Partners Final Accounts

Problem
Richard and Rizwan started a business on 1st January 2018 with capitals of ₹ 3,00,000
and ₹ 2,00,000 respectively.
According to the Partnership Deed
a) Interest on capital is to be provided @ 6% p.a.
b) Rizwan is to get the salary of ₹ 50,000 per annum.
c) Richard is to get a 20,000 commission.
d) Profit-sharing ratio between the two partners is 3:2.
During the year, the firm earned a profit of ₹ 3,00,000.
Prepare profit and loss appropriation account. The firm closes its accounts on 31st
December every year.

Preparation of Partnership Final Accounts:

Trial Balance and adjustments are important in preparation of Final Account.
The list of debit and credit balances of all ledger account is called as "Trial
Balance". The Final Account is prepared at the end of every financial year.
Trading Account shows the Gross Profit or Gross Loss and Profit and Loss
Account shows the Net Profit or Net Loss of the firm. The Balance Sheet shows the
financial position of the business in the form of assets and liabilities at the end of
year.

Trading Account :
Trading Account is a Nominal Account. Trading Account is opened in the trading
organization for the purpose to find out the Gross Profit or Gross Loss incurred
during the year. In the debit side of this account all direct expenses are recorded
and in the credit side of account all direct incomes of the firm's are recorded. If the
trading account's credit side is more than debit side then account shows the Gross
Profit and vice versa. The Gross Profit or Loss is transferred to Profit and Loss
Account.

J. R. Batliboi :
“The Trading Account indicates the results of buying and selling of goods while
preparing this account, the general establishment charges are ignored and only
the transactions related to goods are included.”
 Trading Account for the year ended...
Dr. Cr.
Particulars Amt. Amt. Particulars Amt. Amt.
(Rs.) (Rs.) (Rs.) (Rs.)
To Opening xxx By Sales xxx
Stock xx Less : Return Inward xxx xxx
To Purchases x xxx
Less: Return xx xxx By Goods lost by xxx
Outward x xxx fire By Goods lost xxx
To Carriage Inward xxx by theft By Goods
To Freight xxx distributed as xxx
To Dock Charges xxx free samples xxx
To Custom Duty xxx By Goods lost in
To Wages/ xxx Accident xxx
Productive xxx By Goods xxx
/Manufacturing withdrawn by xxx
wages Partners
To Wages & xxx By Closing Stock
Salaries To Import xxx By Gross Loss c/d
Duty xxx
To Coal/Coke/Gas/ xxx
Motive Power/Oil/ xxx
Water /Grease xxx
To Royalty on xxx
Purchase/Producti xxx
on
To Primary
Packing
Charges
To Factory Lighting
& Heating
To Factory Rent &
Rates
To Factory Insurance
To Works Manager's
Salary
To Gross Profit c/d
xxx xxx
In the case of combined term of wages and salaries following treatment should be
given :
a) When the item Wages and Salaries is given in which Wages are appearing first,
it should be transferred to Trading A/c debit side.
b) When the item Salaries and Wages is given in which Salaries appear first, it
should be transferred to Profit and Loss A/c – Debit side.
Profit and Loss Account :
Profit and Loss Account is the type of Nominal Account. Profit and Loss account is a
main account of income statement. It is prepared to ascertain the Net Profit earned
or Net Loss suffered by a business concern during the accounting year. All indirect
expenses are to be recorded to the debit side where as all indirect incomes are to
be recorded to the credit side of this account. The credit balance on this account
shows Net Profit which is to be transferred to Capital Accounts credit side or
added in capital. The debit balance of this account shows, Net Loss which is to be
transferred to Capital Account debit side or deducted from Capital.
R.N. Carter, "A Profit and Loss Account is an Account into which all gains and losses
are considered in order to ascertain the excess of gain over the losses or vice versa.”
Dr. Pro-forma of Profit and Loss Account for year ended Cr.
Particular Amt. Amt. Particulars Amt. Amt.
s Rs. Rs. Rs. Rs.
To Salaries xxx By Gross Profit b/d xxx
To Salaries & xxx By Commission Received xxx
Wages To Rent & xxx By Discount Received/ xxx
Rates xxx Earned
To Insurance xxx By Interest Received xxx
To xxx By Dividend xxx
Electricity/Lighting xxx Received
To Telephone, xxx By Rent xxx
Postage To Printing & xxx Received xxx
Stationery xxx By Sundry/Miscellaneous
To Travelling Expenses of xxx Receipts xxx
Salesman To Depreciation on xxx By Profit on Sale of Asset xxx
Assets xxx By Net Loss transferred
To Loading to Partners'
Charges To Audit Capital A/c /
Fees Current A/c
To Entertainment Exp.
To Repairs / Renewals /
Maintenance
To Interest on Loan xxx
To Sundry/Miscellaneous xxx
Expenses To Conveyance xxx
To Loss by Fire xxx
To Loss by xxx
Theft xxx
To Loss in Accident xxx
To Goods distributed as free xxx
sample To Commission xxx
Allowed/ Given xxx
To Discount xxx
allowed To xxx
Allowances xxx
To Advertisement xxx
To Carriage xxx
Outward To Sale xxx
Charges xxx
To Bad Debts xxx
To Export xxx
Duty To xxx
Taxes xxx
To General xxx
Expenses To xxx
Trade Expenses xxx
To Legal Charges xxx
To Professional xxx
Charges To Bank
Charges
To Solicitor's Fees
To Secondary Packing
Charges To Loss on sale of
Fixed Assets
To Net Profit transferred to
Partners' Capital A/c/
Current A/c
xxx xxx
 Balance Sheet :
Balance Sheet is a statement showing financial position of the firm on a particular
day. All liabilities are recorded to its left hand side where as all Assets are recorded
to its right hand side. The Balance Sheet is not an account but a statement showing
the financial position of a firms, as on a given date in the form of Assets and
liabilities.
A. Palmer defines Balance Sheet as :
"The Balance Sheet is, a statement on a particular date showing on one side
the traders property and possessions and on the other side the liabilities".
Proforma of Balance Sheet is given below
Balance Sheet as on .......

Liabilities Amt. Amt. Asse Amt. Rs. Amt.

Rs. Rs. ts Rs.
Capital Accounts : Goodwill xxx
A xxx Land and Building xxx
B xxx Less : Depreciation xxx xxx
C xxx xxx Plant & Machinery xxx xxx
Partners Current A/c Less : Depreciation xxx xxx
(Credit Balance) xxx xxx Furniture & Fixtures xxx xxx
General Reserve xxx Less : Depreciation xxx xxx
Profit & Loss A/c xxx Equipment xxx
xxx
Loan on Mortgage xxx Less : Depreciation xxx
xxx
Bank Loan xxx Delivery/Motor Van xxx
xxx
Loan from Partners xxx Less : Depreciation xxx
Bills Payable xxx Leasehold / Freehold xxx
xxx
Bank Overdraft xxx Premises xxx
Sundry Creditors xxx Less : Depreciation xxx xxx
Add/Less : Any Patents xxx xxx
other xxx Less : xxx xxx
adjustment xxx Depreciation xxx
Less : Provision for Loose Tools
Discount on Creditors Less : Depreciation xxx
Outstanding Expenses xxx Investments xxx xxx
Income received in xxx Stores & Spare Parts xxx
Advance xxx Less : Depreciation xxx xxx
Provision for Taxes xxx Prepaid xxx
Expenses xxx
Outstanding xxx
Incomes Loans
and Advances xxx
Closing Stock
Sundry Debtors xxx
+ Any adjustments
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 Less : Bad Debts(New) xxx
Less : Provision for xxx
Discount
on Debtors
Insurance Claim
Receivable
Bills Receivable
Cash in Hand
Cash at Bank
Partners Current A/c
(Debit Balance)
Total xxx Total xxx

Notes :
1) Every item in the Trial Balance must be shown only one time and in just one part of the
Final Accounts, excluding silent/ hidden adjustments.
2) Every adjustment must have two effects in Final Accounts i.e. debit and credit.
3) We have already studied this topic in XI standard as “Final Account of Proprietary
Concern.” Most of the theory part, explanation of journal entries, and effects of journal
entries are similar. To avoid repetition common explanation is not given in the XII stan-
dard. But explanation and Journal Entries of new adjustments are given. For common
references / explanation teachers and students can refer textbook of standard XI. First
topic in this book i.e Introduction to Partnership is also correlated with Partnership
Final Account. Students can refer topic no.1.

Adjustments :
Adjustment 1st 2nd Effect
Effect
1. Closing Stock Balance Sheet Asset side Trading A/c credit side
2. Outstanding Expenses Add to the particular Balanc She Liabilit
Expenses on the debit e Side et y
side of Trading/Profit
and Loss A/c
3. Prepaid Expenses Deduct from the Balance Sheet Asset
particular Side
expenses on the debit
side of
Trading/Profit and Loss
A/c
4. Income received in Deduct from the Balanc She Liabilit
advance (Pre-received particular income e Side et y
Income) on the credit side of
Profit and Loss A/c
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5. Income receivable Add to the particular Balance Sheet Asset
income on the credit Side
side of Profit and
Loss A/c
6. Bad debts or Show to the debit side of Deduct from Sundry
(Additional New Bad Profit and Loss A/c (add Debtors in Balance
debts) to old bad debts if any) Sheet Asset Side

7. Provision for Doubtful Show to the debit Deduct from

Debts (Reserve for side of Profit and Sundry
Doubtful debts, new Loss A/c Debtors in Balance
R.D.D.) Sheet
Asset Side
8. Reserve for o Show to the debit side of Deduct from
discount n Profit and Loss A/c (Add Sundry
Debtors to discount allowed) Debtors
Balance Sheet Asset
Side
9. Depreciation Show on the debit side Less from the
of the Profit and Loss A/c particular
asset in Balance
Sheet Asset
Side
10. i) Interest on capital Show to the Debit Side Partners
of Profit and Loss A/c
Capital/Current A/c
Credit Side or add to
Capitals/ Current
Account
ii) Interest on Drawings Show to the Debit Side Show to the Credit
of partners Side of Profit and
Capital/Current A/c or Loss A/c
less from Capital/
Current
Account
iii) Interest on loan Show to the Debit Add to loan taken in
taken Side of Profit and the
Loss A/c Balance Sheet
Liability Side
11 Interest on investment Show to the Credit Balance Sheet Asset
. and on loan given Side of Side
Profit and Loss A/c
12 i) Insured goods Trading A/c Credit Side 1. Balance Sheet
. destroyed by (gross amount) Asset Side (Claim
fire/accident amount)
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 2. Profit and Loss A/c
Debit side (Amount
of Loss)
ii) Uninsured goods Profit and Loss A/c Debit Show to the Credit
destroyed by Side Side of Trading A/c
fire/ accident
13 Goods stolen Profit and Loss A/c Debit Show to the Credit
. Side Side of
Trading A/c
14 Goods distributed as Profit and Loss A/c Debit Show to the Credit
. free Side Side of
samples (Add in Advertisement if Trading A/c
any)
15 Goods withdrawn Show to the Credit Side Partners
. by Partners for of Trading A/c or deduct Capital/Current A/c
personal use from Debit Side
Purchases A/c
16 i) Unrecorded Add to Purchases on the Add to Creditors on
. Purchases Debit Side of Trading A/c the
Liability Side of
Balance Sheet
ii) Unrecorded Sales Add to Debtors on the Add to Sales on the
Asset credit
Side of the Balance Side of Trading A/c
Sheet
17 i) Capital Expenditure Deduct from that Add to that particular
. included in Revenue particular Revenue asset in Balance
Expenditure Expenses on the Debit Sheet Asset Side
Side of Trading or Profit
and
Loss A/c
ii) Revenue Add to that particular Deducted from
Revenue Expenditure that
Expenditure particular Asset in
included in Balance
Capital Sheet
Expenditure
18 Bills Receivable Add the amount of Deduct the amount
. dishonored bill dishonored to of bill dishonored
Sundry Debtors from
in the Balance Sheet Bills
Asset Side Receivable.
19 Bills Payable Add the amount of Deduct the amount
. Dishonored bill dishonored to of bill dishonored
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 Sundry Creditors from
in the Balance Sheet Bills
Payable
20 Deferred Expenses of Advertisement Expenses Remaining amount of
. Advertisement paid for related to current year Advertisement is
5 years debited to Profit and shown on asset side
Loss A/c of the Balance Sheet
as prepaid
Advertisement

Revenue Receipts Add to sales on the Add to Furniture on

21 included credit side the
. in Capital Receipts e.g. of Trading A/c. Asset Side of the
sale of goods included Balance Sheet
in sale of
Furniture
22 Commission to
Show to the Debit Side of Show to the Credit
. partners Profit and Loss A/c Side of
as percentage of Gross Partners
Profit/sales. Capital/Current A/c
or Add to Partners
Capital A/c.
Hidden Adjustment Given in Trial Balance

Sr. Adjustment Trading and Balance Sheet

No. Given in Profit and
Trial Balance Loss A/c
1. Salaries/Rent Add the amount of Show separately the
Paid (For 10 Salaries/ Rent for 2 amount of Salaries/Rent
months) months to Salaries/ for 2 months on the
Rent respectively Liabilities Side of the
Balance Sheet
2. Insurance premium Deduct the Show separately the
paid for 1 year proportionate amount amount of prepaid
ending 30th June, of Insurance Premium insurance on the Assets
2019 (Accounting for 3 months from Side of the Balance
year ends on 31st insurance on the Debit Sheet
March 2019) Side of Profit and Loss
A/c
3. Advertisement Show 1/4th amount of Show the remaining i.e.
expenses (for 4 Advertisement 3/4th of Advertisement
years) expenses on the Debit expenses (not written
Side of Profit and Loss off) on the Assets Side
A/c of the Balance Sheet
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 4. Rent Add the proportionate Show the same amount
received amount of Rent for one on the Assets Side of
(for 11 month to Rent received the Balance Sheet
months) on Credit Side of Profit
and Loss A/c
5. 10% Loan (Borrowed Show the amount of Add the amount of
on 1st Jan. 2018) Interest Payable on Interest Payable on
(Accounting year Loan for 3 months on Loan on the Liability
ends on 31st March the Debit Side of the Side of the Balance
2018) Profit and Loss A/c Sheet
6. 16% Investment Show the amount of Add the amount of
(Purchased on 1st Interest Receivable on Interest Receivable on
Jan. 2019) Investment for 3 Investment on the
(Accounting year months on the Credit Assets Side of the
ends on 31st March Side of the Profit and Balance Sheet
2019) Loss A/c
7. 10% Government Show the amount of Add the amount of
Bonds Interest Receivable on Interest Receivable to
the Credit Side of Profit Government Bonds on
and Loss Account the Assets Side of the
Balance Sheet or show
seperately in Balance
sheet Asset Side.

important Points :
1) Each item from Trial Balance will be included only once in the Final Accounts
i.e. either in Trading or in Profit & Loss A/c or in Balance Sheet or in working
section.
2) Each adjustment has two effects for the similar amount.
3) Debit balances of Trial Balance will appear on the debit side of Trading Account
or Profit & Loss A/c or on the asset side of the Balance Sheet.
4) Credit balances of Trial Balance will appear on the credit side of Trading
Account or Profit & Loss A/c or Capital Account or on the Liabilities Side of the
Balance Sheet.
5) If Salaries and Wages are given as separate items, Wages are shown on the
debit side of Trading Account while salaries are shown on the debit side of
Profit and Loss A/c. If the item is “Wages and Salaries”, it is shown on the debit
side of Trading A/c and if the items is “Salaries & Wages”, it is shown on the
debit side of Profit & Loss A/c.
6) If the Trial Balance contains only “Trade Expenses”, the item will be shown on
the debit side of Profit & Loss A/c. If the Trial Balance contains “Trade
Expenses” and also other items like “Sundry Expenses” or “Office Expenses” or
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 “General Expenses” or “Miscellaneous Expenses”, the item “Trade Expenses”
is shown on the debit side of Trading A/c while the other items of expenses are
shown on the debit side of Profit &Loss A/c.
7) The adjustment for Bad Debts and Provision for Bad and Doubtful Debts should
be effected after other adjustments for Debtors are given effect to. Such
adjustments can be unrecorded sales, drawings included in Debtors, drawings
treated as sales, etc.
8) Reserve for Discount on Debtors should be given effect after the adjustments
for Bad Debts and Provision for Bad and Doubtful Debts.
9) Reserve for Discount on Creditors should be given effect after making all the
other adjustments concerning Creditors.
10) Hidden / Self-explanatory adjustments are to be given effect even if there is no
special instruction in the problem in this respect.
11) Closing Stock should be taken at “Cost or Market Price, whichever is less."
12) If a manager or a partner is allowed commission at a certain percentage on Net
Profit, such commission should be calculated in the following manner
depending upon how the commission is quoted :
a) If it is on Net Profit before charging such commission :
Rate of Commission × Net Profit
Commission Amount 100
=
b) If it is on Net Profit after charging such commission :
Rate of Commission  Net Profit
Commission Amount
=
100+ Rate of Commission
13) When the date of drawings are not given Interest on drawings should be
calculated on average basis or for six months
Drawings   6
Rate 12
100

14) If a partner introduces capital in the middle of the accounting year, then
interest on capital should be calculated on proportionate time period only.
(This complication is not expected at your Std. XII level).

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Treatment of some important Items appearing in Trial Balance only :

i) Any outstanding expenses Liability Side of Balance Sheet

ii) Any Prepaid Expenses Asset Side of Balance Sheet
iii) Any outstanding income Asset Side of Balance Sheet
iv) Income Received in Advance Liability Side of Balance Sheet
v) Depreciation Debit Side of Profit & Loss A/c
vi) Loss on Sale of any Asset Debit Side of Profit & Loss A/c
vii) Goods withdrawn by partner Debit Side of Capital/Current A/c
viii) General Reserve / Reserve Fund Liability Side of Balance Sheet
ix) Deposit from Public Liability Side of Balance Sheet
x) Goods distributed as free samples Debit side of Profit & Loss A/C
xi) Suspense Account: Show the same figure on Asset
a) If it is on Debit Side Side Show the same figure on
b) If it is on Credit Side Liability Side
xii) Bank for Collection of Bills Asset Side of Balance Sheet
Steps for solving problem :
1) Prepare the necessary accounts, including the working notes.
2) Place some mark on Trial Balance items for external as well as internal
adjustments.
3) Go through Trial Balance items and give only one accounting effect sequentially.
4) Go through Adjustments and give two accounting effects.
5) Close Ledgers in the working notes, except capital.
6) Find Gross Profit, Net Profit and transfer it to individual capital accounts.
7) Find the closing balance in capital and transfer it to Balance Sheet.
8) Tally the Balance Sheet.

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