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WB HS Accountancy study materials
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WB HS Accountancy: Accounting for Partnership Firms: Fundamentals

WB HS Accountancy · Work through your exam, one topic at a time.

All guide sections

Accounting for Partnership Firms: Fundamentals

What the exam tests

This domain tests whether you can apply the partnership deed before default rules. When the deed is silent, the Indian Partnership Act, 1932 supplies: profits and losses shared equally; no interest on capital or drawings; no salary or commission; interest on a partner's loan at 6% p.a.; and indemnity for payments made in the ordinary course.

Core rules

  • Profit-sharing ratio (PSR) may be a ratio, fractions, or percentages. Convert to a common denominator before distributing divisible profit.
  • Drawings are debited to the partner's capital or current account. Interest on drawings is income to the firm and is credited to the Profit and Loss Appropriation Account; it is not an expense in the P&L.
  • Interest on capital is an appropriation, not a charge, unless the deed says otherwise. It is allowed only out of profits.
  • Salary or commission to a partner is also an appropriation. Commission may be a percentage of net profit before or after charging such commission; read the wording.
  • Fixed-capital method: capital account stays at original capital; current account absorbs drawings, interest, salary, and share of profit. Fluctuating method: all adjustments go through capital account.

Worked example

A and B share 3:2. Capitals: A ₹80,000, B ₹60,000. Deed: interest on capital 10% p.a.; B gets salary ₹12,000 p.a.; interest on drawings: A ₹600, B ₹400. Profit before appropriations ₹70,000. Appropriation: interest on capital A ₹8,000, B ₹6,000; salary B ₹12,000. Add interest on drawings ₹1,000. Total appropriation = 8,000 + 6,000 + 12,000 − 1,000 = ₹25,000. Divisible profit = 70,000 − 25,000 = ₹45,000. A gets 3/5 = ₹27,000; B gets 2/5 = ₹18,000. A total = 8,000 − 600 + 27,000 = ₹34,400; B total = 6,000 + 12,000 − 400 + 18,000 = ₹35,600. Check: 34,400 + 35,600 = ₹70,000.

Traps

Charging interest on capital when there is a loss; forgetting to deduct interest on drawings before splitting profit; mixing fixed and fluctuating capital methods; and using the old ratio after a change in PSR without a past-adjustment entry.