Partnership and Other Advanced Accounting Topics
This domain covers partnership accounts and the introductory company accounts portion - share capital, issue and forfeiture. Partnership questions turn on the deed: where it is silent, the Partnership Act, 1932 applies - equal profits, no interest on capital or drawings, no salary, and 6% per annum interest on a partner's loan.
Core rules
- Fixed versus fluctuating capital - under the fixed method, drawings, interest, salary and share of profit pass through the Current Account.
- Goodwill - average profit × years of purchase; super profit = average profit − normal profit on capital employed, × years of purchase.
- Admission - sacrificing ratio = old ratio − new ratio; revalue assets and liabilities; cash premium is credited to sacrificing partners in the sacrificing ratio.
- Retirement or death - gaining ratio = new ratio − old ratio; the outgoing partner is settled through his capital account, with share of profit to date on time or turnover basis.
- Dissolution - Garner v Murray: realisation loss is borne by solvent partners in the ratio of capital, not the profit-sharing ratio.
- Shares - application, allotment and calls; premium goes to Securities Premium; on forfeiture, unpaid calls plus premium already credited are debited to Share Forfeiture, never to premium.
Worked example
A and B share profits 3:2. C is admitted for 1/5, with the new ratio A 1/2, B 3/10, C 1/5. Sacrifice: A = 3/5 − 1/2 = 1/10; B = 2/5 − 3/10 = 1/10, i.e. 1:1. Goodwill is valued at ₹60,000, so C brings ₹12,000 for his 1/5 share; ₹6,000 is credited to A's capital and ₹6,000 to B's.
Traps
Crediting goodwill raised in the books to the new partner instead of the old partners in the old ratio; charging interest on capital in a loss year without a deed allowing it; treating a partner's loan as capital; and recording a revaluation profit without adjusting partners' capital accounts in the old ratio.