Accounts Class 12th (Ch.1 Accounting for Partnership Firms and Fundamentals) Part 2

Accounts (Ch.1 Accounting for Partnership Firms and Fundamentals) Part 2

Drawing - Drawing refers to that amount which is withdrawn by the partners from the business for their personal use.

Drawing may be out of capital or against profit.

Drawing out of capital - It means the withdrawal the part of capital.

Drawing against Profit - It means withdrawal the amount of profit earned during the year in a partnership firm.

*Difference b/w Drawing against Profit and Drawing out of Capital.

>Drawing against Profit
1.It is debited to Drawing A/C
For Ex.    Drawing A/C               Dr.

   To Cash/Purchase

                                     
2.It is the part of expected profit.
3.It does not effect capital.
4.It is considered for calculating interest on drawig.
5.It is not the considered for calculating interest on capital.

>Drawing out of capital
1.It is debited to Capital A/C

 For Ex.  Partner's Capital A/C             Dr.

  To Cash/Bank/Asset A/C

2.It is the part of capital.
3.It effect the capital.

4.It is not considered for calculating Interest on Drawing.

5.It is considered for calculating Interest on Capital.

Interest on Partner's Drawing - Interest is charged on drawing made by partners against profit if provided in Partnership Deed.

It is not charged on the Drawing out of Capital.

It is the income to the firms point of view.

                                             JOURNAL ENTRIES

1.Due the Interest on Drawing :-
 Partner's Capital/Current A/C       Dr.

      To Interest on Drawing A/C

2.On closer the Interest on Drawing A/C  :-
Interest on Drawing A/C          Dr.

    To Profit & Loss Appr. A/C

Drawing by partner may be categories as :- 

1.Regular Drawing - It refers to drawing of  same amount at regular interval.

Conditions of Regular Drawing
a)The amount of drawing is uniform.
b)The time gap b/w the two consecutive drawing is also uniform.

2.Irregular Drawing - It refers to the same amount or different amount at iregular interval.

Methods of calculating rate of interest on drawing are:-

1.SIMPLE Method -Under this method interest on drawing is calculated for the period the amount of drawing has been utilized.
The interest on drawing is calculated with the of each single drawing.

2.Product Method - Under this method the amount of drawing is multiply by the no. of months or no. of days has been used.
The product so obtain is total and interest on drawing is calculated there on for 1 month of the time period is taken in month or for 1 day if the time period is is taken is days.

3.Average Period Method - This method is applied when there is regular drawing

Special Note:-

1. If the date of withdrawal is not given than interest on drawing is calculated on drawing made during in the year for 6 months on average basis.

2.If rate of interest of drawing is given without the word per annum (P.a.) that time of interest on drawing is calculating without considering the time fact or interest.

Salary to Partner

  

1.If a person is an active partner or devoting most of the time in business that it may be a allowed the salary to that partner. If provided in the terms and conditions of partnership deed.

2.It is an appropriation of profit. It means it will be provided when only there is profit.

3.Accounting Treatment -
a) Due the salary to partner.

  Salary to Partner's A/C                       Dr.

      To Partner's Capital/Current A/C 

                                           
b)On closer the salary to Partner's A/C
   Profit&Loss Appr. A/C                   Dr.
       To Salary to Partner's A/C

Commission to Partner

1.The partner of a firm is often allowed commission as percentage of net profit so that he can perform his duty with full dedication.

2.It is allow only when partnership deed allows it.

3.It is an appropriation profit.

4.Journal Entries -
a)Due the commission to partner's
  Comm. to Partner;s A/c                             Dr.
      To Partners Capital/Current A/c
b)On closer the commission to Partner's Account
     Profit&Loss Appr. A/c                            Dr.
        To Comm. to Partner's A/c

 5. Ways on calculating the Commission to partner
                                                                                                     

Interest on Partners Loan =

 A) Rate of Interest -

1.) As Per Partnership Deed  = If a person has given loan to the firm , he is entitled to receive Int. on his loan at agreed rate of Int.

2.) Absence of Partnership Deed = In the absence of partner deed a partner is entitled to receive Int. @ 6% P.a.

B) Nature of Int. of partner Loan = Int. on partner loan is a charged against profit it means it will be provided even the firm will earn Profit or Loss .

C) Accounting Treatment = It is Debited to P&L A/C and Credited to Partner Loan A/c.

D) Journal Entries =
a) Due the Int. on Partners loan

    Int. on Partners Loan A/C                   Dr.

       To Partner Loan A/C

          

b) On closing the Int. on Partners Loan  A/C                                    

     P&L  A/C                                    Dr.

        To Int. on partners loan A/c 

Rent to Partner on his /her  Premises

1) Rent to Partner is an expense incurred for using the Property of the partner .

2.) Likewise Int. on Partner Loan , it is also a Charge Against Profit . It means it will be provided              even there is Profit or Loss .

3.) Accounting Treatment = It is Debited to Profit & Loss A/C and Credited to Rent payable A/c.

4.) Journal Entries -
a) Due the Rent to Partner 

     Rent to Partner A/C Dr.

        To Rent Payable A/C

b) On Closing the Rent to Partner A/C

     P&L A/C                                  Dr.

        To Rent to Partner A/C   

Interest on Loan taken by a Partner from the Firm

1.) The Indian Partnership Act 1932 does not provided for charging Int. on loan taken by a partner            from the Firm . Hence the Int. on loan is Charged only when there is any Provision given in the          Partnership Deed regarding this . 

2.) It is the Income for the firm .

3.) It is Credited to Profit & Loss A/c and Debited to Partners Capital A/c .

4.) Journal Entries =
a) Due the Int. on Partner loan taken from the firm 

    Partners Capital/Current A/c                 Dr.

       To Int. on Loan A/c

                                 

 b) On Closing the Int. on loan A/c 

      Int. on Loan A/c                                Dr.

         To P&L A/C 

Partner's Capital A/c

That account which is related to partner is called Partners Capital A/c.

Methods of Partner;s Capital A/c are --

  1.) Fixed Capital Method 

         a) Partner's Capital A/c

         b) Partner's Current A/c

2.) Fluctuate Capital Method 

        a) Partner's Capital A/c

Special Note =

If question is silent about the method of Partner's Capital A/c that time Fluctuate Capital Method will be applied .

A) Partner's Capital A/c 

   1) This A/c always show the Credit balance .

   2) In this A/c only the Capital of the Partners will be shown .

   3) Its Op. Balance is always equal to Cl. Balance .

   

B) Partner's Current A/c 

   1) This A/c is prepared only when the Partner's  Capital is Fixed.

   2) The Balance of the A/c can be either Cr. or Dr. . If no information has been given that time it               will be assumed Cr. 

   3) Except the capital of the partner all the transaction related to be recorded to this A/c .

         For Example - Int. on Capital, Salary,Comm, Int. on Drawing etc.

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