Key Points - Partnership: Fundamentals

Guarantee of profits
An assurance is given to a partner that a minimum amount is given to him irrespective of profits
The firm or the partner who has given the guarantee is DEBITED
The partner to whom guarantee has been given is CREDITED.
This guarantee can be given in any one of the following forms---- (Guarantee of minimum profits to a partner by firm)
A, B and C are partners in a firm sharing profits and losses in the ratio of 3:2:1 with a guarantee of minimum profits to C for ` 15,000. Total profits of the firm for the year ended on December 31, 2012 amounted ` 60,000. Prepare a profit and loss appropriation account to show the distribution of profits as per terms of partnership deed.

When Guarantee of minimum profit to a partner is given by the firm, we can solve the question in two different methods.METHOD 1-----Out of total profits of 60,000, C has been credited with 15,000(guaranteed amount)and the balance of profit distributed among A and B in their profit sharing ratio

METHOD 2

C has been credited for 10,000 by the firm &
C has been credited with 5,000 by debiting A and B in their profit sharing ratio

This deficiency will be borne by A and B in their profits sharing ratio i.e., 3:2. (Guarantee of minimum profits to a partner by other partners in a specific ratio)

1. A, B and C are partners in a firm sharing profits and losses in the ratio of 3:2:1 with a guarantee of minimum profits to C for ˆ 15,000. Total profits of the firm for the year
ended on December 31, 2012 amounted ˆ60,000. Any excess payable to C on account of such guarantee shall be borne by A and B in equal ratio.
Prepare a profit and loss appropriation account to show the distribution of profits as per terms of partnership deed.
Solution---C has been credited by debiting firm for 10,000 &
C has been credited by debiting A and B in specific ratio , i.e, equal
Profit and Loss Appropriation Account
For the year ending on 31ST March, 2012
Dr.
Cr.
Particulars
To A’s Capital A/c (3/6 of ` 60,000)

3.,000
Less: Deficiency
Borne for C (2,500)
------To B’s Capital A/c (2/6 of ` 60,000)

2.,000
Less: Deficiency
Borne for C (2,500)
------To C’s Capital A/c (1/6 of
ˆ

6.,000

1.,000
Add: Deficiency
Recovered from A 2,500
Add: Deficiency
Recovered from B 2,500
-------
`
Particulars
By Profit and Loss A/c (Net Profits)
`

6.,000

2.,500

1.,500

1.,000

6.,000
_____________
------------

6.,000
------------
Working Note:
Minimum guarantee to C
= ˆ15,000
Less: C’s actual share in profits = ˆ 10,000
Deficiency in profits
= ˆ 15,000 - ˆ 10,000 = ˆ 5,000
This deficiency will be borne by A and B in equal ratio i.e., 1:1.
(Guarantee of minimum profits to a partner by other partner – one partner only)
A, B and C are partners in a firm sharing profits and losses in the ratio of 3:2:1 with a guarantee of minimum profits to C for ˆ 15,000. Total profits of the firm for the year ended on December 31, 2012 amounted ˆ60,000. Any excess payable to C on account of such guarantee shall be borne by A.
Prepare a profit and loss appropriation account to show the distribution of profits as per terms of partnership deed.
C has been credited by debiting firm for 10,000 &
C has been credited by debiting A only for 5,000
Profit and Loss Appropriation Account
For the year ending on 31ST March, 2012
Dr.
Cr.
Particulars
To A’s Capital A/c (3/6 of ˆ 60,000)

3.,000
Less: Deficiency
Borne for C (5,000)
------To B’s Capital A/c (2/6 of ˆ 60,000)
ˆ
Particulars
By Profit and Loss A/c (Net Profits)
ˆ

6.,000

2.,000

2.,000
To C’s Capital A/c (1/6 of
ˆ

6.,000

1.,000
Add: Deficiency
Recovered from A 5,000
------15,000

6.,000
-------------

6.,000
_____________
------------

2. A, B and C are partners in a firm sharing profits and losses in the ratio of 3:2:1 with a guarantee of minimum profits to C for ˆ 15,000. Total profits of the firm for the year ended on December 31, 2012 amounted ˆ60,000. Any excess payable to C on account of such guarantee shall be borne by B.
Prepare a profit and loss appropriation account to show the distribution of profits as per terms of partnership deed.
C has been credited by debiting firm for 10,000 &
C has been credited by debiting B only for 5,000
SOLUTION:
Profit and Loss Appropriation Account
For the year ending on 31ST March, 2012
Dr.
Cr.
Particulars
To A’s Capital A/c (3/6 of ˆ 60,000)
ˆ

3..000
To B’s Capital A/c (2/6 of ˆ 60,000)

2.,000
Less: Deficiency
Borne for C (5,000)
------To C’s Capital A/c (1/6 of
ˆ

6.,000

1.,000
Add: Deficiency
Recovered from B 5,000
-------
Particulars
By Profit and Loss A/c (Net Profits)
ˆ

6.,000

1.,000

1.,000

6.,000
_____________
------------

6.,000
------------
Working Note:
Minimum guarantee to C
= ˆ15,000
Less: C’s actual share in profits = ˆ 10,000
Deficiency in profits
= ˆ 15,000 - ˆ 10,000 = ˆ 5,000
In 4 question deficiency will be borne by A only
In 5 question deficiency to borne by B only (Guarantee of minimum profits to firm by partners)

3.
A, B and C are partners in a firm sharing profits and losses in the ratio of 3:2:1. The partnership deed provided the following:

Interest on Capital is to be provided @ 10% p.a.
Interest on drawings is to be charged @ 12% p.a.
Salary payable to C ˆ 2,000 per month.
C had guaranteed that the firm would earn a profits of ˆ 1,20,000 before charging or allowing interest and salary payable to partners.
Capital of A,B, and C at the beginning of the year were ˆ 1,00,000, ˆ 80,000 and ˆ

6.,000 respectively. Drawings of the partners during the year ended on 31st March,

2.12 were A: ˆ 20,000, B: ˆ 15,000 and c: ˆ 10,000.
The actual profits before interest and salary amounted to ˆ 1,10,000.
Prepare Profit and Loss Appropriation Account for the year ending on 31st March, 2012. .
Profit and Loss Appropriation Account
For the year ending on 31ST March, 2012
Dr.
Cr.
Particulars
To Interest on Capital: (@ 10% p.a.)
A

1.,000
B

8.000
C

6.000
------To Salary to C (ˆ 2,000 X 12)
To Profits transferred to
Capital A/cs of:
A

3.,350
B

2.,900
C

1.,450
______
ˆ
Particulars
By Profit and Loss A/c (Net Profits)
By C’s Capital A/c
By Interest on Drawings:

2..000 (@12% p.a. for 6 months as the date of drawings is not given)

2.,000
A

1.200
B

9.0
C

6.0
______

1.10,000

1.,000

2.700

7.,700

1.22,700
-------------

ˆ

1.22,700
_____________
------------
Note: Firm’s profit is ˆ 1,10,000 (i.e., ˆ 10,000 less than the amount guaranteed by C) .

As such ˆ 10,000 will be debited to C’s Capital A/c and credited to Profit and
Loss Appropriation A/c. (Actual amount of profit is more than the guaranteed amount)

1. A, B and C are partners in a firm sharing profits and losses in the ratio of 3:2:1 with a guarantee of minimum profits to C for ˆ 15,000. Total profits of the firm for the year ended on December 31, 2012 amounted ˆ1,20,000. Any excess payable to C on account of such guarantee shall be borne by B.
Prepare a profit and loss appropriation account to show the distribution of profits as per terms of partnership deed. Profit and Loss Appropriation Account
For the year ending on 31ST March, 2012
Dr.
Cr.
Particulars
To A’s Capital A/c (3/6 of ˆ 1,20,000)
ˆ

6..000
To B’s Capital A/c (2/6 of ˆ 1,20,000)

4.,000
Particulars
By Profit and Loss A/c (Net Profits)
ˆ

1.20,000
To C’s Capital A/c (1/6 of ˆ 1,20,000 or ˆ15,000 whichever is higher)

2.,000

1.20,000

1.20,000
_____________
------------
------------ Working note
Share of Actual profits=20,000
Guaranteed amount=15,000
Values Involved in above questions







Financial Security,
Mutual Understanding,
Team Spirit.
Transparency
Questions regarding Past Adjustment

Q.7 Asha, Bela and Cheena were sharing profits equally. Their capitals were ` 40,000; ` 20,000 and `

3.,000 respectively. After closing the accounts for the year 2004, it was found that the interest on capital @ 10% p.a. was not allowed before distributing the profits. It was decided to pass a single adjusting entry to rectify the accounts of the year 2004. Journalise. (CBSE 2005)
Solution 7:
Journal
Date

2.05
Jan.1
Particulars
Bela’s capital A/c
Dr.
To Asha’s capital A/c (adjustment of interest on capital for the year 2004)
L.F.
Dr.(`)

1.000
Cr.(`)

1.000
Working Note:
Interest on capital
Profit to be recovered
Adjustment
Cr.
Dr.
Asha

4.000

3.000

1.000
Cr.
Bela

2.000

3.000

1.000
Dr.
Cheena

3.000

3.000
-----
Total

9.000

9.000
-----
Q.8 A, B, C and D are partners sharing profits & Losses in the ratio of 4:3:3:2. Their respective fixed capitals on March 31,2010 were ` 60,000, ` 90,000, ` 1,20,000 and ` 90,000. After preparing the final accounts for the year ended March 31,2010, it was discovered that interest on capital @ 12% p.a. was not allowed and interest on drawings amounting to ` 2,000, ` 2,500, ` 1,500 and ` 1,000 respectively was also not charged.
Pass the necessary adjustment Journal entry showing your workings clearly. (CBSE 2011)
Solution 8:
Journal
Date

2.10
Apr.1
Particulars
A’s current A/c
Dr.
B’s current A/c
Dr.
To C’s current A/c
To D’s current A/c (Adjustment of interest on capital and interest on drawings for the year 200910)
L.F.
Dr.(`)

6.867

7.0
Cr.(`)

3.850

3.767
Working Note:
Interest on capital
Interest on drawings
Profit to be recovered
Total
Adjustment
Cr.
Dr.
Dr.
Dr.
A

7.200

2.000

1.,067

1.,067

6.867
Dr.
B

1.,800

2.500

9.050

1.,550

7.0
Dr.
C

1.,400

1.500

9.050

1.,550

3.850
Cr.
D

1.,800

1.000

6.033

7.033

3.767
Cr.
Total

4.,200

7.000

3.,200
Q.9 Ram, Shyam and Mohan are partners in a firm sharing profits and losses in the ratio of 2:1:2.
Their fixed capitals were ` 3,00,000, ` 1,00,000 and ` 2,00,000 respectively. Interest on capital for the year 1996 was credited to them @ 9% p.a. instead of 10% p.a.. Showing your working notes clearly, pass necessary adjusting Journal entry.
Solution 9:
Journal
Date

1.97
Jan.1
Particulars
Shyam’s current A/c
Dr.
Mohan’s current A/c
Dr.
To Ram’s current A/c (adjustment of interest on capital for the year 1996)
L.F.
Dr.(`)
Cr.(`)

2.0

4.0

6.0
Working Note:

1. Interest on capital Cr.
Profit to be recovered Dr.
Adjustment
Ram

3.000

2.400

6.0
Cr.
Shyam

1.000

1.200

2.0
Dr.
Mohan

2.000

2.400

4.0
Total

6.000

6.000
Q.10 Mohan, Vijay and Anil are equal partners, the balances in their capital accounts being ` 30,000, `

2.,000 and ` 20,000 respectively. In arriving at these figures, the profits for the year ended December

3.,1992 are ` 24,000 had already been credited to partners in the proportion in which they shared profits. Their drawings were:
Mohan ` 5,000, Vijay ` 4,000 and Anil ` 3,000 in 1992.
Subsequently, the following omissions were noticed and it was decided to bring them into account. (i) Interest on capital @ 10% p.a. (ii) Interest on Drawings: Mohan ` 250, Vijay ` 200and Anil ` 150.
Make the necessary rectifications through a Journal entry and show your workings clearly. (CBSE 1994)
Solution 10:
Calculation of Opening Capital
Mohan

3.,000

5.000

3.,000

8.000

2.,000

2.700
Closing capital
Add: Drawings
Less: Profit already distributed
Opening capital
Interest on capital @ 10% p.a.
Vijay

2.,000

4.000

2.,000

8.000

2.,000

2.100
Anil

2.,000

3.000

2.,000

8.000

1.,000

1.500
Anil

1.500

1.0

1.900
Total

6.300

6.0

5.700
Table Showing Adjustment
Interest on capital
Interest on drawings
Profit to be recovered
Cr.
Dr.
Dr.
Mohan

2.700

2.0

1.900
Vijay

2.100

2.0

1.900
Total
Adjustment
Dr.

2.150

5.0
Cr.

2.100
---

2.050

5.0
Dr.

6.300
Journal
Date

1.93
Jan.1
Particulars
Anil’s capital A/c
Dr.
To Mohan’s capital A/c (adjustment of interest on capital and interest on drawings for the year 1992)
L.F.
Dr.(`)
Cr.(`)

5.0

5.0
Q.11 X, Y and Z are partners in a firm who share profits in the ratio of 2:3:5. The firm earned a profit of ` 1,50,000 for the year ended December 31,2004. The profit by mistake was distributed among X,
Y and Z in the ratio of 3:2:1 respectively. This error was noted only in the beginning of the next year.
Pass necessary Journal entry to rectify the error. (CBSE 2005)
Solution 11:
Table Showing Adjustment
X
Profit already distributed
Profit to be distributed
Adjustment
Cr.
Dr.

7.,000

3.,000

4.,000
Dr.
Y

5.,000

4.,000

5.000
Dr.
Z

2.,000

7.,000

5.,000
Cr.
Total

1.50,000

1.50,000
Journal
Date

2.05
Jan.1
Particulars
X’s capital A/c
Dr.
Y’s capital A/c
Dr.
To Z’s capital A/c (adjustment of profit sharing ratio for the year 2004)
L.F.
Values Involved in questions of past adjustments:
 Admitting errors committed
 Rectifying those errors
 Communicating the correct information

Dr.(`)

4.,000

5.000
Cr.(`)

5.,000
Reconstitution of Partnership: Change in Profit Sharing Ratio
Q.12 P, Q and R are partners sharing profits equally. They decided that in future R will get 1/5 share in profits and remaining profit will be shared by P and Q equally. On the day of change, firm’s goodwill is valued at ` 60,000. Give Journal entries arising on account of change in profit- sharing ratio. Also identify the value involves in adjustment of goodwill.
Solution 12:
Value involves: Reward for sacrifice
Change in share of:
P = 1/3-2/5 = 5-6/15 = - 1/15 (Gain)
Q = 1/3-2/5 = 5-6/15 = - 1/15 (Gain)
R = 1/3-1/5 = 5-3/15 = 2/15 (Sacrifice)
Journal
Date
Particulars
P’s capital A/c
Dr.
Q’s capital A/c
Dr.
To R’s capital A/c (adjustment of goodwill for change in profit sharing ratio)
L.F.
Dr.(`)

2.000

2.000
Cr.(`)

4.000
Reconstitution of Partnership: Death of a Partner
Q.13 G, H and I were partners in a firm sharing profits in the ratio of 4:3:3. On March 31, 2006, their
Balance Sheet was as follows:
Balance Sheet
As at March 31, 2006
Liabilities
Creditors
Reserve
Capitals
G
H
I

1.05,000

8.,000

8.,000
`

8.,000 Buildings

3.,000 Machinery
Stock
Debtors
Cash

2.70,000

3.90,000
Assets
`

1.70,000

1.20,000

4.,000

4.,000

1.,000

3.90,000
H died on June 30,2006. Under the partnership agreement, the executors of a deceased partner were entitled to: (i) Amount standing to the credit of deceased [partner’s capital account at the time of death. (ii) Interest on capital @ 12% per annum, (iii) His share of goodwill. The goodwill of the firm on H’s death was valued at ` 2,70,000. (iv) His share in the profit till the date of the death on the basis of last year’s profit. The profit of the firm for the year ended on March 31, 2006 was ` 2,40,000.
Identify the value involves in the calculation of share of profit of deceased partner.
Prepare H’s capital account to be rendered to his executors.

Solution

Particulars
To H’s Executor A/c
H’s Capital Account

Particulars

1.96,450 By balance b/d
By interest on capital
By G’s capital A/c
By I’s capital A/c
By P&L suspense A/c
By reserve

1.96,450
Value involved in questions of Reconstitution of Partnership
Adapting to changes
Integrity
Justification
Transparency
`

8.,000

2.550

4.,286

3.,714

1.,000

9.900

1.96,450