NTA UGC NET - Commerce: Unit 02 - Accounting and Auditing (Part 03)

 

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Unit 02

Accounting and Auditing

Part 03

 

Partnership Accounts

 

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MCQ: Which of the following statements are correct?
 

1. In the absence of any agreement, partners will share profit and losses in the capital ratio. (Equally)
 

2. In the absence of partnership agreement, partners are to be paid interest on capital @6% per annum (No int.)
 

3. Debit balance on current account will be shown on the asset side of the balance sheet
 

4. The current account of a partner may show either debit or Credit Balance
 

    1) Both 1 & 2  

    2) Only 4
    3) Both 3 & 4
    4) All of the above
 

 

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Partnership Accounts

 

• Indian Partnership Act 1932 (Sec 4) (governs partnership forms of)

• ‘relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all’.

• When two or more persons join hands to set up a business and share its profits and losses it is called Partnership.

• There should be at least two persons

• For Banking Business, Partners must be less than or equal to 10.

• For Any Other Business, Partners must be less than or equal to 20.

• If the number of partners exceeds the limits, the partnership becomes illegal.

 

 

Partnership Deed

• The partnership agreement can be either oral or written.

• The Partnership Act does not require that the agreement must be in writing.

• But when the agreement is in written form, it is called ‘Partnership Deed’ or “ Article of Partnership”

• Partnership deed should be duly signed by the partners, stamped & registered. 

 

Rules applicable in the absence of Partnership Deed

• The partners will share profits and losses equally.

• Partners will not get a salary.

• Interest on capital will not be payable.

• Drawings will not be chargeable with interest.

• Partners will get 6% p.a. interest on loans to the firm if they mutually agree

 

 

Partnership Accounts

    Partner’s Capital Accounts ( transactions relating to the         partners of the firm are recorded in the books of the firm         through their capital accounts. )

    2 methods by which the capital of the partners is                         maintained. These special aspects accounts are :

        (a) Fixed Capital Method 

 

•         a firm maintains 2 capital accounts

•         Capital Account and Current Account.    

•         Capital Account only includes transactions like Initial                 investment, an addition of capital and permanent                     withdrawal of capital.

•         The balance of capital account does not change in                     general circumstance

•          Current account record – Int. on capital, Partners

         salary,         commission etc

       

•          If it show debit balance, it implies that the partner have             overdrawn from the business 

•         Debit balance is shown on the asset side of balance                 sheet

•         Credit balance is shown on the liability side 

 

        (b) Fluctuating Capital Method. 

 

•         Single account and that is Capital Account.

 

    Profit and Loss Appropriation Account.

•         Prepared to show how net profit is distributed among the         partners 

 

 

Reconstitution of Partnership Firm
 

Reconstitution means a change in the terms of the agreement of the partners or the ‘Partnership Deed’.

• Change in the profit sharing ratio of the partners,

• Admission of the partners,

• Retirement or death of a partner,

• Insolvency of a partner, etc.

 

 

Admission of a Partner

• He will take a share of profit which hither to was enjoyed by the existing partners

• Old partners must be compensated for the sacrifice

• The contribution by the new partner is divided among the old partners in Sacrificing ratio

• Sacrificing Ratio = Old Ratio – New Ratio

• New Ratio = Old Ratio - Surrendering Share.

• Surrendering Share = Surrendered Share X Old Ratio

• Share of goodwill bought in by the incoming partner in cash is shared by the old partners in Sacrificing ratio

• At the time of admission of a new partner, the assets are re-valued and liabilities are reassessed

• Profit and loss arriving on account of such revaluation up to the date of admission of a new partner may be adjusted in the partner’s capital accounts in their old profit sharing ratio.

 

 

Retirement and Death of a partner

• The continuing partners share the profit of outgoing partner in – Gaining Ratio

• Gaining Ratio = New Ratio – Old Ratio

• Goodwill of the firm is valued and the retiring partners’ share of goodwill is credited to his capital account.

• Assets and liabilities are revalued on the date of retirement and retiring partner’s share of profit is credited or the loss is debited to his capital account.

 

Dissolution of a partnership means

The act of ending of the old Partnership agreement and a reconstruction of the firm due to admission, retirement and death of a partner. It may or may not close the business.
 

Dissolution of a Partnership ‘firm’

The firm close its business 

 

 

Cases of Dissolution of Partnership firm

 

• Without the intervention of the court 

 

    1. When all partners agree to dissolve the firm.[sec.40] 

 

    2. Compulsory Dissolution [sec.41] · When all or one                 partner of the firm becomes insolvent. ·

 

     When business of the firm becomes unlawful. 

 

    3. On the happening of any incidents:[sec.42]

 

•         Insolvency of a partner.

 

•         Fulfilment of the object for which the firm was formed.

 

•         Expiry of the period 

 

    4. When any partner giving notice to other partners can         dissolve the firm.[sec.43 ] ·

 

•     By order of the court [sec.44]: cases in which the court may     order the dissolution of the partnership firm. 

 

1. A partner has become of unsound mind 

 

2. When a partner unable to perform his duties as a partner. 

 

3. When a partner is guilty of misconduct. 

 

4. When a partner wilfully, commits violation of law of partnership agreement. 

 

5. When a partner has transferred the whole of his interest in the firm to a third party. 

 

6. The firm cannot be carried on except at a loss. 

 

7. The dissolution is just and equitable due to some other reasons. 

 

Settlement of accounts on Dissolution:
 

1. The amount of loss including the deficiency of capital shall be paid out of profit, next out of capital.
 

2. Amount realised from the sale of the assets of the firm,shall be applied in the following manner:
    · Outside debts of firm will be paid ,first of all
    · Out of the remaining amount, the loans advanced by                 partners will be paid off.
    · Thereafter the balance of partners’ capital accounts will be         returned .
    · If some amount remains, it will be divided among the                 partners in their profit sharing ratio.

_ Realisation account - is prepared at the time of dissolution

 

_ Nominal Account

_ The profit and loss on realisation is transferred to partners’         capital account in their profit sharing ratio.

Liabilities are paid in the following order

• Expenses of realisation

• Payment of third party liability

• Loans & advances made by a partner

• Repayment of capital

• Balance if any, is distribute among the partners in the profit sharing ratio.

 

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