Accounting for partnership: Basic concept

Deepika Agrawal | 02 Jul

Q3. Why is Profit and Loss Adjustment Account prepared? Explain. Answer: Profit and loss adjustment account is prepared to record those transaction or omissions and errors which were left while preparing the final accounts and they are found after the final accounts have been prepared and the profits distributed among the partners. The omission may be in respect of interest on capital, interest on drawings, interest on partners’ loan, partner’s salary, partner’s commission or outstanding expenses. There may also be some changes in the provisions of partnership deed or system of accountings having impact with retrospective effect. All these acts of omission and commission need adjustments for correction of their impact. These omission errors and corrections can be recorded in partners’ capital account directly but still it seems convenient to prepare the profit and loss adjustment account. Q4. Give two circumstances under which the fixed capitals of partners may change. Answer: Under the fixed capital method, the capital of partners may change in the following two circumstances (i) First, when fresh capital is introduced by the partner with the consent of other partners. (ii) Second, when a part of capital is withdrawn by the partner with the consent of other partners. Q5. If a fixed amount is withdrawn on the first day of every quarter, for what period the interest on total amount withdrawn will be calculated? Answer: When fixed amount of money is withdrawn quarterly, it can be withdrawn either at the beginning or at the end of each quarter, if the amount is withdrawn at the end of each quarter, the interest is calculated on the total money withdrawn during the period of seven and half months. Q6. In the absence of partnership deed, specify the rules relating to the following (i) Sharing of profits and losses (ii) Interest on partner’s capital (iii) Interest on partner’s drawings (iv) Interest on partner’s loan (v) Salary to a partner Answer: (i) Sharing of Profit and Losses In the absence of partnership deed profit sharing ratio among the pad maw will be equal. (ii) Interest on Partner’s Capital In the absence of the partnership deed a partner interest on partners’ capital will not be given. (iii) Interest on Partner’s Drawings In the absence of partnership deed no interest will be charged on partners drawings. (iv) Interest on Partners Loan In the absence of partnership deed if partner gives any loan to the firm, he/she will be entitled to get fixed percentage of interest @6% of annum. (v) Salary of Partner In the absence of the partnership deed a partner will be entitled for getting any salary for his work even if the other is non-working.