In this topic
Learning outcomes
- Explain the relevant accounting rule and terminology.
- Prepare a correctly classified calculation or statement.
- Show working notes and verify the debit-credit or balance check.
Key vocabulary
Concepts to know
Distribution of divisible profit among partners according to their agreement; it is made after arriving at net profit.
An expense payable whether or not the firm earns profit. Interest on a partner’s loan is a charge.
Old share minus new share; it identifies the partners who surrender a portion of their future profit share.
The value of a firm’s reputation and expected future earning capacity, measured using an agreed valuation method.
Core notes
Partnership deed and default rules
A partnership deed records the agreed terms: profit-sharing ratio, capital contributions, interest, salary or commission, drawings, admission or retirement provisions, and dispute resolution. Written terms reduce ambiguity. If the deed is silent, apply the relevant default provisions of the Indian Partnership Act, 1932: profits and losses are shared equally; no interest is allowed on capital; no partner receives salary; and interest on a partner’s advance beyond capital is allowed at 6% per annum. Always distinguish an advance/loan from capital.
A fixed-capital system keeps the capital account unchanged except for permanent changes. Routine salary, interest and drawings are recorded in a separate current account. Under a fluctuating-capital system, these items are posted directly to each partner’s capital account, so its balance changes.
Core notes
Profit and Loss Appropriation Account
Start with net profit transferred from the Profit and Loss Account. Add interest on drawings, if charged. Debit appropriations such as interest on capital, partner salary or commission, and transfer the remaining divisible profit in the agreed ratio. Interest on capital and salary are appropriations only when authorised by the deed; they are not business operating expenses. If profit is inadequate, apply the deed’s wording and the syllabus rule carefully rather than automatically treating an appropriation as a charge.
A guaranteed minimum profit is compared with the partner’s normal share. Any shortfall is borne by the guarantor(s) in the agreed guarantee ratio. Show the ordinary share first, calculate the deficiency, then adjust the guarantor shares.
Core notes
Goodwill and adjustments
Average-profit method: average maintainable profit × years’ purchase. Super-profit method: (average maintainable profit − normal profit) × years’ purchase, with normal profit = capital employed × normal rate of return. Capitalisation of average profit: maintainable profit × 100 ÷ normal rate; goodwill is capitalised value less net tangible assets. For capitalisation of super profit: super profit × 100 ÷ normal rate. Use consistent years, rates and units.
For a past adjustment, recompute the correct entitlement for each partner, compare it with what was actually recorded, and post only the net difference. This avoids reopening every ledger entry.
Worked example
Step-by-step illustration
Illustration: A and B share profits 2:1. Net profit is ₹90,000. Interest on fixed capital is A ₹10,000 and B ₹5,000; A’s deed-authorised salary is ₹12,000. Divisible balance = ₹90,000 − ₹15,000 − ₹12,000 = ₹63,000; A receives ₹42,000 and B ₹21,000 from that balance.
| Journal entry | Dr (₹) | Cr (₹) |
|---|---|---|
| Profit and Loss A/c Dr. To Profit and Loss Appropriation A/c | 90,000 | 90,000 |
| Profit and Loss Appropriation A/c Dr. To A’s Capital/Current A/c (interest) To B’s Capital/Current A/c (interest) To A’s Capital/Current A/c (salary) | 27,000 | 27,000 |
| Profit and Loss Appropriation A/c Dr. To A’s Capital/Current A/c To B’s Capital/Current A/c | 63,000 | 63,000 |
Board preparation
Original practice questions
- Why is interest on a partner’s loan treated differently from interest on capital?
- Calculate goodwill using average-profit and super-profit methods when maintainable profit, capital employed and normal return are supplied.
- Prepare a P&L Appropriation Account that includes a guaranteed minimum profit.
Label each amount as a charge, appropriation, drawing or capital item before posting. Show the deed clause or default rule, the calculation, and a debit-credit check.
These are original practice questions, not claimed previous-year questions. Follow the exact method and rounding instructions in your prescribed text and school guidance.
Current syllabus
How this topic fits the course
Accounting for Partnership Firms is part of the CBSE Class XII Accountancy course structure. Computerised Accounting is an alternative to Financial Statement Analysis, not an additional compulsory unit.
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