Class 12 Accountancy Notes
Unit – 2: Accounting for Partnership Firms
Q.1. Define the term “Partnership”,
Partners, Firm and Firm name. What are essentials of partnership?
Ans: Partnership: 2004, 2010, 2011,
Partnership is an association of two or more
person who agreed to do business and share profits and losses arises from it in
an agreed ratio. The partners act both as agents and principals of the firm.
In India, Partnership firm is governed by the
Indian Partnership Act 1932. Section 4 of this act defines partnership as:
"The relationship between persons, who have agreed to share the profits of
a business carried on by all or any one of them acting for all."
Partnership in this way is an agreement,
between two or more persons to carry on legal business with profit motive,
which is carried on by all or any one of them acting for all.
Partners, Firm and Firm name: The persons who
have entered into a partnership with one another are individually called
partners and collectively a firm. The name under which the business is carried
is called firm name.
Essential
(Characteristics) of Partnership: 2008, 2009, 2020
a)
Agreement: Partnership is the result of an
agreement, either written or oral, between two or more persons. It arises from
contract and not from status or process of law.
b)
Number of Persons: In a partnership firm there
must be at least two people to form the business. Partnership Act 1932, does
not specifies the maximum numbers of persons, but the Indian Company Act 2013,
restricts the number of Partners to 100 for a partnership firm. But in case of
limited liability partnership there is no maximum limit.
c)
Business: There must be a legal business.
Business includes trade, vocation and profession.
d)
Profit-Sharing: The agreement between/amongst the
partners must be to share profit or losses arise from the business.
e)
Agents and principals: The partners act both
as agents and principals of the firm. Partnership firm can be carried on by all
or any of them acting on behalf of all the partners.
f)
Separate legal entity: Partnership is a
separate legal entity from the accounting point of view. But from the legal
view point firm is not separate from its partners. If a firm is bankrupt,
private estate of the partners is liable to meet firm’s obligations.
Q.2. What is Partnership Deed? What
are its contents? 1999,
2003, 2007, 2009, 2014, 2018, 2019
Ans: Partnership deed: Meaning
A partnership is formed by an agreement. This
agreement may be oral or in writing. Though the law does not expressly require
that the partnership agreement should be in writing, it is desirable to have it
in writing. A written agreement, which contains the terms of partnership, as
agreed to by the partners is called ‘Partnership Deed.’
Importance: It is a very important document of
the firm which defines relationship amongst the partners. It is necessary to
avoid disputes amongst the partners and can be presented in the court as evidence.
Contents
(Clauses) of the Deed:
a)
Name and address of the firm.
b)
Names and addresses of the partners.
c)
Nature of Business.
d)
Amount of capital to be contributed by each
partner.
e)
Profit or loss sharing ratio.
f)
Date of commencement of partnership.
g)
Interest of Capital, if provided the rate of
interest must be specified.
h)
Partner’s salaries and commission, if
provided.
i)
Interest on Drawings, if charged, the rate of
interest should also be specified.
Q.3. What are the rules to be followed
in the absence of Partnership agreement between partners? 2000, 2002, 2009,
2011, 2014
Ans: According to Indian Partnership Act 1932 (sec. 4), the
following provision are applicable in the absence of partnership deed:
a)
Profit Sharing Ratio: In the absence of
partnership deed all partners will share Profit or losses in equal ratio.
b)
Interest on Capital: No interest will be given
to any partner on his capital in the absence of partnership deed. In case,
there is a partnership deed, which allows interest on capital, it will be
allowed in case of profit but not in case of loss in the business.
c)
Interest on Drawings: No interest will be
charged on drawing in the absence of partnership deed.
d)
Partner’s Salary/Commission: No salary or
commission will be given to any partner in the absence of partnership deed.
e)
Interest on Partner’s Loan: Interest on
partner’s loan will be given @ 6% p.a. Such interest is payable even if there
are losses.
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ALSO READ (AHSEC ASSAM BOARD CLASS 12):
1. AHSEC CLASS 12 ACCOUNTANCY CHAPTERWISE NOTES
2. AHSEC CLASS 12 ACCOUNTANCY IMPORTANT QUESTION (THEORY)
3. AHSEC CLASS 12 ACCOUNTANCY IMPORTANT QUESTION BANK (PRACTICAL)
4. AHSEC CLASS 12 ACCOUNTANCY PAST EXAM PAPERS (FROM 2012 TILL DATE)
5. AHSEC CLASS 12 ACCOUNTANCY SOLVED QUESTION PAPERS (FROM 2012 TILL DATE)
6. AHSEC CLASS 12 ACCOUNTANCY CHAPTERWISE MCQS
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Q.4. Mention three Rights and Duties
of Partners. 2009, 2014
Ans: Duties (Obligations) of a Partner:
It is the duty of Partners:
a)
It is the duty of every partner to devote his
full attention and time to the firm.
b)
It is the duty of every partner to act
honestly for the benefit of the firm.
c)
It is the duty of every partner to not to
carry similar business.
d)
Every partner must share losses of the firm.
e)
It is the duty of every partner to maintain
secrecy and does not share business secrets with others.
Rights of a Partner:
a)
Every partner has a right to take part in the
conduct and management of the business.
b)
Every partner has a right to be consulted in
the matters of the partnership.
c)
Every partner has a right to share profits with
others in the agreed ratio.
d)
Partners have a right of free access to all
records, books of accounts and also to examine and copy them.
e)
Every partner has the right not to allow the
admission of a new partner.
f)
Every partner has the right to retire from the
firm after giving proper notice.
Q.5. What are various types of
partners and partnership?
Ans: Types of Partners :
a)
Active partner: An active
partner is a partner who gives capital, participates in management, shares the profits and losses and has unlimited
liability.
b)
Sleeping partner or
Dormant Partner: A Partner who do not take part in the business activities.
c)
Secret partner: A partner
who has association with the firm but unknown to the public.
d)
Nominal partner: A partner
who allows his name to be used by the firm is called nominal partner.
e)
Partner by estoppel:
A
person who by behaviour sets an impression to others that he/she is a partner
of the firm.
f)
Partner by holding
out: A
person who is not a partner but allows himself to be represented as partner in
a firm.
Kinds of
Partnership:
Partnership firms are of two type’s viz.,
General Partnership and Limited Partnership.
1. General Partnership: In this case the liability of all the
partners is unlimited. General
Partnership can be further divided into two types i.e. (i) Partnership at Will,
and (ii) Particular Partnership. These are explained as under:
(i) Partnership at will: When a partnership firm is constituted
for unspecified period, it is known as Partnership at will. It can be dissolved
by any partner by giving a notice indicating that he wants to withdraw his
interest from the firm.
(ii) Particular partnership: As the very
name suggests, this type of partnership is formed for conducting business of
specific or temporary nature. The partnership comes to an end either on the
accomplishment of the task for which the partnership was undertaken or on the
expiry of the time period for which the firm was constituted.
2. Limited Partnership: Under this type
of partnership some of the partners have unlimited liability while others have
limited liability up to their individual share in the capital of the firm.
Q.6. What is Profit and Loss
appropriation Account? Mention its purpose and features. Distinguish between
profit and loss account and profit and loss appropriation account. 2020
Ans: Profit or loss appropriation
account: For the purpose of distribution of net profit between or amongst
the partners, an additional account known as profit and loss appropriation
accounts is prepared. This account is nominal in nature. It is prepared after
profit and loss accounts to show the distribution of net profit amongst the
partners after all appropriations. It is credited with net profit as shown by
profit and loss account, interest on drawings and fines/penalty charged on
partners and debited with interest on capital, partner’s salaries & commission
and transfer to reserves. The balance of this account is distributed
between/amongst the partners in their agreed profit sharing ratio.
Purpose of
preparing profit and loss appropriation: In case of sole trade business, the
whole of the net profit is credited to the proprietor’s capital and the capital
account is debited for any drawings. But in case of partnership business, a
separate account is needed for appropriation and distribution of profits
between or amongst the partners. So, a new account is added after profit and
loss account which is prepared only in case of partnership business. This
account will show how the net profit of the business is being appropriated
among partners.
Features
of Profit and loss Appropriation account:
a) It is an extension of the profit and loss
account.
b) It is a nominal account.
c) It is prepared by partnership firms only.
d) It is prepared as per the contents of
partnership deed.
e) It shows the appropriation of profit for
the accounting period.
Difference between Profit and loss
account and Profit and loss appropriation account:
Profit and loss
Account |
Profit and loss
appropriation account |
1. It is prepared after trading account. 2. This account is prepared by every form of
business organisation. 3. Items debited in profit and loss account
are all expenses. 4. At the time of preparing this account,
matching concept is followed. 5. This account is the basis of calculation
of income tax. |
1. It is prepared after profit and loss
account. 2. This account is prepared by partnership
firm only. 3. Items debited in profit and loss
appropriation account are all appropriations. 4. At the time of preparing this account, no
matching concept is followed. 5. This account is not the basis of
calculation of income tax. |
Q.7. What is fixed and fluctuating
capital? Distinguish between them. 2007,
2020
Ans: In case of a partnership firm, a separate account is
maintained for each partner to record various transactions between the firm and
partners and to find the capital balance of each partner at the end of the
year. This separate account is called partner’s capital account. A partnership
firm can maintain the capital accounts of partners as fixed capital account
method or Fluctuating capital Accounts method.
A) Fixed
Capital Account method: Fixed capital means capital balance of the
partners shall remain unchanged except in certain cases. When fixed capital
method is followed, two accounts i.e., A Capital Account and a Current Account
for each partner are maintained.
Capital
Accounts: In case capital accounts are fixed, the opening and closing
balances of capital accounts normally remain unchanged. But, if additional
capital is introduced or drawings are made out of capital during the accounting
year then closing capital will differ from opening capital. Fixed capital
account always shows credit balance.
Current
Accounts: When capital account is fixed, then current account is opened for
each partner separately to record all the transactions, other than capital contribution
and withdrawal of capital, between the firm and the partner. It is credited
with partner’s salary, fees, bonus, commission, interest on capital, share in
profits, partners’ share in reserves and goodwill and debited with Drawings out
of profit, interest on drawings and share in losses. Current account of the
partners may show both credit or debit balance.
B)
Fluctuating Capital Account Method: Under fluctuating capital account
method, only Capital account is maintained for each partner. Fluctuating
capital method is normally followed for maintaining capital accounts in the
absence of any instructions. Fluctuating capital accounts of partners means
where in all the transactions relating to partners e.g. salary, fees
,commission, interest on capital, share in profits, goodwill, reserves,
drawings etc., are recorded along with the opening balance of capital and
additional capital introduced in the firm. In case of fluctuating capital
accounts, current accounts of partners are not opened. The closing balances of
partner’s capital account may show debit or credit balance.
Difference
between fixed capital accounts and fluctuating capital Accounts: 2018
Basic of difference |
Fixed Capital Account |
Fluctuating Capital Accounts |
1. Opening and Closing balance |
Opening and Closing balances normally remains the same. |
Opening and Closing balance changed due to adjustment in capital
account. |
2. Current account |
Current accounts of partners are opened in this case. |
Current accounts of partners are not opened in this case. |
3. Adjustment relating to capital |
All adjustment relating to partners capital accounts are made in
current account. |
All such adjustments are made in capital account itself. |
4. Closing capital |
The closing balance of capital account always shows a credit
balance. |
The closing balances of partner’s capital account may be debit
or credit. |
5. Number of Accounts |
Two accounts i.e. capital and current account is maintained. |
Only one account i.e. capital account is maintained. |
6. Specific mention |
If capital is fixed, then it should be specifically mentioned in
the deed. |
It is not necessary to be mentioned in the deed. |
Q. 8. Mention the adjustment entries
for P/L appropriation account. 1999,
2003, 2012,
Ans:
Adjustment entries for P/L Appropriation account
Particulars |
When Capitals
are Fixed |
When Capitals
are Fluctuating |
1. For Interest on Capital (Adjustment Entries) |
Interest on Capital A/c Dr. Partner’s Current A/c Cr. |
Interest on Capital A/c Dr. Partner’s Capital A/c Cr. |
Transferring
interest of capital to p/l appropriation account |
Profit and Loss Appropriation A/c Dr. To Interest on
Capital A/c |
|
2. For Interest on Drawing |
Partner’s Current A/c Dr. Interest on Drawings A/c Cr. |
Partner’s Capital A/c Dr. Interest on Drawings A/c Cr. |
Transferring
interest of Drawings to p/l appropriation account |
Interest on
Drawings A/c Dr. To Profit and
Loss Appropriation A/c |
|
3. For Partner’s Salaries/ bonus /commission |
Partner’s Salaries A/c Dr. Partner’s Current A/c Cr. |
Partner’s Salaries A/c Dr. Partner’s Current A/c Cr. |
Transferring
interest of Partner’s salaries/bonus/commission to p/l appropriation account |
Profit and Loss Appropriation A/c Dr. To Partner’s
salaries/bonus/commission A/c |
|
4. Interest on Partner’s loan |
Interest on Partner’s Loan A/c Dr. Partner’s Loan A/c Cr. |
Interest on Partner’s Loan A/c Dr. Partner’s Loan A/c Cr. |
Transferring
interest on partner’s loan to profit and loss account |
Profit and Loss
Account Dr. To Interest on
Partner’s Loan A/c |
|
5. Creation of reserve |
Profit and Loss Appropriation A/c Dr To
General Reserve A/c |
Q.9. What do you mean by Guarantee in
Partnership and Past Adjustments?
Ans: Guarantee in partnership: A new
partner may be admitted into the firm for the promotion and expansion of
business. Sometimes on the admission of a new person into a partnership the old
partner may agree that the new partner would be entitled to receive a minimum
amount of profits, irrespective of the actual profit earned by the business. This
is called guarantee of share of profit in partnership. In such a case, the old
partners offer a guarantee of the minimum amount of profits to new partner in
case his actual share of profit is less than the stipulated amount. The
deficiency arises due to such guarantee will be borne by the partners who have
given the guarantee in their respective profit or loss sharing ratio.
Past Adjustments: Sometimes
profits or losses of the firm are distributed amongst the partners for a particular
period without giving due consideration to the terms and conditions contained in
the partnership deed. Those ignored or omitted terms and conditions may require
to be adjusted after the close of the accounting period. Since some accounting
treatment is required to correct the past errors or omission, therefore,
treatment is called past adjustments.
Q.10. What is Joint Venture? Write two
similarities and difference between Joint venture and Partnership.
Ans: Meaning of Joint Venture 1999, 2000, 2003, 2011
A joint venture is the combination of two or
more persons into a single activity. It is a form of partnership which is
limited to a specific venture. It is exactly the same as partnership, with the
exception that it is one of a business that is to be terminated after the
completion of the particular business.
Since the business is to be terminated after completion of the venture,
a firm name is not generally used. Thus the joint venture is like a temporary
partnership without a firm name. It can also be said a particular partnership
or partnership for a particular object.
Similarities
between Partnership and Joint Venture:
Basis |
Partnership |
Joint Venture |
Association |
It is association of two or more partners. |
A joint venture is the combination of two or
more persons into a single activity. |
Distribution of
Profits |
Primary aim of partners is to distribute
profit between them. |
The profits are ascertained for each venture
separately and distributed between covertures. |
Difference
between Partnership and Joint Venture:
Basis of
Difference |
Partnership |
Joint Venture |
Going Concern |
It is a going concern. |
It is a terminable venture. |
Name |
It always has a name. |
It may not bear a name. |
Parties |
Persons carrying on business are called
partners. |
Persons carrying on business are called
co-venturers. |
Ascertainment
of profit |
Profits are ascertained at regular
intervals, i.e., annually. |
|
Accounts |
Maintenance of separate account is
mandatory.` |
Maintenance of separate account is not
necessary. |
Q.11. What do you mean by Goodwill?
What are its various types? Why it is valued?
2017, 2019
Ans: Goodwill: Goodwill
is an intangible asset which indicates the value of the reputation of a firm. It
comes into existence due to various favourable factors such as favourable
location, efficient management, good quality of product and services etc. It is
one factor which distinguishes an old established business from a new business.
It can also be defined as the capacity of a business to earn extra income.
In the words of Eric L. Kohler “Goodwill is
the present value of expected future profits in excess of a normal return on
the investment in tangible assets.”
Types of
Goodwill
Goodwill is mainly of two types:
1.
Purchased Goodwill
2.
Non-Purchased Goodwill
Purchased Goodwill: It is that goodwill which is
acquired by making a payment. When one business is taken over by another business,
the excess of purchase consideration over its net value (assets-liabilities) of
the business which is taken over is termed to as purchased Goodwill. This type
of goodwill is shown in the balance sheet.
Non Purchased Goodwill: Non Purchased Goodwill
is an internally generated goodwill which arises because of favourable factors
that a business possesses (e.g., favourable location, time factor and
efficiency of management). This type of goodwill is not to be recognised as an
asset hence not shown in balance sheet.
Situations/Reasons
for Valuation of Goodwill 2009,
2012, 2019
In case of a partnership firm, the need for
valuation of goodwill may arise under the following circumstances:
a)
When a new partner is admitted,
b)
When a partner retires from the firm
c)
When a partner dies
d)
When there is a change in profit sharing ratio
among partners,
e)
When the firm is sold as a going concern,
f)
When two or more firms amalgamated.
Q.12. What are various characteristics
of goodwill? What are the factors affecting the value of goodwill?
Ans: Nature and Characteristics of
Goodwill
a)
It is an intangible and not a fictitious
asset.
b)
It indicates the capacity of a firm to earn
extra income.
c)
It comes into existence due to various
favourable factors such as favourable location, efficient management, good
quality of product and services etc.
d)
It is difficult to ascertain the exact value
of goodwill.
e)
It can be sold along with the sale of the
business.
Factors
affecting the value of Goodwill are: 2007,
2019
a)
Skill in Management: If the management is
capable and efficient, the firm will earn good profits and that will raise the
value of goodwill.
b)
Location Factor: If the business is located at
a favourable place, it can increase the volume of sales which correspondingly
increases the value of goodwill.
c)
Quality: If the quality of goods and services
are high, then there will be a ready market for the goods and the value of its
goodwill will be high.
d)
Favourable Contracts: Sometimes, a firm enters
into long term contracts for sale and purchase of goods at favourable prices.
This will also affect profits and goodwill of the firm.
e)
Risk Involved: When the risk is less in the
business it creates more goodwill but if the risk is more, it creates less
goodwill.
f)
Market situation: If a firm deals in a product
whose demand is higher than the supply, it will lead to a higher profit thereby
increasing the value of goodwill of the firm.
Q.13. Explain various methods for
valuation of Goodwill. 2008,
2013, 2015, 2017
Ans: Methods of Valuation of Goodwill:
1)
Average/Simple Average profits method 2019
2)
Weighted average profit method
3)
Super profit method 2012,
2019, 2020
4)
Capitalisation method 2016
5)
Annuity method
1)
Average
Profits Method: In this method, Actual maintainable profits of business over a number
of years are taken into account. Actual maintainable profits earned over a
number of years are totalled and average is determined by dividing total with
number of years. The average profits so determined are multiplied by the number
of year’s purchases to arrive at the value of goodwill.
For
calculation of goodwill following steps are to be followed
1.
Calculate Actual maintainable profits with the
help of following formula. Actual maintainable profits = Net Profit + Abnormal
loss – Abnormal Gain – regular business expenses not considered in accounts.
2.
Calculate Average maintainable Profit = Total Actual
maintainable profits /no of years.
3.
Calculate goodwill = Average maintainable
Profit x no. of year’s purchase
2)
Weighted
average method: This method is a modified version of average profit method. In
this method each year profit is assigned a weight i.e. 1, 2, 3, 4 etc.
Thereafter each year profit is multiplied by the weights so assigned and the sums
of the products are calculated. The total of products is divided by the total
of weights. As a result we find the weighted average profit. After this the
value of goodwill is calculated by multiplying the weighted average profit with
the agreed number of year’s purchase.
For calculation of goodwill following steps are to be followed:
1.
Total of Product of Profits: Sum of product of
each year’s profit with weights.
2.
Weighted average profit = (Total of Product of
Profits / Total of Weights)
3.
Value of goodwill = Weighted average profit × number of year of
purchase
3)
Super
Profit Method: Super Profits means excess of actual average maintainable profits
over normal Profit of a firm. Normal profits mean the profit which the firms
could normally earns in a particular business. It is calculated by multiplying
capital employed in the firm with normal rate of return. Goodwill under this
method is calculated by multiplying super profit with the agreed number of
year’s purchase.
Under this method, the following steps
are to be followed for calculation of goodwill:
1.
Calculate average maintainable profit with the
help of following formula: Total Actual maintainable profits /no of years.
2.
Calculate normal profit by multiplying capital
employed with normal rate of return.
3.
Calculate super profit. Super profit is the
excess of average maintainable profit over normal profit.
4.
Calculate the value of goodwill = super profit
x no. of year’s purchase
4)
Capitalization
Method: Under this method, the value of goodwill is obtained by
capitalizing the average profit or super profit of the basis of normal rate.
Value
of goodwill under capitalization of average profit is
Goodwill = (Average normal profit of
the business/ rate of return) – capital employed
Value
of goodwill under capitalization of super profit is
Goodwill = Super profit/ rate of
return
5)
Annuity Method: Under this method,
goodwill is calculated on the basis of super profit of a definite period of
time. Super profit so calculated is discounted at a given rate of interest to
find the present value of super profit. The present value so calculated is the
required amount of goodwill of the firm under annuity method.
In this method, goodwill is calculated with the help of following formula:
Goodwill = Annuity Factor x Super Profit