Accounting for Partnership Firms: Fundamentals
What the exam tests
Accounting for Partnership Firms: Fundamentals tests whether you can apply a partnership deed, maintain partners' capital and current accounts, and distribute profit through the Profit and Loss Appropriation Account. Core rules: without a deed, profits and losses are shared equally, no interest on capital or drawings is allowed, and no salary is paid; interest on a partner's loan is 6% p.a. even without a deed. Interest on capital is charged only out of profits unless the deed says otherwise. Interest on drawings is debited to the partner's account and credited to the Appropriation Account.
Worked example
A and B have capitals Rs. 3,00,000 and Rs. 2,00,000, share profits 3:2, and allow 10% interest on capital. B is entitled to salary Rs. 12,000. Profit before appropriations is Rs. 90,000. Interest is Rs. 30,000 + Rs. 20,000 = Rs. 50,000. Add salary Rs. 12,000; divisible profit is Rs. 28,000. A gets Rs. 16,800 and B Rs. 11,200. The Appropriation Account debits interest, salary and share of profit; it is not a charge against gross profit in the trading account.
Traps
Do not credit interest on capital when there is a loss unless the deed permits it. Do not treat partner salary as an expense in the Profit and Loss Account. Keep capital and current accounts distinct under the fixed-capital method. Interest on drawings is income to the firm and is credited to the Appropriation Account, not to the partner's capital directly.