partnership accounts

Fixed and fluctuating capital

  • Permanent addition or deduction of capital will be recorded in fixed capital.
  • While interest on capital, interest on drawing, drawings, profit or loss for the year, remuneration of partners – regular nature transactions will be recorded in fluctuating capital account,

Interest on capital:

  • If it is mentioned in deed then only it can be paid.
  • In case of insufficient profit, available profit will be distributed in capital ratio.
  • In case of loss if deed silent interest will not be paid.
  • But specifically given in deed although there is a loss, interest on capital will be paid. It must be paid in loss also.

Interest on drawings :

  • if mentioned in deed then only it will be paid.
  • Beginning of month multiply 78/12
  • End of month multiply 66/12
  • Middle of month multiply 72/12
  • If date of drawing is not given interest of 6 month will be paid.

Effective capital

  • actual utilization period will be considered, product method can be used,
  • Monthly or day product will be used.

A and B partners: capital as on 01.01.2010 1,00,000 and 2,00,000.  introduce A 1.4.10  – 50.000  B  20,000 

withdraw 1.10.10  A  – 20,000 B 10,000

effective capital   

A

To 1.1/ 3 months*100000 = 3,00,000

1.4 to 1.10    6 months*1,50,000 = 9,00,000

1.10 to 31.12 3months*1,30,000 = 3,90,000

                                             Total 15,90,000       

B

1.1 To 1.4    3 months*200000  =  6,00,000

1.4 to 1.10    6 months*2,20,000 = 13,20,000

1.10 to 31.12 3months*2,10,000 = 6,30,000

                                             Total 25,50,000

Ratio  15,90,000 : 25,50,000   = 53 : 85        

Guaranteed minimum profit:

If given by partner:

  • Deficit will be deducted from partner giving the guarantee after distribution of profit.

If guarantee given by firm:

  • First distribute profit of guaranteed partner, then balance will be given to other partners.

Unit 2 goodwill

  • It is the reputation of firm due to which over and above normal profit, firm can earn.
  • It arise due to location, service, patent name etc.

It is required to calculate in the following cases.

  • Change in profit and loss ratio
  • Admission of new partner
  • Retirement of partner
  • Dissolution of firm

Method of valuation

Average profit method:

  • In case of increase or decrease trend in profit, weightage profit will be calculated otherwise simple average is used.
  • Simple profit of 3 years  10000, 8000, 9000
  • Average profit 10000+8000+9000/3                                                         =9000
  • If given goodwill is 3 years purchase
  • Goodwill  9000*3 = 27,000

Weightage

  • profit of 3 yrs 10000, 12000, 15000
  • 10000        1          10000
  • 12000        2          24000
  • 15000        3          45000
  •                   6          79000
  • Average profit  = 79000/6
  •                         = 13166.67
  • If given goodwill is 3 years purchase
  • Goodwill 13166.67*3 = 39500

Super profit:

Steps:

  • Find capital invested
  • Find adjusted average profit
  • Normal profit = step1* normal rate of return
  • Super profit = step  2-  step 3
  • Goodwill =  super profit* no of years

Annuity method:

  • Under this method time value of money is considered.

  • Goodwill = annuity rate of Rs 1 for given years*super profit

Capitalization method:

Steps:

find

  • Normal rate of return

  • Adjusted Average profit

  • Capital invested

  • Capitalize value = step2/step1

  • Goodwill = step 4 – step 3

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