Chapter 1: Introduction to Partnership and Partnership Final Accounts.

Balbharati Solutions for Book-keeping and Accountancy 12th Standard Hsc Maharashtra State Board.

Chapter 1: Introduction to Partnership and Partnership Final Accounts

Select the most appropriate alternative from the following & rewrite the sentence:

When there is no partnership agreement between partners, the division of Profits takes place in ________ ratio.

1. Equal

2. capital ratio

3. initial contribution

4. experience and tenure of partner

To find out Net Profit or Net Loss of the business __________ account is prepared. 

1. Trading

2. Capital

3. Current

4. Profit & Loss

A ____________ is an Intangible Asset.

1. Goodwill

2. Stock

3. Cash

4. Furniture

In the absence of an agreement, interest on loan advanced by the partner to the firm is allowed at the rate of _____________.

1. 5%

2. 6%

3. 10% 

4. 9%

Liability of partners in a partnership business is ________.

1. Limited

2. Unlimited

3. Limited and Unlimited

4. None of the above

The Indian Partnership Act is in force since _______.

1. 1932

2. 1881 

3. 1956 

4. 1984

Maximum number of Partners in a firm are ____ according to Companies Act 2013 

1. 10

2. 25

3. 20

4. 50

---

Write the word/phrase/term, which can substitute the following sentence.

Persons who form the partnership firm.

Ans. Partners. 

Amount of cash or goods withdrawn by partners from the business from time to time.

Ans. Drawings

An association of two or more persons according to the Indian partnership Act 1932.

Ans. Partnership Firm

Act under which partnership firms are regulated.

Ans. Indian Partnership Act

Process of entering the name of a partnership firm in the register of Registrar.

Ans. Registration

Partnership agreement in written form.

Ans. Partnership Deed

Under this method capital, balances of partners remain constant.

Ans. Fixed Capital Method

Proportion in which partners share profit.

Ans. Profit Sharing Ratio

Such capital method in which only Capital Account is maintained for each partner.

Ans. Fluctuating Capital Method

The account to which all adjustments are made when capital is fixed.

Ans. Current Account

Expenses which are paid before they are due.

Ans. Prepaid Expenses

The accounts that are prepared at the end of each accounting year.

Ans. Final Accounts

An asset which can be converted into cash easily.

Ans. Current Assets or Liquid Assets

Order in which fixed assets are recorded first in the Balance Sheet.

Ans. Order of liquidation

The account in which selling expenses of the business are recorded.

Ans. Profit and Loss account

Debit balance of Trading Account.

Ans. Gross Loss

Credit balance of Profit and Loss Account.

Ans. Net Profit

---

State whether the following statement is True or False with reasons.

Partnership firm is a Non-Trading Concern. – False

Explanation:

The main aim of the partnership firm is to earn maximum profit. The partnership is a trading concern. It undertakes either manufacturing or distributive activities with the sole aim of earning profit and distributing that profit among the partners in a specific ratio. It is never formed for charitable purposes.

Profit and Loss Account is a Real Account. – False.

Explanation:

Account of expenses, losses, gains, and incomes is called the Nominal account. Profit and Loss Account contains all indirect expenses and indirect incomes of the firm. Therefore, Profit and Loss Account is a Nominal Account and not a real account.

Carriage inward is a carriage on purchase. – True

Explanation:

Total transport expenses incurred on bringing the goods from the market to the place of business is called the carriage. When goods are purchased, the carriage is supposed to be borne by the firm. It is known as carriage inward. It means carriage paid on purchase.

Adjustments are recorded in Partner’s Current Account in Fixed Capital Method. – True

Explanation:

In the Fixed Capital Method, as the name suggests capital balances (opening and closing) generally remain fixed. Under this method, adjustments are not to be recorded in the Capital Account. All adjustments are recorded in a separate account called Partners’ Current Accounts.

Prepaid expenses are treated as liabilities. – False

Explanation:

Prepaid expenses are expenses which are paid before they are due. Therefore, they are considered an asset of the business organisation.

If the partnership deed is silent, partners share profits and losses in proportion to their capital. – False

Explanation:

As per the provisions made under Indian Partnership Act 1932, when partnership deed is silent about profit and loss sharing ratio, partners are supposed to share profits and losses in equal proportion, and not in their capital ratio

Balance Sheet is an Account. – False

Explanation:

Financial statement showing all assets and liabilities is called the Balance sheet. It is not an account. It is a position statement which shows various assets owned by the firm and various liabilities owned by it. On the left-hand side, all liabilities are listed and on the right-hand side all assets are recorded.

Wages paid for the installation of Machinery is a Revenue expenditure. – False

Explanation:

Wages paid for the installation of machinery is a capital expenditure and therefore it is added to the cost of machinery. It is, generally, paid once in the life of an asset. It is long-term and capital expenditure.

Income received in advance is a liability. – True

Explanation:

When income in respect to next year, it is received in the current year, it is known as income received in advance. So, in next year the firm will not be able to receive that amount and therefore it is considered as a liability for the current year.

R.D.D. is created on Creditors. – False.

Explanation:

R.D.D. stands for Reserve for Doubtful Debts. It is created on the value of debtors. Such provision is made against profit and loss account. In the future if the loss is incurred on account of bad debts, such amount is used to run the business.

Depreciation is not calculated on Current Assets. – True

Explanation:

Current Assets mean liquid assets having no fixed tenure therefore depreciation cannot be calculated on it. Depreciation is calculated and charged on fixed assets for their use, wear and tear, etc.

Goodwill is an intangible asset. – True

Explanation:

Goodwill is a reputation of a business computed in terms of money. Reputation can be experienced but can’t be seen or felt. Therefore, Goodwill is an intangible asset.

Indirect expenses are debited to the Trading Account. – False

Explanation:

Indirect expenses mean expenses that are not directly related to the production of goods and services. Therefore, indirect expenses cannot be debited to the Trading Account. All indirect expenses are debited to the Profit and Loss Account.

Bank loan is a current liability. – False.

Explanation:

The loan usually taken for the period more than 1 year say 5 years from the bank is called Bank Loan. It is a long term loan. It is not repaid within 1 year but paid in installments over a number of years. It might be paid in lumpsum at the expiry of the term.

Net profit is a debit balance of Profit and Loss Account. – False

Explanation:

In a Profit and Loss Account, when the credit side total i.e. a total of incomes is more than the debit side total, i.e. expenses it is known as a credit balance. When incomes exceed expenses there is profit. Therefore the credit balance of Profit and Loss Account indicates net profit.

---

Find an odd one.

Wages, Salary, Royalty, Import Duty.

Wages

Salary

Royalty

Import Duty

Postage, Stationery, Advertising, Purchases.

Postage

Stationery 

Advertising

Purchases.

Capital, Bills Receivable, Reserve Fund, Bank overdraft.

Capital

Bills Receivable

Reserve Fund

Bank overdraft.

Building, Machinery, Furniture, Bills payable.

Building

Machinery

Furniture

Bills payable.

Discount received, Dividend received, Interest received, Depreciation.

Discount received

Dividend received

Interest received

Depreciation.

---

Complete the Sentence.

Partners share profit & losses in equal ratio in the absence of partnership deed.

Registration of Partnership is optional in India.

Partnership business must be lawful.

Liabilities of Partners in Partnership firm is unlimited.

The balance of Drawings Account of a partner is transferred to his current account under the Fixed Capital Method.

The interest on capital of a partner is debited to  Profit and Loss account.

Partners are joint & several liable for the debts of the firm.

Partnership Deed is an  Article of Partnership.

The withdrawal by partner for personal use from the firm is debited to his account.

Commission payable to partner is liability/ outstanding expense to the firm.

When partners adopt Fixed Capital Method then they have to operate partners current Account.

If partners Current Account shows credit balance it is shown to the liability side of Balance sheet.

The expenses paid for trading purpose are known as trade expenses.

Cash receipts which are recurring in nature are called as revenue Receipts.

Return outward are deducted from purchase .

Expenses which are paid before due date are called as Prepaid Expenses .

Assets which are held in the business for a long period are called fixed assets.

Trading Account is prepared on the basis of is direct expenses.

When commission is allowed to any partner, it is expenditure of the business.

When goods are distributed as free samples, it is treated as advertisement expense of the business.

---

Answer in one sentence only

What is Fluctuating Capital?

When capital balances of the partners go on changing every year due to transactions of partners with the firm, it is known as Fluctuating Capital.

Why is Partnership Deed necessary?

Partnership Deed is necessary to prevent disputes or misunderstandings among the partners in future.

If the Partnership Deed is silent, in which ratio, the partners will share the profit or loss?

If the Partnership Deed is silent, partners will share profits and losses in equal ratio.

What is the Fixed Capital Method?

Fixed Capital Method is one in which capital balances of the partners remains same at the end of every financial year unless any amount of additional capital is introduced or part of the capital is withdrawn by the partner from the business.

How many partners are required to form a partnership firm?

Minimum two persons are required to form a partnership firm.

What is Partnership Deed?

A partnership deed is a written agreement duly stamped and signed document containing the terms and condition of the partnership.

What are the objectives of the Partnership Firm?

To earn maximum profit is the main objective of the partnership firm.

What rate of interest is allowed on partner’s loan in the absence of an agreement?

6 % is the rate of interest to be allowed on partner’s loan in the absence of an agreement.

What is the minimum number of partners in a partnership firm according to Indian PartnershipAct 1932?

Minimum two persons are required number of partners in a partnership firm according to Indian Partnership Act 1932.

What is liability of a partner?

Liability of a partner (except minor partner) is unlimited.

In the absence of Partnership Deed, what is the rate of interest on loan advanced by a partner to the firm is allowed?

In the absence of Partnership Deed, 6 % is the rate of interest on loan advanced by partner to the firm

What do you mean by pre-received income?

Income which is received by the partnership firm before it is due is called pre received income.

What is the effect of the adjustment of provision for discount on debtors in the final accounts of partnership?

The effects of the adjustment of provision for discount on debtors in the final accounts of partnership are as follows : Debit Profit and Loss A/c and deduct the amount of provision for discount on debtors from the amount of debtors.

When is Partners Current Account is opened ?

When Fixed Capital Method is adopted by the firm, Partners Current Account is opened.

As per which principle of accounting, closing stock is valued at cost price or at market price whichever is less?

As per Conservatism principle of accounting, closing stock is valued at cost price or at market price whichever is less.

What is the provision of Indian Partnership Act with regard to Interest on Capital?

As per provision of Indian Partnership Act, Interest on Capital is not to be allowed.

Why is Balance Sheet prepared?

Balance Sheet is prepared to know the financial position of the business in the form of its assets and liabilities on a particular date.

Why wages paid for installation of machinery are not shown in Trading Account?

Wages paid for installation of machinery is a capital expenditure and it is not to be recorded in Trading Account.

What do you mean by indirect incomes?

All incomes other than direct incomes are called indirect incomes. [e.g. Interest received on investments, Incomes like discount, commission, dividend, rent etc. received].

Why partners capital is treated as long-term liability of business?

Partner’s Capital is not refunded during the existence of partnership firm unless partner is retired or expired.

---

Do you agree/disagree with the following statement:

When Partnership Deed is silent, Partners share profits of the firm according to capital ratio.

Agree

Disagree

Current account always shows a debit balance.

Agree

Disagree

It is compulsory to have a partnership agreement in writing.

Agree

Disagree

Partnership Firm is a trading concern.

Agree

Disagree

An interest on capital is an expenditure for the partnership firm.

Agree

Disagree

Partnership is an association of two or more persons.

Agree

Disagree

Partners are entitled to get Salary or Commission.

Agree

Disagree

The balance of Capital Account remains constant under Fixed Capital Method.

Agree

Disagree

The Indian Partnership Act, came into existence in the year 1945.

Agree

Disagree

Profit and Loss Account reflects the true Financial position.

Agree

Disagree

Amount borrowed by partner from his business will be debited to Current Account.

Agree

Disagree

Sold but undispatched goods must be part of the valuation of closing stock.

Agree

Disagree

Carriage Inward is a selling and distribution overhead.

Agree

Disagree

Gross profit is an operation profit.

Agree

Disagree

All financial expenditures are debited to profit and loss account.

Agree

Disagree

Free distribution of goods is debited to the trading account.

Agree

Disagree

---

PRACTICAL PROBLEM SUM NUMBER 1

Amitbhai and Narendrabhai are in Partnership Sharing Profits and Losses equally. Year ended 31st March, 2019 and Balance Sheet as on that date. Trial Balance as on 31st March, 2019 – Book Keeping and Accountancy.

Balbharati solutions for Book-keeping and Accountancy 12th Standard Hsc Maharashtra State Board 

Chapter 1 Introduction to Partnership and Partnership Final Accounts Practise Problem [Pages 54 – 61]

Practise Problem | Q 1 | Page 54

 Trial Balance as on 31st March 2019

Debit Balance	Amount ₹	Credit Balance	Amount ₹
Plant & Machinery	2,80,000	Capital A/c :
Factory Building	75,000	Amitbhai	3,50,000
Sundry Debtors	28,700	Narendrabhai	3,00,000
Purchases	85,500	Sales	1,80,000
Bad Debts	500	Bills Payable	8,500
Sales Return	2,200	Discount	1,200
10% Govt. Bond(Purchased on 1st Oct 2018)	40,000	Creditors	38,500
Import Duty	1,800	R.D	2,700
Legal Charges	2,000	Bank Loan	15,000
Motive Power	12,000	Purchases Return	2,000
Warehouse Rent	1,800
Cash in Hand	20,000
Cash at Bank	70,000
Advertisement (for 2 years, w.e.f 1st Jan 2019)	10,000
Salaries	3,800
Rent	1,500
Drawings :
Amitbhai	2,400
Narendrabhai	3,200
Furniture	1,95,800
Bills Receivable	20,700
Freehold Property	41,000
	8,97,900		8,97,900

Adjustments :

1) Stock on hand on 31st March 2019 was valued at  ₹ 43,000.

2) Uninsured goods worth ₹ 8,000 were stolen.

3) Create R.D.D at 2% on Sundry debtors.

4) Mr. Patil, our customer became insolvent and could not pay his debts of ₹ 500.

5) Outstanding Expenses – Rent ₹ 800 and Salaries ₹ 300

6) Depreciate Factory Building by ₹ 2,500 and Furniture by ₹ 1,800

SOLUTION:-

In the books of Amitbhai and Narendrabhai Trading and Profit and Loss Account for the year ended on 31st March 2019

Dr.					Cr.
Particulars	Amount ₹	Amount ₹	Particulars	Amount ₹	Amount ₹
To Purchases	85,500		By Sales	1,80,000
Less: Purchase Return	2,000	83,500	Less: Sales Return	2,200	1,77,800
To Import Duty		1,800	By Closing Stock		43,000
To Motive Power		12,000	By Goods Stolen Away		8,000
To Depreciation – Factory Building		2,500
To Gross Profit c/d		1,29,000
		2,28,800			2,28,800
		PROFIT AND LOSS A/C
To Warehouse Rent		1,800	By Gross Profit b/d		1,29,000
To R.B.D.D. A/C	NIL		By Discount		1,200
Bad debts	500		By O/s Interest on Govt. Bonds		2,000
Add: New Bad debts	500		By R.B.D.D. A/c (Excess Reserve)(2,700 – 1,564)		1,136
Add: New Reserve	564
	1564
Less: Old Reserve	2700
To Legal Charges		2,000
To Advertisement Expenses	10,000
less: Prepaid Adv. Exp.	8,750	1250
To Salaries	3,800
Add: O/s Salaries	300	4100
To Rent	1500
Add: O/s Rent	800	2,300
To Depreciation on Furniture		1,800
To Loss due to Theft		8,000
To Net Profit Transferred to Capital A/c
Amitbhai	56,043
Narendrabhai	56,043	1,12,086
		1,33,336			1,33,336

Balance Sheet as on 31st March 2019

Liabilities	Amount ₹	Amount ₹	Assets	Amount ₹	Amount ₹
Capital Account: Amitbhai			Plant & Machinery		2,80,000
Opening Balance	3,50,000		Factory Building	75,000
Add: Net Profit	56,043		Less: Depreciation	2,500	72,500
Less: Drawings	2,400	4,03,643	Closing Stock		43,000
			Sundry Debtors	28,700
Capital Account: Narendrabhai			Less: B.D. (New)	500
Opening Balance	3,00,000			28,200
Add: Net Profit	56,043		Less: R.D.D. (New)	564	27,636
Less: Drawings	3,200	3,52,843	10 % Govt. Bond		40,000
Bills Payable		8,500	O/s Interest on Govt. Bond		2,000
Creditors		38,500	Cash in Hand		20,000
Bank Loan		15,000	Cash at Bank		70,000
Outstanding expenses			Prepaid Advertisement Expense		8,750
Rent	800		Furniture	1,95,800
Salaries	300	1,100	Less: Depreciation	1,800	1,94,000
			Bills Receivable		20,700
			Freehold property		41,000
		8,19,586			8,19,586

Notes :

(1) Import duty, Motive power, and Depreciation on Factory building are recorded in the Trading A/c.

(2) 10 % govt. bond is an investment. It was purchased on 1 – 10 – 2018.

Interest is calculated for six months.

Interest on Govt. Bond = ₹ 40,000 X (6/12) X 10% =₹  2,000

(3) Adv. exp. paid for 2 years from 01 – 01 – 2019. Up to 31 – 3 – 2019, 3 months adv. exp. is written off to Profit and Loss A/c. It is calculated as below : 10000 X (3/24) = ₹1250

Prepaid adv. exp. 10,000 – 1,250 = ₹ 8,750

---