Accountancy Volume 2 (Std12 - English Medium)

2006·0.27 MB·English

A C C O U N T A N C Y
HIGHER SECONDARY – SECOND YEAR
VOLUME II
Untouchability is a sin
Untouchability is a crime
Untouchability is inhuman
TAMILNADU
TEXTBOOK CORPORATION
College Road, Chennai - 600 006.
©Government of Tamilnadu
First Edition - 2005
Reprint - 2006
PREFACE
CHAIR PERSON
The book on Accountancy has been written strictly in accordance
Dr. (Mrs) R. AMUTHA
with the new syllabus framed by the Directorate of School Education,
Reader in Commerce
Government of Tamil Nadu.
Justice Basheer Ahmed Sayeed College for Women
Chennai - 600 018.
As curriculum renewal is a continuous process, Accountancy
Curriculum has been improved from time to time in accordance with
REVIEWERS the changing needs of the society. The present effort of reframing and
updating the curriculum in Accountancy at the Higher Secondary level
Dr. R. MATHIALAGAN Dr. K. GOVINDARAJAN
is an exercise based on the feed back.
Reader in Commerce Reader in Commerce
Government Arts College (Men) Annamalai University
The text book for Higher Secondary - First year deals with the
Nandanam, Chennai - 600035. Annamalai Nagar - 608002.
basic framework of accounting in all its aspects. The next logical step
is to utilise this subject matter for the maintenance of records of business
AUTHORS enterprises of which Partnership firms and Companies are by far the
most important.
Thiru S. S. KUMARAN Thiru N. MOORTHY
Co-ordinator, Planning Unit P.G. Asst. (Special Grade) The significance of Partnership and Companies in the sphere of
(Budget & Accounts) Govt. Higher Secondary School business as also in the field of accounting can in no way be over-stressed,
Education for All Project Nayakanpettai - 631601 specially when the latter has become the primary vehicle of economic
College Road, Chennai-600006. Kancheepuram District. and industrial growth. Therefore, all the facets of Partnership and
Company accounts, according to the syllabus of the second year , has
Mrs. N. RAMA
been presented in four chapters , Volume II of the present book.
P.G. Assistant
Lady Andal Venkatasubba Rao
Each chapter starts with a simple and lucid discussion of the topic
Matriculation Hr. Sec. School
followed by properly arranged worked out illustrations and ends with
Chetpet, Chennai - 600031.
theoretical questions and practical exercises.
Price : Rs. Students are strongly advised to go through the “Reference Books”
as Questions for examinations need not be restricted to the
This book has been prepared by the Directorate of School Education
exercises alone.
on behalf of the Government of Tamilnadu.
R.Amutha
This book has been printed on 60 G.S.M. paper
Chairperson
Printed by Offset at :
iii
Books for further reference:
CONTENTS
1. Monilal Das – Principles of Accounts for ISC - XII. Vol. II.
2. Dr.R.K.Sharma, Dr.R.S.Popli - Self Tutor, Accountancy.
VOLUME - II 3. T.S.Grewal – Double Entry Book Keeping
4. S.Kr.Paul – Accountancy Vol. II.
5. A.K. Majumdar, R.G.Saxena – National Council of Educational
Chapter Page No.
Research and Training – Accountancy - Text Book for Class XII
6. G.C.Maheshwari, S.C.Jain, S.S.Sehrawat – National Council of
6. Partnership Accounts - Basic Concepts 1 Educational Research and Training – Accountancy - Text Book
for Class XII
7. R.L.Gupta, Radha Swamy – Advance Accountancy, Vol. II.
7. Partnership Accounts - Admission 43
8. Tamil Nadu Textbook Corporation – Accountancy Higher
Secondary Second Year.
8. Partnership Accounts - Retirement 92
9. M.C.Shukla – Advanced Accountancy.
10. N.Vinayakam, V.Charumati – Fnancial Accounting.
9. Company Accounts 129
11. Jain and Narang – Advanced Accountancy.
12. Dr.S.N.Maheswari – Advanced Accountancy.
13. R.L. Gupta, V.K.Gupta – Financial Accounting.
14. P.C.Tulsian – Financial Accounts.
15. A.K. Chattopadhyay & A.Mukhopadhyay – Practical Guide to
Accountancy.
16. R.S.N. Pillay & Bagavathi – Advance Accountancy.
17. B.D. Agarwal – Financial Accounting Advance - Vol. I.
iv
Chapter - 6
PARTNERSHIP ACCOUNTS
- BASIC CONCEPTS
Learning Objectives
After studying this Chapter, you will be able to:
(cid:216) understand the meaning and the features of partnership.
(cid:216) prepare the capital accounts of partners under fixed and
fluctuating capital methods.
(cid:216) understand the distribution of profits among the partners.
(cid:216) prepare the Profit and Loss appropriation account.
(cid:216) know the meaning, nature and methods of valuation of
goodwill.
A business may be organised in the form of a sole proprietorship,
a partnership firm or a company. The sole proprietorship has its limitations
such as limited capital, limited managerial ability and limited risk - bearing
capacity. Hence, when a business expands, it needs more capital and
involves more risk. Then two or more persons join hands to run it.
They agree to share the capital, the management, the risk and the Profit
iv 1
or Loss of the business. Such mutual relationship based on agreement following provisions of the Indian Partnership Act, 1932 shall apply for
among these persons is termed as “Partnership”. The persons who accounting purposes.
have entered into partnership are individually known as ‘Partners’ and
1. Interest on Capital : No interest is allowed on Capitals of the
collectively as ‘Firm’.
Partners. If as per the partnership deed, interest is allowed, it will
6.1 Definition: be paid only when there is profit. If loss, no interest will be paid.
The Indian Partnership Act 1932, Section 4, defines partnership 2. Interest on Drawings : No interest will be charged on drawings
as “the relation between persons who have agreed to share the profits made by the partners.
of a business carried on by all or any of them acting for all”.
3. Salary/ Commission to partner : No partner is entitled to salary/
6.1.1 Features: commission from the firm, unless the partnership deed provides
for it.
Based on the above definition, the essential features of partnership
are as follows. 4. Interest on loan : If any partner, apart from his share capital,
1. An association of two or more persons: To form a partnership, advances money to the firm as loan, he is entitled to interest on
there must be atleast two persons. Regarding the maximum number such amount at the rate of six percent per annum.
of persons, it is limited to 10 in banking business and 20 in other
5. Profit sharing ratio : The partners shall share the profits of the
business.
firm equally irrespective of their capital contribution.
2. Agreement between the Partners: The relationship among the
6.2 Partners’ Capital Accounts:
partners is established by an agreement. Such agreement forms
the basis of their mutual relationship.
In partnership firm, the transactions relating to partners are
3. Profit sharing: The agreement between the partners must be to recorded in their respective capital accounts. Normally, each partners
share the profits or losses of the business. capital account is prepared separately. There are two methods by which
4. Lawful business: The agreement should be for carrying on some the capital accounts of partners can be maintained. These are
legal business to make profit.
l Fluctuating Capital method
5. Business carried on by all or any of them acting for all:
l Fixed Capital method.
Partnership business must be carried on by all or any of them
acting for all. Mutual and implied agency is the essence of 6.2.1 Fluctuating Capital method:
partnership.
Under the fluctuating capital method, only one account, viz., the
capital account for each partner, is maintained. It records all adjustments
6.1.2 Accounting rules applicable in the absence of
relating to drawings, interest on capital, interest on drawings, salary
Partnership deed:
and share of profit or loss in the capital account itself. As a result, the
Normally, a partnership deed covers all matters relating to mutual
balance in the capital accounts keep on fluctuating. In the absence of
relationship among the partners. But, in the absence of agreement, the
2 3
any instruction, the capital accounts of the partners should be prepared Current Accounts
under this method. Dr. Cr.
X Y Z X Y Z
Format: (Fluctuating Capital Method) Particulars Particulars
Rs. Rs. Rs. Rs. Rs. Rs.
Capital Accounts
To Drawings By Balance b/d*
Dr. Cr. To Interest on By Interest on capital
X Y Z X Y Z drawings By Commission
Particulars Particulars To Balance c/d* By Salary
Rs. Rs. Rs. Rs. Rs. Rs.
By Share of Profit
To Drawings By Balance b/d
To Interest on By Interest on capital
drawings By Commission
By Balance b/d*
To Balance c/d By Salary
* The balance may be on the opposite side also.
By Share of Profit
6.2.3 Distinction between Fixed Capital Method and
Fluctuating Capital Method
By Balance b/d
The main differences between the two methods of maintaining
6.2.2 Fixed Capital Method: capital accounts are as follows:-
Under this method, two accounts are maintained for each partner
Basis of Fixed Capital Fluctuating Capital
viz., (i) Capital account and (ii) Current account. The capital account
distinction Method Method
will continue to show the same balance from year to year unless some
1. Change in The capital normally remains The capital is changing
amount of capital is introduced or withdrawn. In the current account,
capital unchanged except under special from period to period.
the transactions relating to drawings, interest on capital, interest on circumstances.
drawings, salary, share of profit or loss etc., are recorded. Hence, the
balance in the current accounts change every year. 2. Number of Each partner has two accounts, Each partner has only one
Accounts namely, Captial Account and account i.e., Capital
Format : (Fixed Capital Method)
Current Account. Account.
Capital Accounts
Capital Account shows always a Capital Account shows
Dr. Cr. 3. Balance
credit balance. always a credit balance.
X Y Z X Y Z
Current account may sometimes
Particulars Particulars
Rs. Rs. Rs. Rs. Rs. Rs. show debit or credit balance.
By Balance b/d 4. Adjust- All adjustments relating to partners All adjustments relating to
To Balance c/d ments are recorded in the Current partners are recorded
Accounts. directly in the Capital
By Balance b/d Accounts itself.
4 5
6.2.4 Preparation of Capital Accounts: Dr Current Accounts Cr
Anbu Balu Anbu Balu
Illustration : 1
Date Particulars Date Particulars
Rs. Rs. Rs. Rs.
Show how the following items will appear in the capital accounts
2005 2005
of the partners, Anbu and Balu.
Mar 31 To Drawings 12,000 9,000 Mar By Interest on 5,400 4,200
When their capitals are a) fixed and b) fluctuating. ’’ To Interest on 31 capital
drawings 360 270 ’’ By Partners’
Anbu Balu
’’ To Balance salary 12,000 ---
Rs. Rs. c/d 11,040 4,930 ’’ By Commission --- 6,000
Capital on 1.4.2004 90,000 70,000 ’’ By Profit &
Loss A/c 6,000 4,000
Drawings during 2004 - 2005 12,000 9,000
23,400 14,200 23,400 14,200
Interest on drawings 360 270
2005
Interest on capital 5,400 4,200 Apr 1 By Balance
b/d 11,040 4,930
Partner’s salary 12,000 ---
Commission --- 6,000 b) When capital accounts are fluctuating:
Share of profit for 2004-05 6,000 4,000
Dr Capital Accounts Cr
Solution: Anbu Balu Anbu Balu
Date Particulars Date Particulars
Rs. Rs. Rs. Rs.
a) When capital accounts are fixed:
2005 2004
Capital Accounts
Mar 31 To Drawings 12,000 9,000 Apr 1 By Balance
Dr. Cr. ’’ To Interest 2005 b/d 90,000 70,000
on drawings 360 270 Mar By Interest on
Anbu Balu Anbu Balu
Date Particulars Date Particulars ’’ To Balance 31 capital 5,400 4,200
Rs. Rs. Rs. Rs. c/d 1,01,040 74,930 ’’ By Salary 12,000 ---
’’ By Commission --- 6,000
2005 2004
’’ By Profit &
Mar 31 To Balance Apr 1 By Balance
Loss A/c 6,000 4,000
c/d 90,000 70,000 b/d 90,000 70,000
1,13,400 84,200 2005 1,13,400 84,200
90,000 70,000 90,000 70,000 Apr 1 By Balance b/d1,01,040 74,930
Illustration : 2
2005
Apr 1 By Balance Write up the capital and current accounts of the partners, Kala
b/d 90,000 70,000 and Mala from the following and show how these will appear in the
Balance Sheet.
6 7
Kala Mala Balance Sheet of Kala and Mala as on 31.12.2004
Rs. Rs.
Liabilities Rs. Assets Rs.
Capital on 1.4.2004 1,50,000 1,00,000
Current accounts on 1.4.2004 (Cr.) 20,000 15,000 Capital Accounts: Current Account:
Kala 1,50,000 Mala 12,000
Drawings during 2004 – 2005 30,000 40,000
Mala 1,00,000 2,50,000
Interest on drawings 900 1,000
Share of profit for 2004 – 2005 10,000 8,000 Current Account:
Kala 8,100
Interest on capital 6% 6%
Solution:
Dr Capital Accounts Cr
6.3 Distribution of Profits
Kala Mala Kala Mala
Date Particulars Date Particulars In a sole trading concern, the net profit disclosed by the Profit and
Rs. Rs. Rs. Rs.
Loss Account belongs to the sole trader and is transferred to his capital
2005 2004
account. However, in a partnership firm, the net profit as shown by the
Mar 31 To Balance Apr 1 By Balance
Profit and Loss Account need certain adjustments with regard to interest
b/d 1,50,000 1,00,000 b/d 1,50,000 1,00,000
on capitals, interest on drawings, salary and commission to the partners.
1,50,000 1,00,000 1,50,000 1,00,000
For this purpose, Profit and Loss Appropriation Account may be
2005
prepared. This is merely an extension of the Profit and Loss Account
Apr 1 By Balance
and is prepared to show how net profit has been distributed among the
b/d 1,50,000 1,00,000
partners.
Dr Current Accounts Cr
This account is credited with net profit and interest on drawings
Kala Mala Kala Mala
Date Particulars Date Particulars and debited with interest on capitals, salary or commission to partners.
Rs. Rs. Rs. Rs.
Net loss will be shown on the debit side. After these adjustments have
2005 2004 been made, this account will show the amount of profit or loss which
Mar 31 To Drawings 30,000 40,000 Apr 1 By Balance
shall be distributed among the partners in the agreed profit sharing ratio.
’’ To Interest b/d 20,000 15,000
on drawings 900 1,000 2005 By Interest on The various adjustments made in the Profit and Loss Appropriation
’’ To Balance Mar 31 capital 9,000 6,000 account are explained below:
c/d 8,100 ’’ By Profit &
Loss A/c 10,000 8,000 6.3.1 Interest on capital:
’’ By Balance c/d 12,000
Interest on capital is allowed to partners only, if the partnership
39,000 41,000 39,000 41,000
deed specifically allows it. Interest is usually calculated on the opening
2005 2005
Apr 1 To Balance b/d 12,000 Apr 1 By Balance b/d 8,100 capital and on the capital introduced during the year. If the date of
8 9
additional capital introduced during the year is not given, the interest is That is
to be calculated for six months. Interest on Rs.90,000 for one year = Rs. 9,000
Journal Entries: Interest on Rs.10,000 for nine months = Rs. 750
(a) To adjust interest on capital Total Interest payable to Ravi = Rs. 9,750
Interest on capital A/c Dr.
To Partners’ Capital A/c 10
(In case of fluctuating capital) b) Interest on Raghu’s capital = 70,000 x ––––
or 100
To Partners’ Current A/c That is
(In case of fixed capital)
Interest on Rs. 70,000 for one year = Rs. 7,000
(b) To close the interest on capital account
Interest payable to Raghu = Rs. 7,000
Profit & Loss Appropriation A/c Dr.
To Interest on capital A/c 6.3.2 Interest on Drawings:
Illustration : 3 Drawings is the amount withdrawn in cash or in kind, for personal
purposes. A Drawings Account is opened in the name of each partner
Ravi and Raghu started business on April 1, 2003 with capitals of
and the drawings are debited to this account. At the end of every year,
Rs.90,000 and Rs.70,000 respectively. Ravi introduced Rs.10,000 as
the Drawings Account is closed by a transfer to the respective partner’s
additional capital on July 1, 2003. Interest on capital is to be allowed
capital account or current account.
@ 10%. Calculate the interest payable to Ravi and Raghu for the year
Interest on partners’ drawings is charged only, if the Partnership
ending March 31,2004.
Deed specifically allows it at a particular rate.
Solution:
Journal Entries:
a) Interest on Ravi’s capital:
(a) To charge interest on drawings
10 10 9 Partners’ Capital A/c (In case of fluctuating capital) Dr.
or
= 90,000 x –––– + 10,000 x –––– x –––
Partners’ Current A/c (In case of fixed capital) Dr.
100 100 12
To Interest on drawings A/c
= Rs. 9,000 + Rs. 750
(b) To close the interest on drawings account
= Rs. 9,750. Interest on drawings A/c Dr.
To Profit & Loss Appropriation A/c
10 11
Interest on drawings can be calculated by applying the following a) If the fixed amount is withdrawn in the beginning of every
two methods: month:
1) Product Method
Take the period at the average of the periods applicable to the
2) Average Period Method
first and last instalment.
1) Product Method:
The period of first instalment is 12 months.
Under this method, the amount of drawings for each period is
multiplied by the period for which the amount is going to be used. The period of last instalment is 1 month.
Then, the product is summed up and the following formula is used to
find the interest on drawings. 12 + 1
Average period = –––––– = 6½ months
Rate of interest 1
2
Interest on drawings = Product x –––––––––––– x –––
100 12
6½ 13
If the amount is withdrawn at irregular period of months: = ––––– (or) –––––
12 24
It is easier to calculate under Product Method.
2) Average Period Method: b) If the fixed amount is withdrawn in the middle of every month:
Interest on drawings is to be calculated with reference to the
Take the period at the average of the periods applicable to the
average of the periods for which the money is withdrawn.
first and last instalment.
Interest on Drawings:
The period of first instalment is 11½ months.
Rate of interest Average period
= Total drawings x ––––––––––– x –––––––––––– The period of last instalment is ½ month.
100 12
11½ + ½ 12
Calculation of Average Period : Average period = –––––– = ––––– = 6 months
2 2
The average period is calculated to take the period for the average
of the periods applicable to the first instalment and the last instalment.
6 12
= ––––– (or) –––––
Beginning period of use + Ending period of use
12 24
Average Period = ––––––––––––––––––––––––––––––––––––
2
12 13