Page 13 - ISCDEBK-12

Partnership Accounts—Fundamentals 1.3

A: Commission as a percentage of the Net Profit before charging such commission
Rate of Commission
= Net Profit before Commission ×
100
B: Commission as a percentage of Net Profit after charging such commission
Rate of Commission
= Net Profit before Commission ×
100 + Rate of Commission
Salary or commission to a partner being an appropriation of profits is transferred to the debit of the Profit
and Loss Appropriation Account and not to the debit of the Profit and Loss Account.
• Interest on Capital: Interest on capital is calculated on time basis, taking into consideration any additional
capital introduced or any existing capital withdrawn.
• Interet on Current Account: Interest on Current Account is allowed (in case of Credit Balance) and
charged (in case of debit balance) on Opening Balance.
It is allowed or charged if instructed in the question.
• Interest on Drawings: If the Partnership Deed so provides, interest on drawings is charged from the
partners. The interest so charged is credited to the Profit and Loss Appropriation Account and debited
to the Partners’ Capital or Current Accounts.
If the date of Drawings is not given, the Interest on total Drawings is calculated for 6 months.
Interest @ 10% without the word ‘per annum’ means interest is calculated without any reference to time period.
• Interest on Loan by Partner to the Firm: If a partner gives a loan to the firm, he is entitled to interest
on such loan at an agreed rate of interest. If there is no agreement as to the rate of interest on loan,
the partner is entitled to interest on loan @ 6% p.a. Interest on loan by partner is a ‘charge’ against the
profit and is credited to his/her Loan Account.
• Interest on Loan by the Firm to a Partner: Firm is entitled to receive interest on loan given to a
partner. However, the firm will charge interest on loan advanced to a partner only, if it is provided in
the Partnership Deed or is agreed to charge interest along with the rate of interest among the partners.
It is a gain to the firm and is credited to Profit and Loss A/c.
Methods of Maintaining Capital Accounts of Partners
The Partners’ Capital Accounts may be maintained according to Fixed Capital Method or Fluctuating Capital Method.
Fixed Capital Method: Under this method, the capital of partners remains unchanged except under special
circumstances. In case of the fixed capital, two accounts are maintained for each partner, viz., (i) Fixed
Capital Account and (ii) Current Account. All adjustments regarding drawings, interest on drawings, salary,
interest on capital, commission and share of profit or loss are recorded in Current Account. The Fixed Capital
Account cannot have a negative balance.
Fluctuating Capital Method: Capital Accounts are called fluctuating when the balances of Capital Accounts
change with each transaction. All adjustments relating to interest on capital, drawings, salary and profit
are recorded in the Capital Accounts. Under this method, only one account is opened for each partner,
i.e., Capital Account.
In the absence of any instruction, Partners’ Capital Accounts are prepared following Fluctuating
Capital Method.
• Guarantee of Minimum Profit to a Partner: A partner may be guaranteed a minimum amount of
his share in profits. Guarantee may be provided by one or some or all of the partners in an existing
profit-sharing ratio or in some other agreed ratio. If in any year, the actual share of profit is less than
the guaranteed amount, the deficiency is borne by the guaranteeing partners in their agreed ratio.
• Past Adjustments: Sometimes after closing the accounts of a partnership firm for a certain period,
certain omissions or errors may be discovered. For example, interest on capital or interest on drawings
may have been omitted or interest has been calculated at a different rate than agreed, or profits may have
been distributed in a different manner than agreed among the partners. Corrections of these errors are
generally done through the Partners’ Capital Accounts by means of a single adjusting Journal entry. No
attempt is made to reopen the accounts of the previous accounting period(s). Such adjustments are called
past adjustments as these are related to past periods.