Chapter 6 Partnership Accounts Profits Distribution

In this post, we are going to solve the practical problems of Chapter 6 Partnership Accounts Profits Distribution, for ICOM II, DCOM, DBA and it will also be helpful for the students of BCOM, ADP Commerce and other disciplines related to business, finance and commerce. In other posts, all other chapters related to partnership will be discussed and also solved papers of Principles of Accounting for ICOM II for FBISE, BISE Lahore, BISE Rawalpindi will be presented to you. Solved Papers of Business Statistics are already posted on the website. Solution for Chapter 7 Partnership Accounts Admission of a Partner has already posted.

Solved by Iftikhar Ali, M.Sc Economics, MCOM Finance Lecturer Statistics, Finance and Accounting

Chapter 6 Partnership Accounts Profits Distribution

Essentials of Partnership

According to Partnership Act 1932, Section 4 defines Partnership “the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all”.

Essential elements of Partnership

There must be an agreement by all the persons who concern.
Agreement must be for the sharing of profits.
Business must be carried by all or one of them acting for all.
Motive of the business must be profit orientation.
Liability of the partners must be unlimited.

Partnership Agreement

While doing a partnership business, there must be an agreement that contains rules and regulations or conditions regarding conduct of partnership business must be set. This agreement or deed must be in written or oral form but written form is better than oral. Partnership deed or agreement contains following elements:

Name of the Business
Nature of the Business
Details about partners
Capital of the Partners with their investing ratio
Profit & Loss sharing ratio
Amount of Drawing allowed to each partner
Amount of Salaries and allowances allowed to partners
Whether the Capital accounts are to be fixed or fluctuating
Rules regarding goodwill at the time of retirement or death of the partner
Duration and commencement of Partnership
Rules and regulation at the time of retirement or death of the partner.
Rules and regulation regarding accounts maintaining.
Rules and regulation regarding audit of the firm and selection of auditor.
Deciding rights and duties of partners
Pre-decided setting of rules used at the time of dispute among partners.

Practical Problems & Solutions

Problem 1: A & B started business on 1.1.2016 with capitals of Rs. 60,000…….

Problem 1: A & B started business on 1.1.2016 with capitals of Rs. 60,000 and 40,000 respectively. During the year A introduced Rs. 10,000 as additional capital on 1.7.2016. They withdraw Rs. 500 p.m for household expenses in lieu of profits. Interest on capital is to be allowed @ 10%.

Calculate the interest payable to A and B for the year ending 31.12.2016

Solution

Capital invested by A
Capital Invested by Mr. A:
Capital invested on 1.1.16	60,000
Additional Capital invested on 1.7.16	10,000
Total Capital invested by A	70,000

Calculation of interest on Capital for A
Calculation of interest on capital of Mr. A:
Interest on 60,000 @ 10% (60,000 x 0.10)	6000
Interest on 10,000 @10% for 6 months (10,000 x 0.10 x 6/12)	500
Total Interest on Capital for A	6500

Capital invested by B
Capital Invested by Mr. B:
Capital invested on 1.1.16	40,000
Total Capital invested by B	40,000

Calculation of interest on Capital for B
Calculation of interest on capital of Mr. B:
Interest on 40,000 @ 10% (40,000 x 0.10)	400
Total Interest on Capital for B	400

Problem 2: A and B partners from 1^st January, 2016 without any partnership…..

Problem 2: A and B partners from 1^st January, 2016 without any partnership agreement and they introduced capitals of Rs. 35,000 and Rs. 20,000 respectively. On 1^st July 2016 A advanced Rs 7500 by way of loan to the firm without any agreement as to interest. The profit and loss account for the year 2016 discloses a profit of Rs. 8225; but the partners cannot agree upon question of interest or upon the basis of division of profits. You are required to divide the profit between them giving reasons for your method.

Solution

Profit & Loss Appropriation Account
Particulars	Amount	Particulars	Amount
Interest on A’s Loan (7500 x 0.06 x 6/12)	225	Balance b/d	8225
Net profit transferred to Partners Capital Account:
A’s Account 4,000
B’s Account 4,000	8,000
	8225		8225

Note: In the absence of any agreement A will be entitled to interest @ 6% per annum on the loan advanced by him to the firm. And the partners will be shared the profits equally.

Problem 3: A, B and C are partners with capitals of Rs. 20,000…..

Problem 3: A, B and C are partners with capitals of Rs. 20,000, Rs. 10,000 and Rs. 6000 respectively and share profits and losses equally. The net profit for the year 2016 before charging interest on capitals amounted to Rs. 10,800. Show the amount of each partner gain from the firm (a) if no interest is calculated on capital and (b) where 5% interest on capital is brought in account, before adjustment of profits.

Solution

Case a: If there is no interest on capital then the profit will be calculated equally as given below:

$Profit\ of\ A = 10,800\ \times \ \frac{1}{3} = 3600\$

$Profit\ of\ B = 10,800\ \times \ \frac{1}{3} = 3600\$

$Profit\ of\ C = 10,800\ \times \ \frac{1}{3} = 3600\$

Case b: If interest on capital is calculated before the distribution of profits.

Profit & Loss Appropriation Account
Particulars	Amount	Particulars	Amount
Interest on Capitals:		Net profit	10,800
A’s Interest 20,000 x 0.05	1000
B’s Interest 10,000 x 0.05	500
C’s Interest 6,000 x 0.05	300
Net profit transferred to Partners Capital Account:
A’s Profit W:1	3000
B’s Profit W:1	3000
C’s Profit W:1	3000
	10,800		10,800

Working 1: Calculation of Profit of A, B & C

$\mathbf{Profit\ of\ A = 9000\ \times \ }\frac{\mathbf{1}}{\mathbf{3}}\$

$\mathbf{Profit\ of\ B = 9000\ \times \ }\frac{\mathbf{1}}{\mathbf{3}}\$

$\mathbf{Profit\ of\ C = 9000\ \times \ }\frac{\mathbf{1}}{\mathbf{3}}\$

Chapter 6 Partnership Accounts Profits Distribution

Problem 4: X and Y set up a partnership firm on 1.1.2016……

Problem 4: X and Y set up a partnership firm on 1.1.2016. They contributed Rs. 150,000 and Rs. 120,000 respectively as their capitals and decided to share profit and loss in the ratio of 3:2. The partnership deed provided that A is to be paid a salary of Rs. 3000 per month and B commission of Rs. 15,000. It also provided that interest on capital be allowed at 6% per annum. The drawings for the year were A Rs. 18,000 and B Rs. 12,000. Interest on drawing was charged Rs. 810 on A’s drawings and Rs. 540 on B’s drawings. The net amount of profit as per profit and loss account for the year 2016 was Rs. 106980.

You are required to prepare the profit & Loss Appropriation Account and Partner’s Capital Accounts after passing necessary journal entries relating to profit and loss appropriation account.

Solution

Profit & Loss Appropriation Account
Particulars	Rs.	Particulars	Rs.
A’s salary (3000 x 12)	36,000	Balance b/d	106980
B’s Commission	15,000	Interest on Drawings:
Interest on Capital:		A:	810
A: (150,000 x 0.06)	9000	B:	540
B: (120,000 x 0.06)	7200

Profit transferred to :
A’s Profit W:1	24678
B’s Profit W:1	16452
	108330		108330

Working 1: Calculations of Profit of A & B

$\mathbf{A}^{\mathbf{'}}\mathbf{s\ Profit =}\frac{\mathbf{41130}}{\mathbf{5}}\mathbf{\ \times \ 3 = 24678}\$

$\mathbf{B}^{\mathbf{'}}\mathbf{s\ Profit =}\frac{\mathbf{41130}}{\mathbf{5}}\mathbf{\ \times \ 2 = 16452}\$

Journal
Date	Particulars	L.F	Dr	Cr
	Profit & Loss Appropriation A/C		36,000
	A’s Capital A/C			36,000
	(Salary of A capitalized)

	Profit & Loss Appropriation A/C		15,000
	B’s Capital A/C			15,000
	(Commission of B capitalized)

	Profit & Loss Appropriation A/C		16200
	A’s Capital A/C			9000
	B’s Capital A/C			7200
	(Interest on Capital of A & B is capitalized)

	A’s Capital A/C		810
	B’s Capital A/C		540
	Profit & Loss Appropriation A/C			1350
	(Interest on Drawings charged and capitalized)

	Profit & Loss Appropriation A/C		41130
	A’s Capital A/C			24678
	B’s Capital A/C			16452
	(Profit of A & B is capitalized)

Problem 5: A and B are partners sharing profits and losses in the proportions of 3:2 with capitals of Rs. 10,000 each. Each partner is entitled to 5% interest on his capital. B is entitled to a salary of Rs. 150 per month. During the year 2016, the drawings of the partners in anticipations of their shares of profit and salary are A Rs. 1,000 and B. Rs. 1,000. The profits for the year prior to calculation of interest on capital but after charging salary of partner amounted to Rs. 8,000. The above figure of profit is before charging depreciation at 7 ½ percent on furniture valued at Rs. 5,000 and writing off a bad debt of Rs. 150.

You are required to prepare partners accounts (i) where capitals are fixed and (ii) where capitals are fluctuating.

Solution (i) When capitals are Fixed

Profit & Loss Appropriation Account
Particulars	Rs.	Particulars	Rs.
Depreciation on Furniture	375	Balance b/d	8,000
Bad Debts	150
Interest on Capital:
A: (10,000 x 0.05)	500
B: (10,000 x 0.05)	500
Net Profit transferred to capital accounts:
A’s Profit W:1	3885
B’s Profit W:1	2590

	8000		8000

Working 1: Calculations of Profit of A & B

$\mathbf{A}^{\mathbf{'}}\mathbf{s\ Profit =}\frac{\mathbf{6475}}{\mathbf{5}}\mathbf{\ \times \ 3 = 3885}\$

$\mathbf{B's\ Profit =}\frac{\mathbf{6475}}{\mathbf{5}}\mathbf{\ \times \ 2 = 2590}\$

A’s Capital Account
Date	Particulars	Rs.	Date	Particulars	Rs.
2016			2016
Dec. 31	Cash Drawings	1000	Dec. 31	Balance b/d	10,000
Dec. 31	Balance c/d	13385		P&L Appr. A/C:
				Net profit	3885
				Interest on Capital	500

		14385			14385

B’s Capital Account
Date	Particulars	Rs.	Date	Particulars	Rs.
2016			2016
Dec. 31	Cash Drawings	1000	Dec. 31	Balance b/d	10,000
Dec. 31	Balance c/d	13890		P&L Appr. A/C:
				Net Profit	2590
				Interest on Capital	500
				Salary	1800
		14890			14890

Solution (ii) When Capitals are Fluctuating

Profit & Loss Appropriation Account
Particulars	Rs.	Particulars	Rs.
Depreciation on Furniture	375	Balance b/d	8,000
Bad Debts	150
Interest on Capital:
A: (10,000 x 0.05)	500
B: (10,000 x 0.05)	500
Net Profit transferred to capital accounts:
A’s Profit W:1	3885
B’s Profit W:1	2590

	8000		8000

Working 1: Calculations of Profit of A & B

$\mathbf{A}^{\mathbf{'}}\mathbf{s\ Profit =}\frac{\mathbf{6475}}{\mathbf{5}}\mathbf{\ \times \ 3 = 3885}\$

$\mathbf{B's\ Profit =}\frac{\mathbf{6475}}{\mathbf{5}}\mathbf{\ \times \ 2 = 2590}\$

A’s Capital Account
Date	Particulars	Rs.	Date	Particulars	Rs.
2016			2016
Dec. 31	Balance c/d	10,000	Jan,1	Balance b/d	10,000

		10,000			10,000

A’s Current Account
Date	Particulars	Rs.	Date	Particulars	Rs.
2016			2016
Dec. 31	Cash Drawings	1000	Dec. 31	P&L Appr. A/C:
Dec. 31	Balance c/d	3385		Net profit	3885
				Interest on Capital	500

		4385			4385

B’s Capital Account
Date	Particulars	Rs.	Date	Particulars	Rs.
2016			2016
Dec. 31	Balance c/d	10,000	Jan,1	Balance b/d	10,000

		10,000			10,000

B’s Current Account
Date	Particulars	Rs.	Date	Particulars	Rs.
2016			2016
Dec. 31	Cash Drawings	1000	Dec. 31	P&L Appr. A/C:
Dec. 31	Balance c/d	3890		Net Profit	2590
				Interest on Capital	500
				Salary	1800

		4890			4890