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Chapter Analysis
Intermediate46 pages • EnglishQuick Summary
This chapter discusses the fundamental concepts of accounting for partnership firms. It covers definitions, essential features, and provisions of the Indian Partnership Act relevant to partnership accounts, such as profit sharing, interest on capital, and partners' salaries. The chapter also explains the methods for maintaining capital accounts and the calculation of interests and guarantees in profit sharing among partners.
Key Topics
- •Definition and features of partnership
- •Provisions of the Indian Partnership Act 1932
- •Methods for maintaining partners’ capital accounts
- •Distribution of profits and losses among partners
- •Interest on capital and drawings calculations
- •Guarantees in profit sharing among partners
- •Accounting for past adjustments in partners’ capital accounts
Learning Objectives
- ✓Define partnership and list its essential features.
- ✓Identify and apply provisions of the Indian Partnership Act relevant to partnership accounts.
- ✓Prepare partners’ capital accounts under fixed and fluctuating capital methods.
- ✓Explain distribution profit or loss and prepare the Profit and Loss Appropriation Account.
- ✓Calculate interest on capital and drawings in various situations.
- ✓Make necessary adjustments to rectify past errors in partners' capital accounts.
Questions in Chapter
What is meant by partnership? Explain its chief characteristics? Explain.
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Discuss the main provisions of the Indian Partnership Act 1932 that are relevant to partnership accounts if there is no partnership deed.
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Explain why it is considered better to make a partnership agreement in writing.
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Illustrate how interest on drawings will be calculated under various situations.
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How will you deal with a change in profit sharing ratio among existing partners? Take imaginary figures to illustrate your answer.
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Triphati and Chauhan are partners in a firm sharing profits and losses in the ratio of 3:2. Their capitals were Rs.60,000 and Rs.40,000 as on April 01, 2019. During the year they earned a profit of Rs. 30,000. According to the partnership deed both the partners are entitled to Rs. 1,000 per month as salary and 5% p.a. interest on their capital. They are also to be charged an interest of 5% p.a. on their drawings, irrespective of the period, which is Rs. 12,000 for Tripathi, Rs. 8,000 for Chauhan. Prepare Partner’s capital/current accounts when capitals are fixed.
Answer: Tripathi’s Current account Balance Rs. 3,600, Chauhan’s Current account Balance Rs.6,400, Tripathi’s capital Rs. 60,000, Chauhan capital Rs. 40,000
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Additional Practice Questions
How would you prepare the Profit and Loss Appropriation Account for a partnership firm?
mediumAnswer: Prepare an account to distribute net profit among partners according to the partnership deed, including adjustments for interest on capital and drawings.
If a partnership does not have a deed, what interest rates apply to partners’ capital and loans?
easyAnswer: Without a deed, no interest is allowed on capital, and interest on partners' loans is charged at 6% p.a. as per the Indian Partnership Act.
What are the advantages of maintaining a written partnership deed?
easyAnswer: A written partnership deed avoids disputes by clearly detailing each partner's roles, profit shares, and resolution methods for disputes.
Calculate the impact of a guaranteed minimum profit on profit distribution between partners.
hardAnswer: A partner guaranteed a minimum profit will have deficit made good by other partners, typically through agreed ratios.
Explain the procedure to calculate interest on drawings for differing withdrawal schedules.
mediumAnswer: Interest on drawings is calculated using either product method or average period method, considering amount and timing of withdrawals.