Accounting Entries in Partnership Firm

8/14/2019 Accounting Entries in Partnership Firm

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5 DECEMBER 09 www.afterschool.tk 1

Accounting entries in partnership firm

by :

DR. T.K. JAIN

AFTERSCHOOL

centre for social entrepreneurship

sivakamu veterinary hospital road

bikaner 334001 rajasthan, indiaFOR PGPSE PARTICIPANTS

mobile : 91+9414430763


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Basics

Dont give any salary or interest on capital toany partner (unless there is some other

agreement).

Interest on loan from partners @6%divide profits equally among partners.


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Important issues....

Find out gaining ratio or sacrificing ratio :

new ratio old ratio


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Revaluation account

Revaluation account is prepared whenever a

new partner joins or a partner retires or apartner dies or there is dissolution of

partnership or sale of partnership etc..

find the profit / loss from realisation anddistribute to partners in their profit sharing

ratio


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entries...

Credit partners for the money they bring, fortheir share of profit or for their share of

goodwill

debit partners for loss, for their withdrawals forthier share of losses


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How to identify goodwill?

There are many methods like :average profit method

super profit method

capitalisation methodetc.


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What to do with goodwill ?

Goodwill is generally not shown in balance

sheet. When a partner joins, create a goodwillaccount by crediting the amount to old partners

in their old profit sharing ratio. Afterwards

close goodwill account by debiting it to all thepartners in their new profit sharing ratio(incuding the new partner's account).


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Joint life insurance acount

There are two options - treat joint lifeinsurance premium as revenue expenditure or

treat it as capital expenditure. If you treat it asrevenue expenditure, then joint life policyaccount will not be created and therefore

whenever a partner retires, you have to create a

joint life policy account. If you treat it ascapital expenditure, you have a joint life policy

account in your balance sheet.


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Retirement of a partner

When a partner retires, he gets credits for his

share in reserves, joint life policy (surrendervalue) and profits. Generally assets, and

liabilities are revalued when a partner retires

and due to revaluation whatever profit / loss isthere is transferred to partners in old profitsharing ratio.


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Retirement entries

Suppose a joint life policy is there which isalready there in the balance sheet then the

entry will be for revaluation only.


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Dissolution of partnership

Partnership can be dissolved voluntarily or oninsolvancy or on order of court or on death ofall the partners. The losses are distributed inprofit sharring ratio but sometimes Garner

v/s Murray rule is applied.


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Surplus capital method for

distribution of proceeds

When a partnership is dissolved, first of all

make the payment to secured creditors, then tounsecured creditors and then to partners' loanaccounts and then you have to pay to partnersfor their capital. First find out surplus capital

and then distribute the proceeds in this ratio sothat the partners capital become in the ratio of

profit sharing.


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What is the difference between

secured / unsecured creditors

Secured creditors are those, who have someproperty exclusively marked for their loans.They may have some property mortgaged or

some pledge of some type. Unsecured creditors

dont have any security / guarantee / property toguarantee.


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What is surplus capital ?

X and Y have capital of 10000 and 2000, however, theirprofit sharing ratio is 1:1, so there is surplus capital of X

of 8000, because if you will pay X Rs. 8000, their capitalwill be in profit sharing ratio. Thus surplus capital is thatcapital which when paid makes the capital in the ratio oftheir profit sharing. Suppose A,B,C have capital of 1,3,

and 5 thousand, but their profit sharing ratio is 1:1:1, so Band C have surplus capital of 2 and 4 and therefore

surplus capital ratio is : 1:2


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What is Maximum loss method ?

In this method, we identify maximum loss at

each stage and distribute it to members Themaximum loss is identified at each stage ofdissolution. And this loss is distributed to

partners in their profit sharing ratio. Thereafterwhatever balance is left in their capital accountis paid to that partner.


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Example of maximum loss

method

Suppose the maximum possible loss is Rs.

1200. The profit sharing ratio is 1:1:1 and thecapitals of A,B,C are 1000, 900, 500. now

distribute the losses. Each partner gets loss of

400. Thus maximum loss of A,B,C are : 600,500, 100. Thus A,B,C will be paid Rs. 600,500 and 100 respectively.


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X,Y and Z share profit in 5:3:2. firm is dissolved.Creditors : 7500, Capital : X 18000, Y : 15000, Z :12000, Cash 3000, Debtors 27000, Stock 22500,

Stock was realised in 13500, debtors in 23250,realisation exp. 750

Money realised : (13500+23250-750-7500) = 28500 loss :( 3750+9000+750)=13500


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Surplus capital method :

First divide the capitals by their profit sharingratios :X 18000/5 = 3600 Y : 15000/3 = 5000,

Z : 12000/2 = 6000, the minimum is 3600, soas per that notional capitals should be : 3600*5

= 18000, 36*3= 10800, and 36*2 = 7200.

thus surplus capital : X = 0, Y = (15000-10800) = 4200, Z = (12000-7200) = 4800 thus

Y and Z have to be paid 4200 and 4800.


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Maximum loss method

Here we distribute the loss to the partners :

13500 distributed in 5:3:2 :

6750, 4050, 2700 this is distributed to X,Y,ZX = (18000-6750)=11250

Y=(15000-4050)= 10950

Z=(12000-2700) = 9300 to be distributed toX,Y,Z. Answer


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A,B,C share profit in ratio 9:4:3, B retires, his share istaken by A and C in 1:3. D was admitted as partner

with share, half of which is gifted by A andremaining by A &C equally.

New share of A : 9+1 = 10/16

new share of C: 3+3 = 6/16

A's gaining ratio: 10/16 9/16 = 1/16 and that of C : 3/16

D gets : 1/4, 1/8 from A and 1/8 by A and C eqully. So newshare of A : 10/16 1/8 1/16 = 7/16

new share of C: 6/16 1/16 = 5/16

thus new ratios are A:C:D: 7:5:4


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Accounting Entries in Partnership Firm