Accounting for Partnership Firms
What the exam tests
Partnership questions in PSEB Senior Secondary Accountancy start with the deed and then test whether you can separate appropriations from charges. Expect short definition questions and a 4–6 mark Profit and Loss Appropriation or capital account problem.
Core rules
- The Indian Partnership Act, 1932 governs a firm that has no separate legal entity. Without a deed: profits are shared equally, there is no interest on capital or drawings and no salary, and a partner's loan earns 6% p.a.
- Interest on capital, salary and commission are appropriations of profit, not charges. Unless the deed makes interest a charge, it cannot exceed the profit available for appropriation.
- Interest on a partner's loan is a charge, so it is debited to Profit and Loss even when the firm makes a loss.
- Interest on drawings is charged only if the deed provides it; use the drawing date or an average period, such as 6.5 months for equal monthly drawings made at the beginning of each month.
- Under the fixed capital method, all appropriations and drawings pass through the partners' current accounts.
Worked example
A and B have capitals of ₹5,00,000 and ₹3,00,000, and the deed allows 10% interest. Profit before interest is ₹70,000. Interest due is ₹80,000, but because it is an appropriation only ₹70,000 is allowed, shared in the capital ratio 5:3: A ₹43,750 and B ₹26,250. Crediting ₹80,000 would turn a real profit of ₹70,000 into an artificial loss of ₹10,000. If the deed made interest a charge, both partners would still receive ₹80,000 and the firm would report a loss of ₹10,000.
Traps
- Treating interest on capital as a charge.
- Computing interest on closing capital instead of opening capital plus additions.
- Charging full-year interest on drawings made monthly.
- Debiting a partner's salary to Profit and Loss instead of the Appropriation account.