Page No 101:

Numerical Question:
Question 1: Triphati and Chauhan are partners in a firm sharing profits and losses in the ratio of
3:2. Their capitals were Rs 60,000 and Rs 40,000 as on January 01, 2005. During the year they
earned a profit of Rs 30,000. According to the partnership deed both the partners are entitled to
Rs 1,000 per month as Salary and 5% interest on their capital. They are also to be charged an
interest of 5% on their drawings, irrespective of the period, which is Rs 12,000 for Tripathi, Rs
8,000 for Chauhan. Prepare Partner’s Accounts when, capitals are fixed.
Answer: a) If interest on Capital and Partners’ salaries and interest on drawings is charged against
profit, the solution will be as:

Profit and Loss Appropriation Account

Dr. Cr.

Amount Amount
Particulars Particulars
Rs Rs

Profit transferred to Profit and Loss 30,000

Triphati’s Current Account 18,000

Chauhan’s Current Account 12,000

30,000 30,000

Partners’ Capital Account

Dr. Cr.

Particulars Tripathi Chauhan Particulars Tripathi Chauhan

Balance b/d 60,000 40,000

Balance c/d 60,000 40,000

60,000 40,000 60,000 40,000

Partners’ Current Account

Dr. Cr.

Particulars Tripathi Chauhan Particulars Tripathi Chauhan

Drawings 12,000 8,000 Interest on Capital 3,000 2,000

Interest on Drawings 600 400 Partners’ Salaries 12,000 12,000

Profit & Loss

Balance c/d 20,400 17,600 18,000 12,000
Appropriation

33,000 26,000 33,000 26,000

b) If interest on Capital and Partners’ salaries and interest on drawings is distributed out of profit, the
solution will be as:
Profit and Loss Appropriation Account

Dr. Cr.

Amount Amount
Particulars Particulars
Rs Rs

Partners’ Salary Profit and Loss (Profit) 30,000

Tripathi 1,000 × 12 = 12,000 Interest on Drawings

Chauhan 1,000 × 12 = 12,000 24,000 Tripathi 600

Chauhan 400 1,000

Interest on Capital

Tripathi 3,000

Chauhan 2,000 5,000

Profit Transferred to

Tripathi’s Current 1,200

Chauhan’s Current 800 2,000

31,000 31,000

Partners’ Capital Account

Dr. Cr.

Particulars Tripathi Chauhan Particulars Tripathi Chauhan

Balance b/d 60,000 40,000

Balance c/d 60,000 40,000

60,000 40,000 60,000 40,000

Partners’ Current Account

Dr. Cr.

Particulars Tripathi Chauhan Particulars Tripathi Chauhan

Drawings 12,000 8,000 Partners’ Salaries 12,000 12,000

Interest on Drawings 600 400 Interest on Capital 3,000 2,000

Profit and Loss

Balance c/d 3,600 6,400 1,200 800
Appropriation
 16,200 14,800 16,200 14,800
As the question is silent about the treatment of Interest on Capitals, Salary, Interest on Drawings, so we
have prepared the solution by following two methods, namely:

1. Charge against Profits

2. Out of Profits

This was done deliberately so as to make students aware-off the two above mentioned methods and also
to match the answer with that of given in the NCERT. The appropriate answer to the question following
Out of Profit Method should be as:
Tripathi's Current A/c balance Rs 3,600 and
Chauhan's Current A/c balance Rs 6,400.
In case no information regarding the treatment of above items is mentioned in the question, then we
usually follow the Out of Profits Method.

Question 2: Anubha and Kajal are partners of a firm sharing profits and losses in the ratio of 2:1. Their
capital, were Rs 90,000 and Rs 60,000. The profit during the year were Rs 45,000. According to
partnership deed, both partners are allowed salary, Rs 700 per month to Anubha and Rs 500 per month
to Kajal. Interest allowed on capital @ 5% p.a. The drawings at the end of the period were Rs 8,500 for
Anubha and Rs 6,500 for Kajal. Interest is to be charged @ 5% p.a. on drawings. Prepare partners
capital accounts, assuming that the capital account are fluctuating.
Answer:
a) Note: If Partners’ Salaries, Interest on capital and Interest on Drawing are treated as these have
already adjusted in Profit and Loss Account. The Solution will be as

Profit and Loss Appropriation Account

Dr. Cr.

Amount Amount
Particulars Particulars
Rs Rs

Profit Transferred to Current A/c Profit and Loss 45,000

Anubha’s Capital 30,000

Kajal’s Capital 15,000 45,000

45,000 45,000

Partners’ Capital Account

Dr. Cr.

Particulars Anubha Kajal Particulars Anubha Kajal

Drawings 8,500 6,500 Balance b/d 90,000 60,000

Interest on Drawings 425 325 Partners’ Salaries 8,400 6,000

Interest on Capital 4,500 3,000

Profit and Loss

Balance c/d 1,23,975 77,175 30,000 15,000
Appropriation

1,32,900 84,000 1,32,900 84,000

b) Alternative
Note: If Partners’ salaries, interest on capital and interest on drawings adjusted in Profit and Loss
Appropriation Account. The solution will be as.

Profit and Loss Appropriation Account

Dr. Cr.

Amount Amount
Particulars Particulars
Rs Rs

Partners’ Salaries: Profit and Loss Account 45,000

Anubha 8,400 Interest on Drawings

Kajal 6,000 14,400 Anubha 425

Kajal 325 750

Interest on Capital:

Anubha 4,500

Kajal 3,000 7,500

Profit transferred to

Anubha’s Capital 15,900

Kajal’s Capital 7,950 23,850

45,750 45,750

Partners’ Capital Account

Dr. Cr.

Particulars Anubha Kajal Particulars Anubha Kajal

Drawings 8,500 6,500 Balance b/d 90,000 60,000

Interest on Drawings 425 325 Partners’ Salaries 8,400 6,000

Interest on Capital 4,500 3,000

Balance c/d 1,09,875 70,125 Profit and Loss Appropriation 15,900 7,950

1,18,800 76,950 1,18,800 76,950

Page No 101:
Long Answer:
Question 1: What is partnership? What are its chief characteristics? Explain.
Answer: According to the Section 4 of the Partnership Act, 1932, partnership is an agreement
between two or more persons who have agreed to share profits or losses of a business that will be
carried by all or any one of them acting for all.
Person who joined their hands to set up the business are called ‘partners’ individually and
‘firm’ collectively and the name under which they carry out their business is termed as ‘firm name’.
Important Characteristics of Partnership
The following are the important characteristics of partnership.
1.Two or more persons: Partnership is an agreement between two or more persons coming together for
a common goal. There should be at least two persons to form a partnership. Although as per the
Partnership Act of 1932, there is no maximum limit on the number of partners in a partnership firm, but
as per the Rule (10) of the Companies (Miscellaneous) Rules Act 2014, the maximum number of
partners permissible is 50 . Therefore, in case the number of partners exceeds the aforesaid limit, then
the concerned partnership is considered to be illegal. In this regards it must be noted that Section 464 of
Companies Act 2013, the maximum number of partners permissible is one humdred. However, it must be
noted that the maximum number of partners is not limited in case an association or partnership is formed
by professionals such as chartered accountants, lawyers, company secretaries, etc. These professionals
are governed by their the special laws as formed by their respective professional institutions. Prior to the
enforcement of Companies Act of 2013, the earlier act of 1956, imposed restrictions on the maximum
number of partners to 10 in case of banking business and 20 in case of any other kind of business.
However, with effect from April 01, 2014, Companies Act of 1956 has been replaced by Companies Act
of 2013.
2.Partnership Deed: The partnership among the partners should be backed up by a partnership deed. A
partnership deed is an agreement among the partners governing them in carrying out the proposed
business. The deed may be oral or written.
3.Business: A partnership is formed to carry out a legal business. Partnerships in smuggling, black
marketing etc. are illegal business activities and hence, the partnership is also illegal.
4. Sharing of profit: The profit or loss earned by a partnership firm must be distributed as per the
partnership deed or equally among the partners (in absence of partnership deed). It is a very important
feature of partnership. If a group is formed for charitable purpose, not to earn profit then this group will
not be regarded as a partnership.
5.Liability: Liability of a partnership firm is unlimited and each partner is liable for firm’s liabilities whether
individually and jointly with other partners to the third party. Moreover, each partner along with his/her co-
partners is responsible for all the acts of the partnership firm.
6. Mutual agency: Partnership may be carried on by all or any one of them acting on behalf of all. It
means all the partners of a firm are equally entitled to participate in the activities of the business or any
one of them who is acting on behalf of all. Every partner acts as an agent for others and binds others by
his/her act and in turn is bound by others by their act.
Note: In case of any question regarding the permissible limit on the maximum number of partners in a
partnership firm, the students shall take the limit as 50.

Question 2: Discuss the main provisions of the Indian Partnership Act, 1932 that are relevant to
partnership accounts if there is no partnership deed.
Answer: The following are the main provisions of the Indian partnership Act, 1932 that are relevant to the
partnership accounts in absence of partnership deed.
1. Profit Sharing Ratio: If the partnership deed is silent on sharing of profit or losses among the partners
of a firm, then according to the Partnership Act of 1932, profits and losses are to be shared equally by all
the partners of the firm.
2. Interest on Capital: If the partnership deed is silent on interest on partner’s capital, then according to
the Partnership Act of 1932, no interest on capital should be given to the partners of the firm. However,
interest on capital is given only out of the profits, if mutually agreed by all the partners.
3. Interest on Drawings: If the partnership deed is silent on interest on partner’s drawings, then
according to the Partnership Act of 1932, no interest on drawing should be charged from the partners of
the firm for the amount of capital withdrawn in the form of drawings.
4. Interest on Partner’s Loan: If the partnership deed is silent on interest on partner’s loan, then
according to the Partnership Act of 1932, the partners are entitled for 6% p.a. interest on the loan
forwarded by them to the firm.
5. Salary to Partner: If the partnership deed is silent on salary to a partner, then according to the
Partnership Act of 1932, no salary should be given to any partner.

Question 3: Explain why it is considered better to make a partnership agreement in writing.

Answer: A partnership deed forms the basis of a partnership firm. A partnership deed consists of all the
pre-determined terms and conditions that are agreed to by all the partners while forming the partnership.
Generally the following details are included in a partnership deed.
1. Objective of business of the firm
2. Name and address of the firm
3. Name and address of all partners
4. Profit and loss sharing ratio
5. Contribution to capital by each partner
6. Rights, types of roles and duties of partners
7. Duration of partnership
8. Rate of interest on capital, drawings and loans
9. Salaries, commission, if payable to partners.
10. Rules regarding admission, retiring, death and dissolution of the firm, etc. It ensures the
A partnership deed can both be oral or written. Although, it is not compulsory to form partnership
agreement in writing under the Partnership Act of 1932, however, written partnership deed is more
desirable than the oral agreements. This is because it ensures the smooth functioning of the business of
the partnership firm. It helps in avoiding disputes and misunderstandings among the partners. Also, it
helps in settling t the disputes (as the case may be) among the partners, as written partnership deed can
be referred to anytime. If written partnership deed is duly signed and registered under Partnership Act,
then it can be used as evidence in the court of law. Moreover, any changes (if needed) in the partnership
deed cannot be made without the consent of all the partners of the firm. Therefore, it is desirable to form
partnership deed in writing because of the merits associated with written documents over its oral
counterparts.

Question 4: Illustrate how interest on drawings will be calculated under various situations.
Answer: When a partner withdraws any amount, either in cash or in any other form, from the firm for
his/her personal use, then it is termed as drawings. The interest charged by the firm on the amount of
drawings is termed as interest on drawings. The method of calculating interest on drawings depends on
the information available for time and frequency of the drawings made by the partner. The following
different situations of drawings made illustrate the calculation of interest charged on drawings.
Situation 1: When information regarding Amount, Date and Rate of Interest on drawings are given.
If a partner withdrew Rs 10,000 on May 01 and interest on drawing is charged at 10% p.a. and the firm
closes its books on December 31 every year then interest of drawings amounts to Rs 667.

Interest on drawings =

Interest on drawings =
Situation 2: When information regarding Amount, Rate of Interest on drawings is given
Case I: If the Amount and Rate of Interest on drawings (per annumn) is given but date is not mentioned
If the details regarding the amount of drawings and rate of interest of drawings (p.a.) is given but the date
of drawings is not mentioned then interest is charged on average basis and the period of drawings is
taken as 6 months.
Example- If a partner withdrew Rs 10,000 and rate of interest on drawings is 10% p.a. then the interest
of drawings amounts to Rs 500

Interest on drawings =
Case II: If the Amount and Rate of Interest on drawings is given but the date and per annumn rate of
interest is not mentioned
If the date and the rate of interest are given but per annum is not specified, then annual interest is
charged.
Example- If a partner withdrew Rs 20,000 and interest rate is 10% , then the interest on drawings
amounts to Rs 2,000.

Interest on drawings =
Situation 3: When a fixed amount is withdrawn at regular interval
Case I: If a fixed amount is withdrawn at the beginning of each month, then the interest is calculated for
6.5 months.
Example- If a partner withdraws Rs 1,000 in the beginning of every month and the rate of interest is 10%
p.a., then the interest on drawings amount to Rs 650.
Interest on drawings =
Case II: If a fixed amount is withdrawn at the end of each month, then the interest is calculated for 5.5
months
Example- If a partner withdraws Rs 1,000 at the end of each month and rate of interest is 10% p.a., then
the interest on drawings amount to Rs 550.

Interest on drawings =
Case III: If a fixed amount is withdrawn in the middle of every month then assuming that the drawings are
made on15th of every month then interest on drawings is calculated for 6 months
Example- If a partner withdraws Rs 1,000 on 15 th of every month and the rate of interest is 10% p.a.,
then the interest on drawings amount to Rs 600.

Interest on drawings =
Case IV: If a fixed amount is withdrawn in the beginning of every quarter then the interest is calculated
for 7.5 months
Example- If a partner withdraws Rs 3,000 in the beginning of every quarter and the rate of interest is
10% p.a. then the interest on drawings amount to Rs 750

Interest on drawings =
Case V: If a fixed amount is withdrawn at the end of every quarter, then the interest is calculated for 4.5
months
Example- If a partner withdraws Rs 3,000 at the end of every quarter and the rate of interest is 10% p.a.,
then the interest on drawings amounts to Rs 450.

Interest on drawings =
Situation 4: When different amount is at different intervals
If different amount is withdrawn by a partner at different points of time then the interest is calculated
by Product Method. The period of drawings is calculated from the date of withdrawal to the last date of
the accounting year.
Example- A partner withdraws Rs 5,000 on Feb 01, Rs 3000 on May 01, Rs 5,000 on Sep. 30 and Rs
1000 on Dec. 31 and the rate of interest on drawings is 10% p.a. The firm closes its book on December
31.
Calculation of Interest on Drawings by Product Method

Interest on Drawings

Amount
Date Outstanding Period Product
Rs

Feb. 01 5,000 11 5,000 ´ 11 = 55,000

May. 01 3,000 8 3,000 ´ 8 = 24,000

Sep. 30 5,000 3 5,000 ´ 3 = 15,000

Dec. 31 1,000 0 1,000 ´ 0 = 0

94,000