Partnership Accounts
What this domain tests
Partnership questions cover the profit and loss appropriation account, interest on capital and drawings, partner's salary, goodwill, admission, retirement and death of a partner, and the basic rules of the Indian Partnership Act, 1932.
Core rules
- Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all (Indian Partnership Act, 1932).
- In the absence of a deed: no interest on capital, no salary, profits shared equally, no interest on drawings, and interest on a partner's loan at 6% per annum - the only rate fixed by the Act.
- Profit & Loss Appropriation Account records interest on capital, partner's salary or commission, interest on drawings and the division of the remaining profit.
- Fixed capital method: separate current accounts for drawings, interest and share of profit. Fluctuating method: all adjustments pass through the capital accounts.
- Admission: the new partner brings capital and goodwill; sacrifice ratio = old share − new share; revaluation gains and reserves belong to the old partners.
- Goodwill may be valued by average profit, super profit or capitalisation of profits.
Worked example
X and Y share profits 3:2 and admit Z for 1/5. The remaining 4/5 is divided in the old ratio: X = 4/5 × 3/5 = 12/25; Y = 4/5 × 2/5 = 8/25; Z = 5/25. New ratio 12:8:5. Sacrifice ratio = X 3/25 and Y 2/25, so the goodwill brought in by Z is credited to X and Y in 3:2. Reasoning: the new partner's share must come out of the existing partners' shares; unless a different agreement exists, sacrifice follows the old ratio.
Traps
Creating the new partner's share out of profits rather than from existing shares; crediting goodwill to all partners including the new one; ignoring 6% interest on a partner's loan; dividing profits equally when the deed specifies a ratio.