1. WELCOME

2. ACCOUNTING FOR PARTNERSHIP BASIC CONCEPTS
CHAPTER-1
ACCOUNTING FOR PARTNERSHIP
BASIC CONCEPTS

3. INTRODUCTION
You have already learnt the accounting procedure for sole trading concerns.
Limitations of sole proprietorship
1.Limited financial resources
2.Limited managerial ability
3.Limited scope of expansion
4.Unlimited liability
The need of partnership arose due to the limitations of sole proprietorship.

4. Definition
As per section 4 of the Indian Partnership Act 1932,Partnership is the relationship between persons who have agreed to share the profits of a business carried on by all any of them acting for all.
*Persons who enter into the partnership are individually called partners and collectively called a firm.

5. Features 1.Agreement/Deed 2.Two or more persons
The basis upon which the partnership is constituted is an agreement ,between the partners. The agreement should be for carrying on a lawful business. The agreement may be in oral or written form.
2.Two or more persons
A minimum of two persons are required to form a partnership. The maximum number of persons in a partnership is limited to 10,in case of banking business and 20 if it is carrying on any other business.

6. 5.Business carried on by all or any of them acting for all.
The agreement should be for carrying on some business. Business include every trade,occupation or profession. The business must be legal.
4.Sharing of profits
The objectives of partnership must be to earn profits and must be distributed among partners in an agreed ratio. In case of losses too are shared in the agreed ratio.
5.Business carried on by all or any of them acting for all.
Each partner can participate in the conduct of business and act for the firm, as well as each partner is bound by the acts of

7. other partners. Thus a partner is both an agent and the principal. ie
other partners. Thus a partner is both an agent and the principal.ie.,he is an agent when he makes the other partners liable for his acts. He is the principal when the other partners make him liable for their acts. This is based on mutual agency principle.
Partnership Deed
A written agreement which contains the terms and conditions of partnership is called Partnership deed.
Contents of the Deed
*Name of the firm
*Name and address of all partners
*Nature and place of the firm
*Date of commencement of partnership.
*Duration of partnership

8. Amount of capital contributed or to be contributed by each partner
*Amount of capital contributed or to be contributed by each partner.etc…………………………………
Rules applicable in the absence of partnership deed
1.No interest on capital
2.No interest on drawings
3.No salary
4.No commission
5.Equal share in profits
6.6% interest on loan taken from a partner.

9. Proforma of capital account
Cr.
Dr.
Particulars am
Drawings X
Balance b/d
Interest on drawings
Cash
Share of loss
Salary
Commission
Interest on loan given to
Firm
Interest on capital
Share of profit

10. A partner’s capital account normally shows credit balance.
However it can show a debit balance under certain circumstances, like excessive withdrawal etc………..
There are two methods of maintaining capital accounts of partners.(in partnership)
1.Fixed Capital Method
2.Fluctuating Capital Method

11. Fixed Capital Method
In the fixed capital method all adjust-
ments like salary,commission,interest
on capital,profit etc are shown in cur-
rent account.
In the fixed capital method there are
two account to be prepared for each
partner.Capital a/c & Current a/c
The balance of fixed capital a/c does
not change in general circumstances.
Capital a/c normally shows credit bal-
ance while current a/c can show a cre-
dit or debit balance.
Fluctuating Capital Method
In the fluctuating capiltal method,
all adjustment like salary, commi-
ssion,interest on capital etc..are
show in the capital a/c itself.
In the fluctuating capital method,
there is only one a/c ie,capital a/c
for each partner
The balance of fluctuating capital
a/c keep on changing from time to
time.
Fluctuating capital a/c normally shows a credit balance.

12. ILLUSTRATION 1
Arun and Balu entered into a partnersip business on 1st April They have contributed capital of Rs and Rs respectively.They decided to share profits and lossess equally.According to the deed interest on capital is allowed at 6% per annum and Balu was entitled to get a salary of Rs.8000 per annum.During the year Balu withdrew Rs.6000 and Arun withdrew Rs.4000.Netprofit of the business after providing interest on capital and salary to Balu amounted to Rs
Show the capital accounts of the partners.
1.When capitals are fixed
2.When capitals are flictuating

13. 1.When capitals are fixedDr
Capital a/c
Cr.
particulars
Arun
Balu
Particulars
Balance c/d
50000
60000
cash
Balance b/d

14. Current a/c
Dr.
Cr.
particulars
Arun
Balu
Drawings
4000
6000
Share of profit
8000
Interest on capital
3000
3600
Salary
Balance c/d
7000
13600
11000
19600
Balance b/d

15. 2.Fluctuating capital method
Dr.
Capital a/c
Cr.
particulars
Arun
Balu
Drawings
4000
6000
Cash
50000
60000
Share of profit
8000
Interest on capital
3000
3600
Salary
Balance c/d
57000
73600
61000
79600
Balance b/d

16. Profit and loss Appropriation a/c
Profit and loss appropriation a/c is an extension of profit and loss account. It is prepared to show how net profit is distributed among the partners.
Proforma of Profit and loss appropriation a/c
Cr.
Dr.
Particulars Am
Interest on capital
XXX
Netprofit b/d
Salary
Interest on drawings
Commission
Loss
Reserve
Profit
XXXX

17. ILLUSTRATION 2
On 1st January 2000 ‘R’ and ‘S’ entered into a partnership contributing Rs and respectively,and sharing profit and losses in the ratio of 3:2.R is to be allowed a salary of Rs.6000 per year. Interest on capital is to be allowed at 6% per annum. During the year R withdrew Rs.3000 and S Rs.4000.Interst on the same being Rs.150 and Rs.240 respectively. The profit of the year before the above mentioned adjustments was Rs
Pass the necessary entries relating to the appropriation of profit and prepare the profit and loss appropriation a/c and partner’s capital a/c.

18. P&L appropriation a/c Dr. Cr. Particulars Am R’s salary 6000
Net profit b/d
12500
Interest on capital
( )
4200
Interest on drawings
390
Capital a/c
R-1614
S-1076
2690
12890

19. Interest on drawings Case 1
When drawings of a fixed amount are made in the beginning of every month, interest will be charged on the whole amount for 6 ½ months.
Interest on drawings = total drawings X rate of interest X 61/2
100 12
Example
A & B are partners in a firm. B withdrew Rs.5000 per month(in the beginning of the month).Calculate his interest on drawings for the preparations of final a/c, if it is 10%.

20. Interest on drawings = total drawings X rate of interest X 6 ½12
100
= X 10 X 6 ½
100 12
=3250
Case 2
When drawings of a fixed amount are made at the end of the every month .
Interest on drawings = total drawings X rate of interest X 5 ½
100 12

21. A partner makes a drawings of Rs.1000 per month ( at the end of
Example
A partner makes a drawings of Rs.1000 per month ( at the end of
the every month ). Under the partnership deed interest is to be charged at 15% per annum. Calculate his interest on drawings.
Total drawings=1000 X 12 = 12000
Interest on drawings = total drawings X rate of interest X 5 ½
100 12
= X 15 X 5 ½
100 12
=825

22. Case 3
When drawings are made in the middle of every month.
Interest on drawings = total drawings X rate of interest X 6 ½
100 12
Example
A partner make a drawings of Rs.1000 per month. Under the partnership deed interest is to be 15% per annum. Calculate his interest on drawings.
Interest on drawings = total drawings x rate of interest x 6 ½ 12
100
Product method
( In the case- different amounts withdrawn on different dates)

23. Interest on drawings = Total of product X 1/12 X 5/100 = 445
Date
Amount
Period
product
January 31
3600 11
39600
March 31
2400 9
21600
June 30
4800 6
28800
August 31
1200 4
October 30
6000 2
12000
Total
106800
Interest on drawings = Total of product X 1/12 X 5/100
= 445

24. Goodwill Factors determining Goodwill.
Goodwill can be defined as “ the present value of a firm’s anticipated
excess earnings” or as “ the capitalised value attached to the differential profit capacity of a business.
*Goodwill is an intangible asset
Factors determining Goodwill.
1.Conduct of business
Goodwill of a business to a large extend, is attached with the quality of the goods it deals with and services it provides. Higher the quality more will be the goodwill or viceversa.
2.Location
The location of a business firm is another factor affecting goodwill . Easy and convenient locations will attract more customers

25. Which eventually add to the goodwill of the firm.
3.Efficiency of the business
If the management of the business is highly efficient , it will be able to maintain cost efficiency and productivity which will enhance profitability of the business and there by it’s goodwill.
4.Market condition
Monopoly in the market restricts competition and helps the firm to earn higher profits which enhances it’s goodwill.
5.Special previlages
The firm that enjoys special previlages like import license , uninterrupted supply of electricity, attractive trade marks etc………. brings goodwill to the firm.

26. Need for the valuation of goodwill
1.Change in the profit sharing ratio amongst the existing partners.
2. Admission of a new partner
3.Retirement of a partner
4.Death of a partner
5.Dissolution of a firm involves sale of business as a going concerns.
6. Amalgamation of firms.
Methods of valuation of goodwill
1.Average profit method
Under this method the value of goodwill is calculated
at an agreed number of years purchase of the average profits for the past few years . At the time of the sale of an established business , the purchaser has to pay an extra amount for the value of

27. goodwill . This amount is equal to the profits he is likely to receive for the first few years .The goodwill ,there for , should be calculated by multiplying the past average profits by the number of years during which the anticipated profits are expected to accrue.
Example
The profits of a firm for the last six years are given . The partnership agreement provides the valuation of goodwill at 3 years purchase prince of the average profits of the last 6 years . Calculate the value goodwill . The profits of the firm were :-

28. Calculate the goodwill under average profits method ?
Year
Profits
1992
60000
1993
40000
1994
50000
1995
55000
1996
45000
1997
Calculate the goodwill under average profits method ?
Goodwill = Average profits X no. of years purchased
Average profit = Total profit
No. of years = 6

29. Goodwill= Average profit x No. of years purchased = 50000 X 3 =150000 = 6
50000
====== =
Goodwill= Average profit x No. of years purchased
= X 3 =150000
======

30. 2. Weighted average profit method
Weighted average method is the modified version of
simple average profit method for computing goodwill . Under this method each year profit is multiplied by the respective number of weights , based on the principle of earnings in the immediate past and earnings in the distant past .
Example
The profits of a firm for the last 5 years ending 31st March were as follows :-
Year
Profits
Weight
1999
18000 1
2000
22000 2
2001
30000 3
2002
24000 4
2003 5

31. ------------------------------------------------------
Calculate the value of goodwill on the basis of 3 year purchased of weighted average profit.
Weighted average profit = Total of products for profits
Total of weight
Year
Profits
Weight
Product(profit x weight)
1999
18000 1
2000
22000 2
44000
2001
30000 3
90000
2002
24000 4
96000
2003 5 15
338000
Weighted average profit = Total of products for profits
Total of weight

32. = 15
= 22533
======
Goodwill = Weighted average profit x number of years
= x 3 = 67599
3. Super profit method
Under super profit method , goodwill is calculated at a certain number of years purchase of the super profits of the business .
Super profits means excess of actual profits over normal profit .

33. Example
The average profit of the firm for the last 5 years and the capital invested in The normal profits for the similar line of business is 10% . Calculate the amount of goodwill if it is 2 years purchase of super profit .
Normal profit = 10% of capital invested.
ie ; = Normal profit = x 10
100
= 13000
=====
Average profit = 20000
Super profit = Average profit - normal profit
= – 13000
=7000
====

34. Goodwill = Super profit x Number of years purchased
= 14000
=====
3 .Capitalization method
Under this method the goodwill can be calculated in two ways .
1. By capitalizing the average profits.
2. By capitalizing the super profits.
Capitalizing the average profit
Here , expected future maintainable profits are estimate after providing for reasonable managerial remuneration . These expected future profits are capitalized on the basis of normal rate of return to find out the total value of business .

35. Example
A business has earned average profits of Rs during the last few years and the normal rate of return in similar type of business is 10% . Find out the value of goodwill by capitalization method , given that the assets of the firm amount to Rs and liabilities to Rs
Capital of the firm = – =
======
Average profit = 80000
Normal rate of return = 10
100
80000 x =
======
Goodwill = capitalized value – net asset
= = 10

36. Capitalization of super profit
Super profit are capitalized under this method .
Example
Calculate goodwill if :-
The goodwill of a firm is estimated at three years purchase of the average profits of the last 5 years which are as follows:-
Year
Profits
1999
10000
2000
15000
2001
5000
2002
5000(loss)
2003
8000
2. If the firms total capital employed is Rs and the normal rate of return is 6%, the average profit for the last 5 years is Rs and goodwill is estimated at 3 years purchase of super profits .

37. Remuneration given to partner was Rs.2000 /- .
3.Rama Bothers earn a net profit of Rs with a capital of Rs The normal rate of return in the business is 10%.Use capitalization of super profits method to value of the goodwill
Average profit = ( – 5000)/5
= 33000/5 = 6600
Goodwill = 6600 x 3 = 19800
2. Average profit = 15000
Remuneration to the partners =2000
Average actual profit =15000 – 2000= 13000
Normal profit = x 6/100 = 6000
Super profit = = 7000
Goodwill=70000 x 3 = 21000

38. Normal profit = x 10/100 = 20000
Super profit= Average profit – normal profit
= – = 5000
Goodwill = Super profit x 100/Normal rate of return
=5000 x 100/10 =50000
=====
4.Present value of super profit
Here goodwill is estimated as the present value of the future super profits. This method is based on the principal of determining the present value of future cash flow.
Example
A firm has forecasted it’s future profit for five years as follows .
1st year
2nd year
3rd year
4th year
5th year

39. Calculate value of goodwill.
The total assets of the firms are Rs and outside liabilities are Rs The present value factor at 10% are as follows .
Year 1 2 3 4 5
Present value factor
0.9091
0.8264
0.7513
0.6830
0.6209
Calculate value of goodwill.
Year 1 2 3 4 5
Profit
100000
120000
80000
110000
130000
Normal profit
70000
Super profit
30000
50000
10000
40000
60000
Super profit x pvf
27273
41320
7513
27320
37254

40. Goodwill = =
======
Past adjustments
After closing the accounts of the firm , it may come to light that certain items were omitted or left out by mistake . In such a case necessary adjustment are carried out in the partners capital accounts . Profit and loss adjustment a/c is used for this purpose .
we can also prepare a statement of adjustment to find out the net difference and pass a direct journal entry in the capital accounts.

41. Example
The net profit of X , Y , and Z for the year ended March 31st 2006 was Rs and the same was distributed among them in their agreed ratio of 3:1:1 . It was subsequently discovered that the under mentioned transactions were not recorded in the books:-
Interest on the capital at the rate 5% per annum.
Interest on drawings amounting to X Rs. 700 , Y Rs. 500 and Z Rs.300
Partners salary : X-Rs.1000 ,Y-Rs.1500 per annum
The capital a/c of partners were fixed as X Rs , Y Rs and Z Rs Record the adjustment entry?

42. Adjusted Profit and loss appropriation a/c
Particulars Am
Interest on capital X Y Z
12000
Net profit b/d
60000
Salary X Y
2500
Interest on drawings X-700
Y-500
Z-300
1500
Profit transferred to capital a/c
X-28200
Y-9400
Z-9400
47000
61500
======

43. Statement showing adjustment
Particulars X Y Z
Amount which should have been credited
28200
9400
Amount which should have been credited to the capital a/c
Salary –
Interest on capital
1000
5000
34200
1500
4000
14900
3000
12400
Less, Amount which should have been debited
Interest on drawings -
700
500
300
Amount actually reserved
Amount actually credited
33500
36000
2500
14400
12000
2400
12100
100

44. X’s capital a/cDr.2500
Y a/c
Z a/c

45. CREATED BY :- 1. DIVYA RAJ (Group member)
2. JINCY SUSAN SKARIA ( Group member)
3. JUBY SUSAN JAMES (Group member)
4. JULIE JOSE (Group member)
5. MEENU.H (Group leader )

46. THANK YOU…..