Accounting for Partnership Firms - Fundamentals
Accounting for Partnership Firms - Fundamentals tests the deed, the P&L Appropriation Account, fixed versus fluctuating capital, and goodwill valuation. The central idea is that partnership profit is not simply divided in the profit-sharing ratio: appropriations are charged first.
P&L Appropriation Account
Debit: interest on capital, partner's salary/commission, interest on partner's loan, transfer to reserve. Credit: interest on drawings, net profit. The balance is divisible profit, shared in the agreed ratio. If the deed is silent: no interest on capital or drawings, no salary; interest on loan is 6% p.a.; profits shared equally.
Capital accounts
Under the fixed capital method, capital accounts remain unchanged and a Current Account records drawings, interest, salary and share of profit. Under the fluctuating method, all these are recorded in the Capital Account. Drawings are always debited; interest on drawings is credited to the partner and debited to the partner's current/capital account.
Goodwill
Average profit method: average profits × number of years' purchase. Super profit method: (average profit - normal profit) × years' purchase, where normal profit = capital employed × normal rate. Capitalisation method compares capitalised average/super profit with actual capital employed.
Worked example
Profit before appropriations ₹1,50,000. Salary to A ₹24,000; interest on capital A ₹15,000, B ₹10,000; interest on drawings A ₹1,000, B ₹1,500. Divisible profit = 1,50,000 - 24,000 - 15,000 - 10,000 + 1,000 + 1,500 = ₹1,03,500. With 3:2, A gets ₹62,100 and B ₹41,400. Appropriations are expenses of the firm before division, which is why they are deducted.
Traps
Commission "after charging such commission" uses rate/(100 + rate) × profit. Guaranteed profit deficiency is borne by the guaranteeing partner. Past adjustments go through capital/current accounts, not P&L. Do not charge interest on capital when there is a loss unless the deed permits.