability partnership shall have either the words “limited liability partnership”
or the acronym “LLP” as the last words of its name.
Note: every limited liability partnership shall file the Statement of Account and Solvency in
Form 8 with the Registrar, within a period of thirty days from the end of the six months of
the financial year to which the Statement of Account and Solvency relates.
32

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Note: The books of accounts which a limited liability partnership is required to keep shall be
preserved for eight years from the date on which they are made.
format of the Statement of Assets and Liabilities

Particulars Figures as at the end Figures as at the end
of the current of the previous
reporting reporting
period (in ₹) period (in ₹)
(I) CONTRIBUTION AND LIABILITIES
(1) Partner’s funds
Contribution received
Reserves and surplus (including surplus being
the profit/loss made during year)
(2) Liabilities
Secured loans
Unsecured loans
Short term borrowings
Creditors/Trade payables - Advance from
customers
Amount of other liabilities
Other liabilities (to specify)
Provisions
For taxation
For contingencies
For insurance
Other provisions (if any)
Total
(II) ASSETS
Gross Fixed assets (including intangible assets)
Less: depreciation and amortization
Net fixed assets
Investments
Loans and advances
Inventories
Debtors/trade receivables
Cash and cash equivalents
Amount of other assets
Other assets (to specify)
Total
Note: The details of contingent liabilities are required to disclosed separately under footnote.
33

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format of the Statement of Income and Expenditure
Particulars Figures for the Figures for the
period (Current period (Previous
reporting period) reporting period)
Income
Gross turnover
Less: Excise duty or service tax
Net Turnover Details
(I) Domestic turnover
(a) Sale of goods manufactured
(b) Sale of goods traded
(c) Sale or supply of services
(II) Export turnover
(a) Sale of goods manufactured
(b) Sale of goods traded
(c) Sale or supply of services
Other income
Increase/ (decrease) in stocks including for raw
materials, work in progress and finished goods
Total Income
Expenses
Raw material consumed
Purchases made for re-sale
Consumption of stores and spare parts
Power and fuel
Personnel Expenses
Administrative expenses
Payment to auditors
Selling expenses
Insurance expenses
Depreciation and amortization
Interest
Other expenses
Total expenditure
Net Profit or Net Loss (before taxes)
Provision for Tax
Profit after Tax
Profit transferred to Partners’ account
Profit transferred to Reserves and Surplus
34

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Failure to maintain books of accounts, prepare Statement of Account and Solvency, File
annual Return, etc
LLP: Punishable with fine of ₹ 25,000 to ₹ 5,00,000
Designated partner: Punishable with fine of ₹ 10,000 to ₹ 1,00,000.
Note: Supplying any material information knowing it to be false or omits any material
information while filing return then punishment will be 1,00,000 to 5,00,000 and
imprisonment up to 2 years.
35

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Paper 6: Financial Accounting Partnership Accounting

Every Partner has the right:

Importance of Partnership Deed:

CMA Intermediate New Syllabus CA Hardik Mishra

Rules applicable in the absence of a partnership deed or specific clause

Interest on capital Not Allowed

Interest on Drawings Not charged

Salary and commission Not Allowed

Interest on Partner’s Loan 6% p.a.

Interest on Partner’s Loan to the firm:

Loan given to firm

Interest on loan to partner

Journal Entries passed are as follows: for payment of interest

Profit and loss Appropriation A/c

CMA Intermediate New Syllabus CA Hardik Mishra

Steps to Determine Profit Distribution

Step 2: Calculate Total Appropriation for All Partners

Step 3: Calculate the Ratio of Appropriations

Step 4: Distribute Available Profits Based on Calculated Ratios

Partners’ Capital Accounts

CMA Intermediate New Syllabus CA Hardik Mishra

Partner’s current accounts

To interest on drawings By commission

Format of partners’ capital account under fluctuating capital method

To interest on drawings By commission

CMA Intermediate New Syllabus CA Hardik Mishra

b. Percentage of net profit after charging such commission

Salary or Commission, is an appropriation of profit, therefore, accounting treatment will be

Interest on partners’ drawings

Case 2: when the rate of interest is given as % p.a.

Case 3: when equal amounts of drawings are made at equal interval.

Case 4: when a different amount is withdrawn at different intervals.

CMA Intermediate New Syllabus CA Hardik Mishra

b. Interest on Drawings A/c …Dr.

2. In case of Fluctuating Capital Accounts:

b. Interest on Drawings A/c …Dr.

Interest on capital can be treated as appropriation of profits or charge against profit.

Charge against profits

Journal Entries for recording Interest on Capital in case of appropriation of profits:

CMA Intermediate New Syllabus CA Hardik Mishra

ii. In case of Fluctuating Capital Accounts:

Journal entries for interest on capital in case of charge against profits:

P&L A/c Dr.

Interest on partner’s capital is calculated on opening capital

In case of fluctuating capital

CMA Intermediate New Syllabus CA Hardik Mishra

Steps to do past adjustments

1. Guarantee by the Firm

2. Guarantee by One or More Existing Partners

CMA Intermediate New Syllabus CA Hardik Mishra

Goodwill is divided into two categories.

II. Self-generated Goodwill also called as inherent goodwill. It is an internally generated

CMA Intermediate New Syllabus CA Hardik Mishra

Factors Affecting the Value of Goodwill

Situation where goodwill valuation is Required: -

Method of valuation of goodwill:

CMA Intermediate New Syllabus CA Hardik Mishra

Goodwill = Weighted Average Profit x No. of years of purchase.

CMA Intermediate New Syllabus CA Hardik Mishra

(B) Capitalisation of Super Profit Method: