Accounting for Partnership Important Questions for CBSE Class 12 Accountancy Computation of Appropriation Items and Change Items
1. Interest on Capital Interest on capital is allowed to compensate partners for contributing capital to the firm. It is paid only if the same has been provided for in the partnership.
Interest on Capital = Amount of Capital x Rate/100 x Time
JOURNAL
(i) Interest on Capital A/c   Dr
To Partners Capital/Current A/c
(ii) Profit and Loss Appropriation A/c   Dr
To Interest on Capital A/c
Different cases related to interest on capital:
(i) When partnership deed is silent-Not allowed
(ii) When partnership deed provides that interest on capital is to be allowed.
There are three possible conditions:
(a) In case of loss Not allowed.
(b) In case of sufficient profit Interest on capital is allowed in full.
(c) In case of insufficient profit Interest on capital is allowed proportionately to the extent of profits. In this case profits are distributed in capital ratio.
(iiii) If interest on capital is to be provided as a charge, it is allowed in full irrespective of profit or losses.
NOTE (i) Interest on additional capital will be calculated for the period it remained with the firm, i.e. from the date of introduction of additional capital to the last day of accounting year.
If Opening Capital is not given, it can be calculated as:
Opening Capital = Closing Capital + Drawings – Profits – Additional Capital
(ii) Interest on capital is calculated on the opening balance of the capital for the full year.
2. Interest on Partner’s Drawings The amount withdrawn by partners in cash or in kind for their personal use in anticipation of profits, is termed as drawings.
When the partnership deed is silent, no interest on drawings is charged.
Interest on drawings is calculated with reference to time period for which money was withdrawn.
Interest on drawings in different cases is calculated as follows:
(i) If a partner withdraws a fixed amount in the beginning, middle and end of each period.
Interest on Drawings = Total Drawings x Rate/100 x Time/12
Value of time under different circumstances will be as under:
ii)When an unequal amount is withdrawn at different dates, the interest on drawings is calculated with the help of
(a)Simple method
(b) Product method
Interest on Drawings = Total of Product x Rate/100 x 1/365 or 1/12
(iii) If the date of withdrawl is not given, then the interest on total drawings for the year is calculated for a six month period on an average basis.
3. Accounting Treatment of Salary or Commission to a Partner
Salary or commission to a partner is to be allowed, if the partnership agreement provides for the same. Salary or commission to a partner is an appropriation out of profits and not a charge against the profits, i.e. they are to be allowed only if there are profits and hence, must be transferred to the debit of profit and loss appropriation account and not to the debit of profit and loss account.
Commission may be allowed as a percentage of net profit before charging such commission or after charging such commission.
(i) Commission as percentage of net profit before charging such commission
= Net Profit before Commission x Rate of Commission/100
(ii) Commission as percentage of net profit after charging such commission
= Net Profit before Commission x Rate of Commission/100 + Rate of Commission
NOTE
Charges such as interest on partners’ loans, manager’s salary and commission must be deducted from profit before transferring it to profit and loss appropriation account.
4. Accounting Treatment of Interest on Partner’s Loan to the Firm
Interest on partner’s loan is a charge against the profits and not an appropriation out of profits and hence, must be transferred to the debit of profit and loss account and not to the debit of profit and loss appropriation account.
NOTE (i) If there is an agreement as to the rate of interest, partner is entitled to an interest on loan at an agreed rate of interest. If there is no agreement as to the rate of interest, partner is entitled to interest on loan @ 6% per annum.
(ii) Interest on partner’s loan is not recorded in the partner’s capital/current account but it should be recorded to the credit side of partner’s loan account, if it is outstanding.
5. Rent Paid to a Partner It is a charge against the profit and not an appropriation out of profits. It is therefore, debited to profit and loss account and credited to partner’s current account in case of fixed capitals or to partner’s capital account, when capitals are fluctuating.
Previous Years Examination Questions
1 Mark Questions
1. A partnership deed provides for the payment of interest on capital but there was a loss instead of profit during the year 2010-2011. At what rate will the interest on capital be allowed? (All India 2012)
Ans. No interest on capital will be allowed as there was loss in the firm.
2. Give the average period in months for charging interest on drawings for the same amount withdrawn at the beginning of each quarter. (All India 2011)
Ans. The average period for charging interest on drawings for the same amount withdrawn at the beginning of each quarter is 7 1/2 months which can be computed as follows = 12+3 /2=15/2=7.5
Interest on Drawings =Total Drawings x Rate/100 x 7 Â 1/2 /12
3.How is interest on drawings calculated, if the drawings are made at regular intervals, as on the first day of each month? Â (Delhi 2009)
Ans. If the drawings are made regularly on the first day of each month, the interest on drawings will be calculated for 6-^ months which can be computed as follows:
= 12+1 /2 = 13/2 Â =6.5
Interest on Drawings = Total Drawings x Rate/100 x 6  1/2 /12
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