Page 35 - DEBKVOL-1

Chapter 2 Accounting for Partnership Firms—Fundamentals 2.7
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Dr. PARTNERS’ CAPITAL ACCOUNTS Cr.
Particulars Simmi (`) Sonu (`) Particulars Simmi (`) Sonu (`)

To Balance c/d 30,000 60,000 By Balance b/d 30,000 60,000
30,000 60,000 30,000 60,000

Dr. PARTNERS’ CURRENT ACCOUNTS Cr.
Particulars Simmi (`) Sonu (`) Particulars Simmi (`) Sonu (`)
To Drawings A/c (Bank A/c) 20,000 15,000 By Balance b/d 30,000 15,000
To Interest on Drawings A/c 600 450 By Partners’ Salaries A/c 12,000 9,000
To Balance c/d 1,17,063 42,937 By Interest on Capital A/c 1,500 3,000
By Profit and Loss
Appropriation A/c (Profit) 94,163 31,387
1,37,663 58,387 1,37,663 58,387
Illustration 2 (Partnership Deed does not Exist).

Ram, Rahim and Karim are partners in a firm. They do not have a Partnership Deed. In the
matter of distribution of profits they have put forward the following claims:

(i) Ram, who has contributed more capital than Rahim and Karim, demands interest on the capital
@ 12% p.a. and the share of profit in the capital ratio. But Rahim and Karim do not accept it.
(ii) Rahim has devoted full time to manage the business and demands salary of ` 5,000 per
month. But Ram and Karim do not agree with him.

(iii) Karim demands interest on the loan of ` 2,00,000 advanced by him to the firm @ 10% p.a.
How will the disputes be settled? Prepare Profit and Loss Appropriation Account after

transferring 10% of the divisible profit to Reserve. Net profit before taking into account any of
the above claims is ` 4,50,000 at the end of the first year of their business.
Solution:
Since they do not have a Partnership Deed, following provisions of the Indian Partnership Act,
1932 shall apply for settling the dispute:

(i) Interest on capital is not payable to any partner. Therefore, Ram is not entitled to interest
on capital. The profit after transferring 10% of divisible profit to reserve shall be distributed
among partners equally.
(ii) Remuneration is not payable to any partner. Therefore, Rahim is not entitled to any salary.

(iii) Interest on loan by a partner is payable @ 6% p.a. Therefore, Karim is to get ` 12,000
(i.e., interest @ 6% p.a. on ` 2,00,000). Interest on loan is debited to Profit and Loss Account
and not to Profit and Loss Appropriation Account because interest on loan is a charge on
profit. Thus, it should be paid whether there is profit or not.