Accounting for Partnership Firms: Fundamentals
Partnership fundamentals covers the deed, the profit and loss appropriation account, capital and current accounts, interest on capital and drawings, salary and commission, and guaranteed profits. The examiner checks whether an item is a charge against profit or an appropriation.
Core rules
- Profit sharing ratio comes from the deed; without a deed, profits are shared equally.
- Interest on capital, partner's salary and commission are appropriations of profit, not business expenses.
- Interest on drawings is income for the firm and is debited to the partner.
- Under the fixed capital method, capital accounts remain unchanged and current accounts record interest, salary, share of profit and drawings.
- A guaranteed minimum profit can be borne by the firm or by a partner; the deficiency is adjusted through capital accounts.
Worked example
A and B have capitals of ₹2,00,000 and ₹1,00,000 and share profits 3:2. Interest on capital is 6%: ₹12,000 and ₹6,000. Profit before interest is ₹80,000. Divisible profit = 80,000 − 18,000 = ₹62,000, shared ₹37,200 and ₹24,800. A is credited ₹49,200 and B ₹30,800 in total.
Traps
- Treating interest on capital as a business expense.
- Charging interest on drawings to the firm instead of the partner.
- Calculating commission on profit before charging the commission when the deed says after.
- Ignoring the deed and sharing equally.
- Failing to adjust past errors through capital accounts.