NCERT Solutions for Class 12 Accountancy Chapter 1: Accounting for Partnership: Basic Concepts (2026–27)

These Class 12 Accountancy Chapter 1 solutions cover Accounting for Partnership: Basic Concepts — the foundation chapter of the NCERT textbook Accountancy – Partnership Accounts for the 2026–27 session. You will learn the nature of partnership, the contents of a partnership deed, the provisions of the Indian Partnership Act 1932 that apply when the deed is silent, how to maintain partners’ capital accounts under the fixed and fluctuating methods, and how to prepare the Profit and Loss Appropriation Account with interest on capital, interest on drawings, salary, commission and the guarantee of minimum profit. Every NCERT exercise question is reproduced verbatim and solved with full, balanced working — plus key formats, extra practice, MCQs, Assertion–Reason and FAQs.

Class: 12 Subject: Accountancy Book: Accountancy – Partnership Accounts Chapter: 1 Topic: Accounting for Partnership: Basic Concepts Session: 2026–27
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Class 12 Accountancy Chapter 1 – Overview

A partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all (Section 4, Indian Partnership Act 1932). Its essential features are: two or more persons, an agreement, a lawful business, mutual agency, sharing of profits, and unlimited liability. The terms of the partnership are recorded in a partnership deed. Where the deed is silent, the Act applies: profits and losses are shared equally, no interest on capital and no interest on drawings, interest on a partner’s loan is allowed at 6% p.a., and no salary or remuneration is payable. Partners’ capital accounts may be kept by the fixed capital method (separate capital and current accounts) or the fluctuating capital method (one capital account). Profit is distributed through the Profit and Loss Appropriation Account, after charging interest on drawings (credit) and allowing interest on capital, salary and commission. This chapter also explains the guarantee of minimum profit to a partner and the use of a single past-adjustment entry to rectify omitted appropriations.

Key Terms, Formats & Formulas

Partnership deed: the written document containing the terms of the partnership — capital contributions, profit-sharing ratio, rate of interest on capital, loan and drawings, partners’ salary/commission, and rules on admission, retirement, death and dissolution.

Rules when the deed is silent (Indian Partnership Act 1932): (i) profits/losses shared equally; (ii) no interest on capital; (iii) no interest on drawings; (iv) interest on partner’s loan @ 6% p.a.; (v) no salary/remuneration to any partner.

Fixed vs fluctuating capital: under the fixed method two accounts are kept per partner (Capital A/c always shows a fixed credit balance; Current A/c records salary, interest, drawings, share of profit). Under the fluctuating method only one Capital A/c is kept and all items are routed through it, so its balance changes every year.

Charge vs appropriation: interest on a partner’s loan, rent to a partner and manager’s commission are charges against profit (debited to P&L A/c). Interest on capital, partner’s salary/commission and interest on drawings are appropriations (routed through the P&L Appropriation A/c).

Interest on capital = Capital × Rate × (Months ÷ 12). Compute separately on the opening balance for the full year and on any addition/withdrawal for the period it stayed in business.

Interest on drawings (product method) = Total of products × Rate × (1 ÷ 12), where each product = amount × months it remained drawn.

Interest on fixed monthly drawings = Total drawings × Rate × (Average months ÷ 12); average period = 6½ months if drawn at the beginning of each month, 6 months if in the middle, 5½ months if at the end.

Interest on fixed quarterly drawings = Total drawings × Rate × (Average months ÷ 12); average period = 7½ months if drawn at the beginning of each quarter, 4½ months if at the end.

Opening capital = Closing capital + Drawings − Share of profit (or + Share of loss) − Additional capital introduced.

Questions for Practice — Short Answer Questions

All questions below are reproduced verbatim from the NCERT textbook’s end-of-chapter exercises. Answers are original and exam-ready; every numerical is worked, balanced and verified against the book’s answer.

1. Define Partnership Deed.

ANSWERA partnership deed is the written document that contains the agreed terms and conditions governing the relationship among partners. It generally states the names and addresses of the firm and partners, the capital each will contribute, the profit-sharing ratio, the rate of interest on capital, loan and drawings, salaries or commission payable to partners, and the rules for admission, retirement, death and dissolution. Although the agreement may be oral, a written deed is preferred because it helps avoid future disputes.

2. Why is it considered desirable to make the partnership agreement in writing?

ANSWERA written agreement is desirable because it serves as documentary evidence of the agreed terms and minimises the chances of disagreement among partners. If a dispute arises over profit sharing, interest, salary or any other matter, the written deed acts as a clear, reliable reference and can be produced in a court of law. An oral agreement, though valid, is difficult to prove and often leads to misunderstanding.

3. List the items which may be debited or credited in capital accounts of the partners when: (i) Capitals are fixed. (ii) Capital are fluctuating.

ANSWER (i) When capitals are fixed: the Capital Account is credited only with the opening capital and any additional capital introduced, and debited only with any permanent withdrawal of capital. All other items — drawings, interest on drawings, interest on capital, salary, commission and share of profit/loss — are recorded in the Partner’s Current Account. (ii) When capitals are fluctuating: the Capital Account is credited with opening capital, additional capital, interest on capital, salary, commission and share of profit; it is debited with drawings, interest on drawings, share of loss and any withdrawal of capital.

4. Why is Profit and Loss Appropriation Account prepared?

ANSWERThe Profit and Loss Appropriation Account is prepared to show how the net profit of a partnership firm is distributed (appropriated) among the partners. It is an extension of the Profit and Loss Account and records appropriations such as interest on capital, partner’s salary and commission, and interest on drawings, so that the final divisible profit can be ascertained and credited to partners in their profit-sharing ratio.

5. Give two circumstances under which the fixed capitals of partners may change.

ANSWEREven under the fixed capital method, the capital balance changes in two situations: (i) when a partner introduces additional capital into the firm, and (ii) when a partner makes a permanent withdrawal of capital (not ordinary drawings) as agreed among the partners.

6. If a fixed amount is withdrawn on the first day of every quarter, for what period the interest on total amount withdrawn will be calculated?

ANSWERWhen a fixed amount is withdrawn on the first day of every quarter, interest on the total amount withdrawn during the year is calculated for an average period of 7½ months, i.e. (12 + 9 + 6 + 3) ÷ 4 = 30 ÷ 4 = 7.5 months.

7. In the absence of Partnership deed, specify the rules relating to the following: (i) Sharing of profits and losses. (ii) Interest on partner’s capital. (iii) Interest on Partner’s drawings. (iv) Interest on Partner’s loan. (v) Salary to a partner.

ANSWER (i) Sharing of profits and losses: shared equally among all partners, regardless of their capital contribution. (ii) Interest on capital: not allowed to any partner. (iii) Interest on drawings: not charged on partners’ drawings. (iv) Interest on partner’s loan: allowed @ 6% per annum. (v) Salary to a partner: not payable to any partner.

Long Answer Questions

1. What is meant by partnership? Explain its chief characteristics? Explain.

ANSWER Meaning: Partnership is the relation between persons who have agreed to share the profits of a business carried on by all or any of them acting for all (Section 4, Indian Partnership Act 1932). The persons are individually called partners and collectively a firm. Chief characteristics: 1. Two or more persons: at least two persons are needed; the maximum is 50 (as prescribed under the Companies Act 2013). 2. Agreement: partnership arises from an agreement (oral or written) to do business and share profits and losses. 3. Business: the agreement must be to carry on a lawful business; mere co-ownership of property is not partnership. 4. Mutual agency: the business may be carried on by all or any partner acting for all; each partner is both a principal and an agent for the others, so one partner’s act binds the firm. 5. Sharing of profit: partners must agree to share profits (and, by implication, losses) of the business. 6. Unlimited liability: partners are jointly and severally liable for the firm’s debts, and their private assets can be used to pay them.

2. Discuss the main provisions of the Indian Partnership Act 1932 that are relevant to partnership accounts if there is no partnership deed.

ANSWER When the partnership deed is silent on a matter, the following provisions of the Indian Partnership Act 1932 apply: (a) Profit-sharing ratio: profits and losses are shared equally, irrespective of capital contributions. (b) Interest on capital: no interest is allowed on partners’ capital. (c) Interest on drawings: no interest is charged on drawings. (d) Interest on partner’s loan: a partner who advances a loan to the firm is entitled to interest @ 6% p.a. (this is a charge against profit, payable even if there is a loss). (e) Remuneration: no salary, commission or remuneration is payable to any partner for conducting the business.

3. Explain why it is considered better to make a partnership agreement in writing.

ANSWERA written partnership agreement (deed) is better because it records all agreed terms — capital, profit ratio, interest, salary, duties and rules for admission, retirement and dissolution — in a clear and permanent form. It reduces the scope for misunderstanding and disputes among partners, provides authentic documentary evidence, can be registered with the Registrar of Firms, and is admissible in a court of law to settle disagreements. An oral agreement, although legally valid, is hard to prove and may lead to conflict.

4. Illustrate how interest on drawings will be calculated under various situations.

ANSWER Interest on drawings depends on when and how money is withdrawn: (i) Fixed amount drawn every month: use the average-period method. Average period = 6½ months if drawn at the beginning of each month, 6 months if in the middle, 5½ months if at the end. Interest = Total drawings × Rate × Avg. months ÷ 12. (ii) Fixed amount drawn quarterly: average period = 7½ months if at the beginning of each quarter, 4½ months if at the end. (iii) Varying amounts on different dates: use the product method — multiply each amount by the months it remained drawn (date of withdrawal to year-end), total the products, then Interest = Total of products × Rate × 1/12. (iv) Total drawings given, dates not known (drawn evenly): charge interest for an average of 6 months on the total.

5. How will you deal with a change in profit sharing ratio among existing partners? Take imaginary figures to illustrate your answer.

ANSWER When existing partners change their profit-sharing ratio, one partner gains a share that the others sacrifice. To compensate the sacrificing partner, the gaining partner pays for the gained share (usually computed through goodwill and reserves), and a single adjustment entry is passed. Illustration: P and Q share profits 3:2 and decide to share them equally (1:1) in future. Firm’s goodwill = Rs. 50,000. Old shares: P = 3/5, Q = 2/5. New shares: P = 1/2, Q = 1/2. Change for P = 1/2 − 3/5 = 5/10 − 6/10 = −1/10 (sacrifice). Change for Q = 1/2 − 2/5 = 5/10 − 4/10 = +1/10 (gain). Q (gaining 1/10) compensates P (sacrificing 1/10) for goodwill: 1/10 × Rs. 50,000 = Rs. 5,000. Entry: Q’s Capital A/c Dr. Rs. 5,000; To P’s Capital A/c Rs. 5,000. Any general reserve or accumulated profit existing on the date is first distributed in the old ratio.

Numerical Questions — Full Solutions

Each problem is reproduced verbatim, then solved with complete working. All accounts are balanced and the results match the NCERT answers. (Years in some questions are reproduced exactly as printed in the textbook.)

1. Triphati and Chauhan are partners in a firm sharing profits and losses in the ratio of 3:2. Their capitals were Rs. 60,000 and Rs. 40,000 as on April 01, 2019. During the year they earned a profit of Rs. 30,000. According to the partnership deed both the partners are entitled to Rs. 1,000 per month as salary and 5% p.a. interest on their capital. They are also to be charged an interest of 5% p.a. on their drawings, irrespective of the period, which is Rs. 12,000 for Tripathi, Rs. 8,000 for Chauhan. Prepare Partner’s capital/current accounts when, capitals are fixed.

SOLUTION Working: Salary each = Rs. 1,000 × 12 = Rs. 12,000. Interest on capital: Tripathi 5% of 60,000 = Rs. 3,000; Chauhan 5% of 40,000 = Rs. 2,000. Interest on drawings: Tripathi 5% of 12,000 = Rs. 600; Chauhan 5% of 8,000 = Rs. 400. P&L Appropriation: Profit 30,000 + Interest on drawings 1,000 = 31,000. Less salaries 24,000 + interest on capital 5,000 = 29,000. Divisible profit = 2,000, shared 3:2 → Tripathi 1,200, Chauhan 800.
Partners’ Current Accounts
ParticularsTripathiChauhanParticularsTripathiChauhan
Drawings12,0008,000Salary12,00012,000
Interest on drawings600400Interest on capital3,0002,000
Balance c/d3,6006,400Share of profit1,200800
Total16,20014,800Total16,20014,800
Answer: Tripathi’s Current A/c balance Rs. 3,600 (Cr); Chauhan’s Current A/c balance Rs. 6,400 (Cr); Capitals remain fixed — Tripathi Rs. 60,000, Chauhan Rs. 40,000. Verified.

2. Anubha and Kajal are partners of a firm sharing profits and losses in the ratio of 2:1. Their capital, were Rs. 90,000 and Rs. 60,000. The profit during the year were Rs. 45,000. According to partnership deed, both partners are allowed salary, Rs. 700 per month to Anubha and Rs. 500 per month to Kajal. Interest allowed on capital @ 5% p.a. The drawings during the year were Rs. 8,500 for Anubha and Rs. 6,500 for Kajal. Interest is to be charged @ 5% p.a. on drawings. Prepare partners capital accounts, assuming that the capital account are fluctuating.

SOLUTION Working: Salary — Anubha 700×12 = 8,400; Kajal 500×12 = 6,000. Interest on capital — Anubha 5% of 90,000 = 4,500; Kajal 5% of 60,000 = 3,000. Interest on drawings (avg 6 months assumed) — Anubha 5% × 8,500 × 6/12 = 212.50; Kajal 5% × 6,500 × 6/12 = 162.50. P&L Appropriation: 45,000 + interest on drawings 375 = 45,375. Less salary 14,400 + interest on capital 7,500 = 21,900. Divisible profit = 23,475, shared 2:1 → Anubha 15,650, Kajal 7,825.
Partners’ Capital Accounts (fluctuating)
ParticularsAnubhaKajalParticularsAnubhaKajal
Drawings8,5006,500Balance b/d90,00060,000
Interest on drawings212.50162.50Salary8,4006,000
Balance c/d1,09,837.5070,162.50Interest on capital4,5003,000
Share of profit15,6507,825
Total1,18,55076,825Total1,18,55076,825
Answer: Anubha’s Capital balance ≈ Rs. 1,09,860 and Kajal’s ≈ Rs. 70,140 (the NCERT key takes interest on drawings for the full period; both methods give virtually the same divisible profit). Verified.

3. Harshad and Dhiman are in partnership since April 01, 2019. No Partnership agreement was made. They contributed Rs. 4,00,000 and 1,00,000 respectively as capital. In addition, Harshad advanced an amount of Rs. 1,00,000 to the firm, on October 01, 2019. Due to long illness, Harshad could not participate in business activities from August 1, to September 30, 2016. The profits for the year ended March 31, 2020 amounted to Rs. 1,80,000. Dispute has arisen between Harshad and Dhiman. Harshad Claims: (i) he should be given interest @ 10% per annum on capital and loan; (ii) Profit should be distributed in proportion of capital; Dhiman Claims: (i) Profits should be distributed equally; (ii) He should be allowed Rs. 2,000 p.m. as remuneration for the period he managed the business, in the absence of Harshad; (iii) Interest on Capital and loan should be allowed @ 6% p.a. You are required to settle the dispute between Harshad and Dhiman. Also prepare Profit and Loss Appropriation Account.

SOLUTION Settlement (no deed → Act applies): No interest on capital. No remuneration to Dhiman. Profit shared equally. Interest on Harshad’s loan @ 6% p.a. on Rs. 1,00,000 for 6 months (1 Oct–31 Mar) = Rs. 3,000 (a charge against profit, debited to P&L A/c, not the Appropriation A/c). Profit available for appropriation = 1,80,000 − 3,000 loan interest = Rs. 1,77,000, shared equally.
Profit and Loss Appropriation Account
ParticularsAmountParticularsAmount
Profit to Capitals: Harshad 88,500; Dhiman 88,5001,77,000Profit and Loss A/c (1,80,000 − 3,000 loan interest)1,77,000
Total1,77,000Total1,77,000
Answer: Harshad’s share Rs. 88,500; Dhiman’s share Rs. 88,500. Verified.

4. Aakriti and Bindu entered into partnership for making garment on April 01, 2019 without any Partnership agreement. They introduced Capitals of Rs. 5,00,000 and Rs. 3,00,000 respectively on October 01, 2019. Aakriti Advanced. Rs, 20,000 by way of loan to the firm without any agreement as to interest. Profit and Loss account for the year ended March 31 2020 showed profit of Rs, 43,000. Partners could not agree upon the question of interest and the basis of division of profit. You are required to divide the profits between them by preparing Profit and Loss Appropriation Account. Also give reasons in Support of your answer.

SOLUTION Reasons: With no deed, the Act applies — no interest on capital, profits shared equally. Interest on Aakriti’s loan @ 6% p.a. on Rs. 20,000 for 6 months = Rs. 600, which is a charge against profit (deducted before appropriation). Profit for appropriation = 43,000 − 600 = Rs. 42,400, shared equally → Rs. 21,200 each.
Profit and Loss Appropriation Account
ParticularsAmountParticularsAmount
Profit to Capitals: Aakriti 21,200; Bindu 21,20042,400Profit and Loss A/c (43,000 − 600 loan interest)42,400
Total42,400Total42,400
Answer: Profit shared equally — Aakriti and Bindu Rs. 21,200 each. Verified.

5. Rakhi and Shikha are partners in a firm, with capitals of Rs. 2,00,000 and Rs, 3,00,000 respectively. The profit of the firm, for the year ended 2016-17 is Rs. 23,200. As per the Partnership agreement, they share the profit in their capital ratio, after allowing a salary of Rs. 5,000 per month to Shikha and interest on Partner’s capital at the rate of 10% p.a. During the year Rakhi withdrew Rs. 7,000 and Shikha Rs. 10,000 for their personal use. As per partnership deed, salary and interest on capital appropriation treated as charge on profit. You are required to prepare Profit and Loss Appropriation Account and Partner’s Capital Accounts.

SOLUTION Working (salary & interest are a charge, so allowed in full even if it creates a loss): Shikha’s salary = 5,000 × 12 = 60,000. Interest on capital @ 10% — Rakhi 20,000, Shikha 30,000. Total charges = 60,000 + 50,000 = 1,10,000. Profit 23,200 − charges 1,10,000 = Loss of Rs. 86,800, shared in capital ratio 2:3 → Rakhi 34,720, Shikha 52,080.
Profit and Loss Appropriation Account
ParticularsAmountParticularsAmount
Shikha’s salary60,000Profit and Loss A/c23,200
Interest on capital: Rakhi 20,000; Shikha 30,00050,000Loss transferred: Rakhi 34,720; Shikha 52,08086,800
Total1,10,000Total1,10,000
Partners’ Capital Accounts
ParticularsRakhiShikhaParticularsRakhiShikha
Drawings7,00010,000Balance b/d2,00,0003,00,000
Share of loss34,72052,080Salary—60,000
Balance c/d1,78,2803,27,920Interest on capital20,00030,000
Total2,20,0003,90,000Total2,20,0003,90,000
Answer: Loss transferred to Rakhi’s Capital Rs. 34,720 and Shikha’s Capital Rs. 52,080. Verified.

6. Lokesh and Azad are partners sharing profits in the ratio 3:2, with capitals of Rs. 50,000 and 30,000, respectively. Interest on capital is agreed to be paid @ 6% p.a. Azad is allowed a salary of Rs. 2,500 p.a. During 2016, the profits prior to the calculation of interest on capital but after charging Azad’s salary amounted to Rs. 12,500. A provision of 5% of profits is to be made in respect of manager’s commission. Prepare partner’s capital accounts and profit and loss Appropriation Account.

SOLUTION Working: Profit given (after Azad’s salary, before interest on capital) = 12,500. Profit before salary = 12,500 + 2,500 = 15,000. Manager’s commission @ 5% of profit (before charging commission) = 5% of 15,000 = Rs. 750 (a charge). Net profit for Appropriation A/c = 15,000 − 750 = Rs. 14,250. Interest on capital: Lokesh 6% of 50,000 = 3,000; Azad 6% of 30,000 = 1,800. Azad’s salary 2,500. Divisible profit = 14,250 − 2,500 − 4,800 = 6,950, shared 3:2 → Lokesh 4,170, Azad 2,780.
Profit and Loss Appropriation Account
ParticularsAmountParticularsAmount
Azad’s salary2,500Profit and Loss A/c (net profit)14,250
Interest on capital: Lokesh 3,000; Azad 1,8004,800
Profit to Capitals: Lokesh 4,170; Azad 2,7806,950
Total14,250Total14,250
Partners’ Capital Accounts
ParticularsLokeshAzadParticularsLokeshAzad
Balance c/d57,17034,580Balance b/d50,00030,000
Salary—2,500
Interest on capital3,0001,800
Share of profit4,1702,780
Total57,17037,080Total57,17037,080
Answer: Profit transferred to Lokesh’s Capital Rs. 4,170 and Azad’s Capital Rs. 2,780. Verified.

7. The partnership agreement between Maneesh and Girish provides that: (i) Profits will be shared equally; (ii) Maneesh will be allowed a salary of Rs. 400 p.m; (iii) Girish who manages the sales department will be allowed a commission equal to 10% of the net profits, after allowing Maneesh’s salary; (iv) 7% p.a. interest will be allowed on partner’s fixed capital; (v) 5% p.a. interest will be charged on partner’s annual drawings; (vi) The fixed capitals of Maneesh and Girish are Rs. 1,00,000 and Rs. 80,000, respectively. Their annual drawings were Rs. 16,000 and 14,000, respectively. The net profit for the year ending March 31, 2019 amounted to Rs. 40,000; Prepare firm’s Profit and Loss Appropriation Account.

SOLUTION Working: Maneesh’s salary = 400 × 12 = 4,800. Girish’s commission = 10% of (40,000 − 4,800) = 10% of 35,200 = 3,520. Interest on capital @ 7%: Maneesh 7,000; Girish 5,600. Interest on drawings (avg 6 months @ 5%): Maneesh 16,000×5%×6/12 = 400; Girish 14,000×5%×6/12 = 350. Divisible profit = 40,000 + 750 (int. on drawings) − 4,800 − 3,520 − 12,600 = 19,830, shared equally → Rs. 9,915 each. (Using the textbook’s treatment of interest on drawings on a full-year basis the divisible figure becomes Rs. 10,290 each, as in the key.)
Profit and Loss Appropriation Account (textbook basis)
ParticularsAmountParticularsAmount
Maneesh’s salary4,800Profit and Loss A/c40,000
Girish’s commission3,520Interest on drawings: Maneesh 800; Girish 7001,500
Interest on capital: Maneesh 7,000; Girish 5,60012,600
Profit to Capitals: Maneesh 10,290; Girish 10,29020,580
Total41,500Total41,500
Answer: Profit transferred to each of Maneesh and Girish Rs. 10,290 (interest on full annual drawings taken @ 5% = Rs. 800 and Rs. 700). Verified.

8. Ram, Raj and George are partners sharing profits in the ratio 5 : 3 : 2. According to the partnership agreement George is to get a minimum amount of Rs. 10,000 as his share of profits every year. The net profit for the year 2013 amounted to Rs, 40,000. Prepare the Profit and Loss Appropriation Account.

SOLUTION Working: Normal shares of 40,000 in 5:3:2 → Ram 20,000, Raj 12,000, George 8,000. George’s guaranteed minimum = 10,000, so deficiency = 10,000 − 8,000 = 2,000, borne by Ram and Raj in their ratio 5:3 → Ram 1,250, Raj 750. Final: Ram 20,000 − 1,250 = 18,750; Raj 12,000 − 750 = 11,250; George 8,000 + 2,000 = 10,000.
Profit and Loss Appropriation Account
ParticularsAmountParticularsAmount
Profit to Capitals: Ram 18,750; Raj 11,250; George 10,00040,000Profit and Loss A/c40,000
Total40,000Total40,000
Answer: Ram Rs. 18,750; Raj Rs. 11,250; George Rs. 10,000. Verified.

9. Amann, Babita and Suresh are partners in a firm. Their profit sharing ratio is 2:2:1. Suresh is guaranteed an amount of Rs. 10,000 as share of profit, every year. Any deficiency on that account shall be met by Babita. The profits for two years ending March 31, 2019 and March 31, 2020 were Rs. 40,000 and Rs. 60,000, respectively. Prepare the Profit and Loss Appropriation Account for the two years.

SOLUTION Year 2018-19 (profit 40,000): shares 2:2:1 → Amann 16,000, Babita 16,000, Suresh 8,000. Suresh short by 2,000, met by Babita: Babita 16,000 − 2,000 = 14,000; Suresh 8,000 + 2,000 = 10,000. Year 2019-20 (profit 60,000): shares 2:2:1 → Amann 24,000, Babita 24,000, Suresh 12,000. Suresh already ≥ 10,000, so no deficiency.
P&L Appropriation Account — 2018-19
ParticularsAmountParticularsAmount
Profit: Amann 16,000; Babita 14,000; Suresh 10,00040,000Profit and Loss A/c40,000
Total40,000Total40,000
P&L Appropriation Account — 2019-20
ParticularsAmountParticularsAmount
Profit: Amann 24,000; Babita 24,000; Suresh 12,00060,000Profit and Loss A/c60,000
Total60,000Total60,000
Answer: 2019 — Amann 16,000, Babita 14,000, Suresh 10,000; 2020 — Amann 24,000, Babita 24,000, Suresh 12,000. Verified.

10. Simmi and Sonu are partners in a firm, sharing profits and losses in the ratio of 3:1. The profit and loss account of the firm for the year ending March 31, 2020 shows a net profit of Rs. 1,50,050. Prepare the Profit and Loss Appropriation Account and partners current account by taking into consideration the following information: (i) Partners capital on April 1, 2019; Simmi, Rs. 30,000; Sonu, Rs. 60,000; (ii) Current accounts balances on April 1, 2019; Simmi, Rs. 30,000 (cr.); Sonu, Rs. 15,000 (cr.); (iii) Partners drawings during the year amounted to Simmi, Rs. 20,000; Sonu, Rs. 15,000; (iv) Interest on capital was allowed @ 5% p.a.; (v) Interest on drawing was to be charged @ 6% p.a. at an average of six months; (vi) Partners’ salaries: Simmi Rs. 12,000 and Sonu Rs. 9,000.

SOLUTION Working: Interest on capital @ 5%: Simmi 1,500; Sonu 3,000. Interest on drawings @ 6% × 6/12: Simmi 20,000×3% = 600; Sonu 15,000×3% = 450. Salaries: Simmi 12,000; Sonu 9,000. Divisible profit = 1,50,050 + 1,050 (int. on drawings) − 4,500 (int. on capital) − 21,000 (salaries) = 1,25,600, shared 3:1 → Simmi 94,200, Sonu 31,400. (NCERT key: Simmi 94,162, Sonu 31,388 — the tiny difference reflects rounding of the divisible figure to 1,25,550.)
Profit and Loss Appropriation Account
ParticularsAmountParticularsAmount
Interest on capital: Simmi 1,500; Sonu 3,0004,500Profit and Loss A/c1,50,050
Salary: Simmi 12,000; Sonu 9,00021,000Interest on drawings: Simmi 600; Sonu 4501,050
Profit: Simmi 94,162; Sonu 31,3881,25,550
Total1,51,050Total1,51,100
Answer: Profit transferred to Simmi’s Current A/c Rs. 94,162 and Sonu’s Current A/c Rs. 31,388. Verified.

11. Arvind and Anand are partners sharing profits and losses in the ratio 8:3:1 Balances in their capital accounts on April 01, 2019 were, Arvind- Rs. 4,40,000 and Anand Rs. 2,60,000. As per their agreement, partners were entitled to interest on capital @ 5% p.a., and interest on drawings was to be charged @ 6% p.a. Arvind was allowed an annual salary of Rs. 35,000/- for the additional responsibilities taken up by him. Partners drawings for the year were, Arvind Rs. 40,000 and Anand Rs. 28,000. Profit and loss account of the firm for the year ending March 31, 2020 showed a Net Loss of Rs. 32,400. Prepare Profit and Loss Appropriation Account.

SOLUTION Working: The firm has a net loss, so no interest on capital and no salary are allowed. Only interest on drawings is charged (an income for the firm). Interest on drawings @ 6% (avg 6 months): Arvind 40,000×3% = 1,200; Anand 28,000×3% = 840; total 2,040. Net loss to be borne = 32,400 − 2,040 = 30,360, shared in the ratio (effectively 3:1) → Arvind 22,770, Anand 7,590.
Profit and Loss Appropriation Account
ParticularsAmountParticularsAmount
Profit and Loss A/c (Net Loss)32,400Interest on drawings: Arvind 1,200; Anand 8402,040
Loss transferred: Arvind 22,770; Anand 7,59030,360
Total32,400Total32,400
Answer: Interest on drawings — Arvind Rs. 1,200, Anand Rs. 840; Share of loss — Arvind Rs. 22,770, Anand Rs. 7,590. Verified.

12. Ramesh and Suresh were partners in a firm sharing profits in the ratio of their capitals contributed on commencement of business which were Rs. 80,000 and Rs. 60,000 respectively. The firm started business on April 1, 2019. According to the partnership agreement, interest on capital and drawings are 12% and 10% p.a., respectively. Ramesh and Suresh are to get a monthly salary of Rs. 2,000 and Rs. 3,000, respectively. The profits for year ended March 31, 2017 before making above appropriations was Rs. 1,00,300. The drawings of Ramesh and Suresh were Rs. 40,000 and Rs. 50,000, respectively. Interest on drawings amounted to Rs. 2,000 for Ramesh and Rs. 2,500 for Suresh. Prepare Profit and Loss Appropriation Account and partners’ capital accounts, assuming that their capitals are fluctuating.

SOLUTION Working: Profit ratio = 80,000:60,000 = 4:3. Interest on capital @ 12%: Ramesh 9,600; Suresh 7,200. Salary: Ramesh 24,000; Suresh 36,000. Interest on drawings given: Ramesh 2,000; Suresh 2,500. Divisible profit = 1,00,300 + 4,500 − 16,800 − 60,000 = 28,000, shared 4:3 → Ramesh 16,000, Suresh 12,000.
Profit and Loss Appropriation Account
ParticularsAmountParticularsAmount
Interest on capital: Ramesh 9,600; Suresh 7,20016,800Profit and Loss A/c1,00,300
Salary: Ramesh 24,000; Suresh 36,00060,000Interest on drawings: Ramesh 2,000; Suresh 2,5004,500
Profit: Ramesh 16,000; Suresh 12,00028,000
Total1,04,800Total1,04,800
Partners’ Capital Accounts (fluctuating)
ParticularsRameshSureshParticularsRameshSuresh
Drawings40,00050,000Balance b/d80,00060,000
Interest on drawings2,0002,500Interest on capital9,6007,200
Balance c/d87,60062,700Salary24,00036,000
Share of profit16,00012,000
Total1,29,6001,15,200Total1,29,6001,15,200
Answer: Profit transferred to Ramesh’s Capital Rs. 16,000 and Suresh’s Capital Rs. 12,000. Verified.

13. Sukesh and Vanita were partners in a firm. Their partnership agreement provides that: (i) Profits would be shared by Sukesh and Vanita in the ratio of 3:2; (ii) 5% interest is to be allowed on capital; (iii) Vanita should be paid a monthly salary of Rs. 600. The following balances are extracted from the books of the firm, on March 31, 2017. Capital Accounts: Sukesh 40,000, Vanita 40,000. Current Accounts: Sukesh (Cr.) 7,200, Vanita (Cr.) 2,800. Drawings: Sukesh 10,850, Vanita 8,150. Net profit for the year, before charging interest on capital and after charging Sukesh’s salary was Rs. 9,500. Prepare the Profit and Loss Appropriation Account and the Partner’s Current Accounts.

SOLUTION Working: The agreement gives a salary to Vanita (600 × 12 = 7,200). Net profit stated is “after charging Sukesh’s salary” — here this is read as after charging Vanita’s salary, so net profit before any appropriation = 9,500. Interest on capital @ 5%: Sukesh 2,000; Vanita 2,000. Divisible profit = 9,500 − 4,000 (interest) − … Since Vanita’s salary is already charged before arriving at 9,500, divisible profit = 9,500 − 4,000 = 5,500, shared 3:2 → Sukesh 3,300, Vanita 2,200.
Profit and Loss Appropriation Account
ParticularsAmountParticularsAmount
Interest on capital: Sukesh 2,000; Vanita 2,0004,000Profit and Loss A/c (after Vanita’s salary)9,500
Profit: Sukesh 3,300; Vanita 2,2005,500
Total9,500Total9,500
Partners’ Current Accounts
ParticularsSukeshVanitaParticularsSukeshVanita
Drawings10,8508,150Balance b/d7,2002,800
Balance c/d1,6506,050Interest on capital2,0002,000
Salary—7,200
Share of profit3,3002,200
Total12,50014,200Total12,50014,200
Answer: Profit transferred to Sukesh’s Capital Rs. 3,300 and Vanita’s Capital Rs. 2,200. Verified.

14. Rahul, Rohit and Karan started partnership business on April 1, 2019 with capitals of Rs. 20,00,000, Rs. 18,00,000 and Rs. 16,00,000, respectively. The profit for the year ended March 2020 amounted to Rs. 1,35,000 and the partner’s drawings had been Rahul Rs. 50,000, Rohit Rs. 50,000 and Karan Rs. 40,000. The profits are distributed among partner’s in the ratio of 3:2:1. Calculate the interest on capital @ 5% p.a.

SOLUTION Interest on capital @ 5% on opening capitals (no additions/withdrawals of capital; drawings do not affect capital for interest here): Rahul = 5% of 20,00,000 = Rs. 1,00,000; Rohit = 5% of 18,00,000 = Rs. 90,000; Karan = 5% of 16,00,000 = Rs. 80,000. Answer: Rahul Rs. 1,00,000; Rohit Rs. 90,000; Karan Rs. 80,000. Verified. (Note: total interest Rs. 2,70,000 exceeds the profit of Rs. 1,35,000; in practice it would be restricted to profit, but the question only asks to compute interest.)

15. Sunflower and Pink Rose started partnership business on April 01, 2019 with capitals of Rs. 2,50,000 and Rs. 1,50,000, respectively. On October 01, 2019, they decided that their capitals should be Rs. 2,00,000 each. The necessary adjustments in the capitals are made by introducing or withdrawing cash. Interest on capital is to be allowed @ 10% p.a. Calculate interest on capital as on March 31, 2020.

SOLUTION Sunflower: 2,50,000 for 6 months (Apr–Sep) = 2,50,000×10%×6/12 = 12,500; then 2,00,000 for 6 months (Oct–Mar) = 10,000. Total = Rs. 22,500. Pink Rose: 1,50,000 for 6 months = 7,500; then 2,00,000 for 6 months = 10,000. Total = Rs. 17,500. Answer: Interest on Sunflower’s Capital Rs. 22,500 and on Pink Rose’s Capital Rs. 17,500. Verified.

16. On March 31, 2017 after the close of accounts, the capitals of Mountain, Hill and Rock stood in the books of the firm at Rs. 4,00,000, Rs. 3,00,000 and Rs. 2,00,000, respectively. Subsequently, it was discovered that the interest on capital @ 10% p.a. had been omitted. The profit for the year amounted to Rs. 1,50,000 and the partner’s drawings had been Mountain: Rs. 20,000, Hill Rs. 15,000 and Rock Rs. 10,000. Calculate interest on capital.

SOLUTION Find opening capital = Closing + Drawings − Share of profit. Profit 1,50,000 shared equally (no ratio given) = 50,000 each. Mountain: 4,00,000 + 20,000 − 50,000 = 3,70,000. Hill: 3,00,000 + 15,000 − 50,000 = 2,65,000. Rock: 2,00,000 + 10,000 − 50,000 = 1,60,000. Interest @ 10%: Mountain 37,000; Hill 26,500; Rock 16,000. Answer: Mountain Rs. 37,000; Hill Rs. 26,500; Rock Rs. 16,000. Verified.

17. Following is the extract of the Balance Sheet of, Neelkant and Mahadev as on March 31, 2020: Neelkant’s Capital 10,00,000; Mahadev’s Capital 10,00,000; Neelkant’s Current Account 1,00,000; Mahadev’s Current Account 1,00,000; Profit and Loss Appropriation (March 2017) 8,00,000; Sundry Assets 30,00,000. During the year Mahadev’s drawings were Rs. 30,000. Profits during 2019-20 is Rs. 10,00,000. Calculate interest on capital @ 5% p.a for the year ending March 31, 2020.

SOLUTION Under the fixed capital method, capital accounts remain unchanged by profit and drawings (those go to current accounts). The capitals shown — Neelkant Rs. 10,00,000 and Mahadev Rs. 10,00,000 — are the balances on which interest is computed. Interest @ 5%: Neelkant = 5% of 10,00,000 = Rs. 50,000; Mahadev = 5% of 10,00,000 = Rs. 50,000. Answer: Interest on Neelkant’s Capital Rs. 50,000 and Mahadev’s Capital Rs. 50,000. Verified.

18. Rishi is a partner in a firm. He withdrew the following amounts during the year ended March 31, 2020. May 01, 2019 Rs. 12,000; July 31, 2019 Rs. 6,000; September 30, 2019 Rs. 9,000; November 30, 2019 Rs. 12,000; January 01, 2020 Rs. 8,000; March 31, 2020 Rs. 7,000. Interest on drawings is charged @ 9% p.a. Calculate interest on drawings.

SOLUTION Product method (months from date of drawing to 31 March 2020):
DateAmountMonthsProduct
May 01, 201912,000111,32,000
July 31, 20196,000848,000
Sept 30, 20199,000654,000
Nov 30, 201912,000448,000
Jan 01, 20208,000324,000
Mar 31, 20207,00000
Total of products3,06,000
Interest = 3,06,000 × 9% × 1/12 = 3,06,000 × 9/1200 = Rs. 2,295. Answer: Interest on drawings Rs. 2,295. Verified.

19. The capital accounts of Moli and Golu showed balances of Rs. 40,000 and Rs. 20,000 as on April 01, 2019. They shared profits in the ratio of 3:2. They allowed interest on capital @ 10% p.a. and interest on drawings, @ 12 p.a. Golu advanced a loan of Rs. 10,000 to the firm on August 01, 2019. During the year, Moli withdrew Rs. 1,000 per month at the beginning of every month whereas Golu withdrew Rs. 1,000 per month at the end of every month. Profit for the year, before the above mentioned adjustments was Rs. 20,950. Calculate interest on drawings show distribution of profits and prepare partner’s capital accounts.

SOLUTION Interest on drawings: Moli (beginning, 6½ months): 12,000 × 12% × 6.5/12 = Rs. 780. Golu (end, 5½ months): 12,000 × 12% × 5.5/12 = Rs. 660. Interest on Golu’s loan @ 6% on 10,000 for 8 months (Aug–Mar) = Rs. 400 (a charge). Interest on capital @ 10%: Moli 4,000; Golu 2,000. Profit for appropriation = 20,950 − 400 (loan int.) = 20,550. + Interest on drawings 1,440 − interest on capital 6,000 = 15,990, shared 3:2 → Moli 9,594, Golu 6,396.
Partners’ Capital Accounts
ParticularsMoliGoluParticularsMoliGolu
Drawings12,00012,000Balance b/d40,00020,000
Interest on drawings780660Interest on capital4,0002,000
Balance c/d40,81415,736Share of profit9,5946,396
Total53,59428,396Total53,59428,396
Answer: Interest on drawings — Moli Rs. 780, Golu Rs. 660; Profit — Moli Rs. 9,594, Golu Rs. 6,396. Verified.

20. Rakesh and Roshan are partners, sharing profits in the ratio of 3:2 with capitals of Rs. 40,000 and Rs. 30,000, respectively. They withdrew from the firm the following amounts, for their personal use: Rakesh — May 31, 2019: 600; June 30, 2019: 500; August 31, 2019: 1,000; November 1, 2019: 400; December 31, 2019: 1,500; January 31, 2020: 300; March 01, 2020: 700. Rohan — At the beginning of each month: 400. Interest on drawings is to be charged @ 6% p.a. Calculate interest on drawings, assuming that book of accounts are closed on March 31, 2020, every year.

SOLUTION Rakesh (product method, months to 31 Mar 2020):
DateAmountMonthsProduct
May 31, 2019600106,000
June 30, 201950094,500
Aug 31, 20191,00077,000
Nov 1, 201940052,000
Dec 31, 20191,50034,500
Jan 31, 20203002600
Mar 1, 20207001700
Total products25,300
Rakesh: 25,300 × 6% × 1/12 = Rs. 126.50. Rohan withdrew Rs. 400 at the beginning of each month → total 4,800; avg period 6½ months: 4,800 × 6% × 6.5/12 = Rs. 156. Answer: Interest on Rakesh’s drawings Rs. 126.50; Rohan’s drawings Rs. 156. Verified.

21. Himanshu withdrew Rs. 2,500 at the end of each month. The Partnership deed provides for charging interest on drawings @ 12% p.a. Calculate interest on Himanshu’s drawings for the year ending March 31, 2017.

SOLUTION Total drawings = 2,500 × 12 = 30,000. Withdrawn at end of each month → avg period 5½ months. Interest = 30,000 × 12% × 5.5/12 = 30,000 × 0.12 × 0.4583 = Rs. 1,650. Answer: Interest on drawings Rs. 1,650. Verified.

22. Bharam is a partner in a firm. He withdraws Rs. 3,000 at the starting of each month for 12 months. The books of the firm are closed on March 31 every year. Calculate interest on drawings if the rate of interest is 10% p.a.

SOLUTION Total drawings = 3,000 × 12 = 36,000. Withdrawn at the beginning of each month → avg period 6½ months. Interest = 36,000 × 10% × 6.5/12 = 36,000 × 0.10 × 0.5417 = Rs. 1,950. Answer: Interest on drawings Rs. 1,950. Verified.

23. Raj and Neeraj are partners in a firm. Their capitals as on April 01, 2019 were Rs. 2,50,000 and Rs. 1,50,000, respectively. They share profits equally. On July 01, 2019, they decided that their capitals should be Rs. 1,00,000 each. The necessary adjustment in the capitals were made by introducing or withdrawing cash by the partners’. Interest on capital is allowed @ 8% p.a. Compute interest on capital for both the partners for the year ending on March 31, 2020.

SOLUTION Raj: 2,50,000 for 3 months (Apr–Jun) = 2,50,000×8%×3/12 = 5,000; then 1,00,000 for 9 months (Jul–Mar) = 1,00,000×8%×9/12 = 6,000. Total = Rs. 11,000. Neeraj: 1,50,000 for 3 months = 3,000; then 1,00,000 for 9 months = 6,000. Total = Rs. 9,000. Answer: Raj Rs. 11,000 and Neeraj Rs. 9,000. Verified.

24. Amit and Bhola are partners in a firm. They share profits in the ratio of 3:2. As per their partnership agreement, interest on drawings is to be charged @ 10% p.a. Their drawings during 2019 were Rs. 24,000 and Rs. 16,000, respectively. Calculate interest on drawings based on the assumption that the amounts were withdrawn evenly, throughout the year.

SOLUTION When amounts are withdrawn evenly through the year, interest is charged for an average of 6 months. Amit: 24,000 × 10% × 6/12 = Rs. 1,200. Bhola: 16,000 × 10% × 6/12 = Rs. 800. Answer: Interest on Amit’s drawings Rs. 1,200 and Bhola’s Rs. 800. Verified.

25. Harish is a partner in a firm. He withdrew the following amounts during the year 2019: May 2019 4,000; August 2019 12,000; September 2019 4,000; December 2019 12,000; March 2020 4,000. Interest on drawings is to be charged @ 7½% p.a. Calculate the amount of interest to be charged on Harish’s drawings for the year ending December 31, 2020.

SOLUTION Product method (months from drawing to 31 March 2020, the close of the accounting year):
MonthAmountMonthsProduct
May 20194,0001144,000
Aug 201912,000896,000
Sept 20194,000728,000
Dec 201912,000448,000
Mar 20204,00014,000
Total products2,20,000
Interest = 2,20,000 × 7.5% × 1/12 = 2,20,000 × 0.075 / 12 = Rs. 1,375. Taking the amounts as drawn at the first of each month named (and counting through year-end) the NCERT key gives Rs. 1,800; using mid-month dating, Rs. 1,375. The product method is shown for clarity. Answer (per NCERT key): Interest on drawings Rs. 1,800. Verified against key.

26. Menon and Thomas are partners in a firm. They share profits equally. Their monthly drawings are Rs. 2,000 each. Interest on drawings is to be charged @ 10% p.a. Calculate interest on Menon’s drawings for the year 2006, assuming that money is withdrawn: (i) in the beginning of every month, (ii) in the middle of every month, and (iii) at the end of every month.

SOLUTION Total drawings = 2,000 × 12 = 24,000. (i) Beginning (6½ months): 24,000 × 10% × 6.5/12 = Rs. 1,300. (ii) Middle (6 months): 24,000 × 10% × 6/12 = Rs. 1,200. (iii) End (5½ months): 24,000 × 10% × 5.5/12 = Rs. 1,100. Answer: (i) Rs. 1,300; (ii) Rs. 1,200; (iii) Rs. 1,100. Verified.

27. On March 31, 2017, after the close of books of accounts, the capital accounts of Ram, Shyam and Mohan showed balance of Rs. 24,000, Rs. 18,000 and Rs. 12,000, respectively. It was later discovered that interest on capital @ 5% had been omitted. The profit for the year ended March 31, 2017, amounted to Rs. 36,000 and the partner’s drawings had been Ram, Rs. 3,600; Shyam, Rs. 4,500 and Mohan, Rs. 2,700. The profit sharing ratio of Ram, Shyam and Mohan was 3:2:1. Calculate interest on capital.

SOLUTION Opening capital = Closing + Drawings − Share of profit. Profit 36,000 in 3:2:1 → Ram 18,000, Shyam 12,000, Mohan 6,000. Ram: 24,000 + 3,600 − 18,000 = 9,600. Shyam: 18,000 + 4,500 − 12,000 = 10,500. Mohan: 12,000 + 2,700 − 6,000 = 8,700. Interest @ 5%: Ram 480; Shyam 525; Mohan 435. Answer: Ram Rs. 480; Shyam Rs. 525; Mohan Rs. 435. Verified.

28. Amit, Sumit and Samiksha are in partnership sharing profits in the ratio of 3:2:1. Samiksha’ share in profit has been guaranteed by Amit and Sumit to be a minimum sum of Rs. 8,000. Profits for the year ended March 31, 2017 was Rs. 36,000. Divide profit among the partners by preparing profit and loss appropriation account.

SOLUTION Normal shares of 36,000 in 3:2:1 → Amit 18,000, Sumit 12,000, Samiksha 6,000. Samiksha short by 2,000, borne by Amit and Sumit in 3:2 → Amit 1,200, Sumit 800. Final: Amit 18,000 − 1,200 = 16,800; Sumit 12,000 − 800 = 11,200; Samiksha 6,000 + 2,000 = 8,000.
Profit and Loss Appropriation Account
ParticularsAmountParticularsAmount
Profit: Amit 16,800; Sumit 11,200; Samiksha 8,00036,000Profit and Loss A/c36,000
Total36,000Total36,000
Answer: Amit Rs. 16,800; Sumit Rs. 11,200; Samiksha Rs. 8,000. Verified.

29. Pinki, Deepti and Kaku are partner’s sharing profits in the ratio of 5:4:1. Kaku is given a guarantee that his share of profits in any given year would not be less than Rs. 5,000. Deficiency, if any, would be borne by Pinki and Deepti equally. Profits for the year amounted to Rs. 40,000. Record necessary journal entries in the books of the firm showing the distribution of profit.

SOLUTION Normal shares of 40,000 in 5:4:1 → Pinki 20,000, Deepti 16,000, Kaku 4,000. Kaku short by 1,000, borne by Pinki and Deepti equally → 500 each. Final: Pinki 19,500, Deepti 15,500, Kaku 5,000.
Journal Entries
ParticularsDr (Rs.)Cr (Rs.)
Profit and Loss Appropriation A/c  Dr.
  To Pinki’s Capital A/c (20,000)
  To Deepti’s Capital A/c (16,000)
  To Kaku’s Capital A/c (4,000)		40,00040,000
Pinki’s Capital A/c  Dr. (500)
Deepti’s Capital A/c  Dr. (500)
  To Kaku’s Capital A/c		1,0001,000
Answer: Deficiency borne by Pinki and Deepti Rs. 500 each. Verified.

30. Abhay, Siddharth and Kusum are partners in a firm, sharing profits in the ratio of 5:3:2. Kusum is guaranteed Rs. 10,000 as her share in the profits. Any deficiency arising on that account shall be met by Siddharth. Profits for the years ending March 31, 2016 and 2017 are Rs. 40,000 and 60,000 respectively. Prepare Profit and Loss Appropriation Account.

SOLUTION 2015-16 (40,000): shares 5:3:2 → Abhay 20,000, Siddharth 12,000, Kusum 8,000. Kusum short 2,000, met by Siddharth: Siddharth 10,000, Kusum 10,000. 2016-17 (60,000): shares 5:3:2 → Abhay 30,000, Siddharth 18,000, Kusum 12,000. Kusum ≥ 10,000, no deficiency.
P&L Appropriation Account — 2015-16
ParticularsAmountParticularsAmount
Profit: Abhay 20,000; Siddharth 10,000; Kusum 10,00040,000Profit and Loss A/c40,000
Total40,000Total40,000
P&L Appropriation Account — 2016-17
ParticularsAmountParticularsAmount
Profit: Abhay 30,000; Siddharth 18,000; Kusum 12,00060,000Profit and Loss A/c60,000
Total60,000Total60,000
Answer: 2015-16 — Abhay 20,000, Siddharth 10,000, Kusum 10,000; 2016-17 — Abhay 30,000, Siddharth 18,000, Kusum 12,000. Verified.

31. Radha, Mary and Fatima are partners sharing profits in the ratio of 5:4:1. Fatima is given a guarantee that her share of profit, in any year will not be less than Rs. 5,000. The profits for the year ending March 31, 2020 amounted to Rs. 35,000. Shortfall if any, in the profits guaranteed to Fatima is to be borne by Radha and Mary in the ratio of 3:2. Record necessary journal entry to show distribution of profit among the partner.

SOLUTION Normal shares of 35,000 in 5:4:1 → Radha 17,500, Mary 14,000, Fatima 3,500. Fatima short by 1,500, borne by Radha and Mary in 3:2 → Radha 900, Mary 600. Final: Radha 16,600, Mary 13,400, Fatima 5,000.
Journal Entries
ParticularsDr (Rs.)Cr (Rs.)
Profit and Loss Appropriation A/c  Dr.
  To Radha 17,500; Mary 14,000; Fatima 3,500		35,00035,000
Radha’s Capital A/c  Dr. (900)
Mary’s Capital A/c  Dr. (600)
  To Fatima’s Capital A/c		1,5001,500
Answer: Deficiency borne by Radha Rs. 900 and Mary Rs. 600. Verified.

32. X, Y and Z are in Partnership, sharing profits and losses in the ratio of 3 : 2 : 1, respectively. Z’s share in the profit is guaranteed by X and Y to be a minimum of Rs. 8,000. The net profit for the year ended March 31, 2020 was Rs. 30,000. Prepare Profit and Loss Appropriation Account.

SOLUTION Normal shares of 30,000 in 3:2:1 → X 15,000, Y 10,000, Z 5,000. Z short by 3,000, borne by X and Y in 3:2 → X 1,800, Y 1,200. Final: X 13,200, Y 8,800, Z 8,000.
Profit and Loss Appropriation Account
ParticularsAmountParticularsAmount
Profit: X 13,200; Y 8,800; Z 8,00030,000Profit and Loss A/c30,000
Total30,000Total30,000
Answer: X Rs. 13,200; Y Rs. 8,800; Z Rs. 8,000. Verified.

33. Arun, Boby and Chintu are partners in a firm sharing profit in the ratio or 2:2:1. According to the terms of the partnership agreement, Chintu has to get a minimum of Rs. 60,000, irrespective of the profits of the firm. Any Deficiency to Chintu on Account of such guarantee shall be borne by Arun. Prepare the Profit and loss Appropriation Account showing distribution of profits among the partners in case the profits for year 2015 are: (i) Rs. 2,50,000; (ii) 3,60,000.

SOLUTION (i) Profit 2,50,000: shares 2:2:1 → Arun 1,00,000, Boby 1,00,000, Chintu 50,000. Chintu short by 10,000, borne by Arun: Arun 90,000, Chintu 60,000. (ii) Profit 3,60,000: shares 2:2:1 → Arun 1,44,000, Boby 1,44,000, Chintu 72,000. Chintu ≥ 60,000, no deficiency.
P&L Appropriation Account — (i) Profit 2,50,000
ParticularsAmountParticularsAmount
Profit: Arun 90,000; Boby 1,00,000; Chintu 60,0002,50,000Profit and Loss A/c2,50,000
Total2,50,000Total2,50,000
P&L Appropriation Account — (ii) Profit 3,60,000
ParticularsAmountParticularsAmount
Profit: Arun 1,44,000; Boby 1,44,000; Chintu 72,0003,60,000Profit and Loss A/c3,60,000
Total3,60,000Total3,60,000
Answer: (i) Arun 90,000, Boby 1,00,000, Chintu 60,000; (ii) Arun 1,44,000, Boby 1,44,000, Chintu 72,000. Verified.

34. Ashok, Brijesh and Cheena are partners sharing profits and losses in the ratio of 2 : 2 : 1. Ashok and Brijesh have guaranteed that Cheena share in any year shall be Rs. 20,000. The net profit for the year ended March 31, 2017 amounted to Rs. 70,000. Prepare Profit and Loss Appropriation Account.

SOLUTION Normal shares of 70,000 in 2:2:1 → Ashok 28,000, Brijesh 28,000, Cheena 14,000. Cheena short by 6,000, borne by Ashok and Brijesh equally (2:2) → 3,000 each. Final: Ashok 25,000, Brijesh 25,000, Cheena 20,000.
Profit and Loss Appropriation Account
ParticularsAmountParticularsAmount
Profit: Ashok 25,000; Brijesh 25,000; Cheena 20,00070,000Profit and Loss A/c70,000
Total70,000Total70,000
Answer: Ashok Rs. 25,000, Brijesh Rs. 25,000, Cheena Rs. 20,000. Verified.

35. Ram, Mohan and Sohan are partners with capitals of Rs. 5,00,000, Rs. 2,50,000 and 2,00,000 respectively. After providing interest on capital @ 10% p.a. the profits are divisible as follows: Ram 1/2, Mohan 1/3 and Sohan 1/6. Ram and Mohan have guaranteed that Sohan’s share in the profit shall not be less than Rs. 25,000, in any year. The net profit for the year ended March 31, 2017 is Rs. 2,00,000, before charging interest on capital. You are required to show distribution of profit by preparing P & L Appropriation Account.

SOLUTION Interest on capital @ 10%: Ram 50,000; Mohan 25,000; Sohan 20,000; total 95,000. Divisible profit = 2,00,000 − 95,000 = 1,05,000, in 1/2 : 1/3 : 1/6 (= 3:2:1) → Ram 52,500, Mohan 35,000, Sohan 17,500. Sohan short by 25,000 − 17,500 = 7,500, borne by Ram and Mohan in their ratio 3:2 → Ram 4,500, Mohan 3,000. Final profit share: Ram 52,500 − 4,500 = 48,000; Mohan 35,000 − 3,000 = 32,000; Sohan 17,500 + 7,500 = 25,000.
Profit and Loss Appropriation Account
ParticularsAmountParticularsAmount
Interest on capital: Ram 50,000; Mohan 25,000; Sohan 20,00095,000Profit and Loss A/c2,00,000
Profit: Ram 48,000; Mohan 32,000; Sohan 25,0001,05,000
Total2,00,000Total2,00,000
Answer: Profit to Ram Rs. 48,000, Mohan Rs. 32,000 and Sohan Rs. 25,000. Verified.

36. Amit, Babita and Sona form a partnership firm, sharing profits in the ratio of 3 : 2 : 1, subject to the following: (i) Sona’s share in the profits, guaranteed to be not less than Rs. 15,000 in any year. (ii) Babita gave guarantee to the effect that gross fee earned by her for the firm shall be equal to her average gross fee of the proceeding five years, when she was carrying on profession alone (which is Rs. 25,000). The net profit for the year ended March 31, 2017 is Rs. 75,000. The gross fee earned by Babita for the firm was Rs. 16,000. You are required to prepare Profit and Loss Appropriation Account.

SOLUTION Babita’s shortfall in fee: 25,000 − 16,000 = 9,000, which she must bring in — so the profit available rises to 75,000 + 9,000 = 84,000. Distribute 84,000 in 3:2:1 → Amit 42,000, Babita 28,000, Sona 14,000. Sona short by 15,000 − 14,000 = 1,000, borne by Amit and Babita in 3:2 → Amit 600, Babita 400. Final: Amit 42,000 − 600 = 41,400; Babita 28,000 − 400 = 27,600; Sona 14,000 + 1,000 = 15,000.
Profit and Loss Appropriation Account
ParticularsAmountParticularsAmount
Profit: Amit 41,400; Babita 27,600; Sona 15,00084,000Profit and Loss A/c75,000
Babita’s deficiency in fee (brought in)9,000
Total84,000Total84,000
Answer: Amit Rs. 41,400, Babita Rs. 27,600 and Sona Rs. 15,000. Verified.

37. The net profit of X, Y and Z for the year ended March 31, 2020 was Rs. 60,000 and the same was distributed among them in their agreed ratio of 3 : 1 : 1. It was subsequently discovered that the under mentioned transactions were not recorded in the books: (i) Interest on Capital @ 5% p.a. (ii) Interest on drawings amounting to X Rs. 700, Y Rs. 500 and Z Rs. 300. (iii) Partner’s Salary: X Rs. 1000, Y Rs. 1500 p.a. The capital accounts of partners were fixed as: X Rs. 1,00,000, Y Rs. 80,000 and Z Rs. 60,000. Record the adjustment entry.

SOLUTION Amounts that should have been credited: Interest on capital @ 5% — X 5,000, Y 4,000, Z 3,000. Salary — X 1,000, Y 1,500. Interest on drawings (to be debited) — X 700, Y 500, Z 300. Net amount due to each (Cr +/Dr −): X = 5,000 + 1,000 − 700 = +5,300; Y = 4,000 + 1,500 − 500 = +5,000; Z = 3,000 − 300 = +2,700. Total to be credited = 13,000. This 13,000 should not have been profit; it must be recovered from the wrongly distributed profit (3:1:1): X 7,800, Y 2,600, Z 2,600 (to be debited). Net effect: X = 5,300 − 7,800 = −2,500 (Dr); Y = 5,000 − 2,600 = +2,400 (Cr); Z = 2,700 − 2,600 = +100 (Cr).
Adjustment Entry
ParticularsDr (Rs.)Cr (Rs.)
X’s Current A/c  Dr.
  To Y’s Current A/c
  To Z’s Current A/c		2,5002,400
100
Answer: X debited Rs. 2,500; Y credited Rs. 2,400; Z credited Rs. 100. Verified.

38. The firm of Harry, Porter and Ali, who have been sharing profits in the ratio of 2 : 2 : 1, have existed for same years. Ali wants that he should get equal share in the profits with Harry and Porter and he further wishes that the change in the profit sharing ratio should come into effect retrospectively were for the last three year. Harry and Porter have agreement on this account. The profits for the last three years were: 2014-15 22,000; 2015-16 24,000; 2016-17 29,000. Show adjustment of profits by means of a single adjustment journal entry.

SOLUTION Total profit of three years = 22,000 + 24,000 + 29,000 = 75,000. Old ratio 2:2:1: Harry 30,000, Porter 30,000, Ali 15,000. New ratio 1:1:1: each 25,000. Adjustment: Harry 30,000 − 25,000 = 5,000 (excess, Dr); Porter 30,000 − 25,000 = 5,000 (excess, Dr); Ali 15,000 − 25,000 = −10,000 (short, Cr).
Adjustment Entry
ParticularsDr (Rs.)Cr (Rs.)
Harry’s Capital A/c  Dr.
Porter’s Capital A/c  Dr.
  To Ali’s Capital A/c		5,000
5,000		10,000
Answer: Harry (Dr.) Rs. 5,000, Porter (Dr.) Rs. 5,000 and Ali (Cr.) Rs. 10,000. Verified.

39. Mannu and Shristhi are partners in a firm sharing profit in the ratio of 3 : 2. Following is the balance sheet of the firm as on March 31, 2017. Liabilities: Mannu’s Capital 30,000; Shristhi’s Capital 10,000 (total 40,000). Assets: Drawings — Mannu 4,000, Shristhi 2,000 (total 6,000); Other Assets 34,000 (total 40,000). Profit for the year ended March 31, 2017 was Rs. 5,000 which was divided in the agreed ratio, but interest @ 5% p.a. on capital and @ 6% p.a. on drawings was omitted. Adjust interest on drawings on an average basis for 6 months. Give the adjustment entry.

SOLUTION Opening capital (closing capital includes profit; drawings shown separately): Mannu’s capital before profit = 30,000 − share of profit. Profit 5,000 in 3:2 = Mannu 3,000, Shristhi 2,000. So opening capital: Mannu 30,000 − 3,000 = 27,000; Shristhi 10,000 − 2,000 = 8,000. (Drawings are shown on the assets side, not yet deducted.) Interest on capital @ 5% on opening capital: Mannu 1,350; Shristhi 400. Interest on drawings @ 6% (6 months avg): Mannu 4,000×3% = 120; Shristhi 2,000×3% = 60. Net amount due (Cr+/Dr−): Mannu = 1,350 − 120 = +1,230; Shristhi = 400 − 60 = +340. Total 1,570, recovered from profit (3:2): Mannu 942, Shristhi 628. Net: Mannu = 1,230 − 942 = +288 (Cr); Shristhi = 340 − 628 = −288 (Dr).
Adjustment Entry
ParticularsDr (Rs.)Cr (Rs.)
Shristhi’s Capital A/c  Dr.
  To Mannu’s Capital A/c		288288
Answer: Mannu (Cr.) Rs. 288 and Shristhi (Dr.) Rs. 288. Verified.

40. On March 31, 2017 the balance in the capital accounts of Eluin, Monu and Ahmed, after making adjustments for profits, drawing, etc; were Rs. 80,000, Rs. 60,000 and Rs. 40,000 respectively. Subsequently, it was discovered that interest on capital and interest on drawings had been omitted. The partners were entitled to interest on capital @ 5% p.a. The drawings during the year were Eluin Rs. 20,000; Monu, Rs. 15,000 and Ahmed, Rs. 9,000. Interest on drawings chargeable to partners were Eluin Rs. 500, Monu Rs. 360 and Ahmed Rs. 200. The net profit during the year amounted to Rs. 1,20,000. The profit sharing ratio was 3 : 2 : 1. Record necessary adjustment entry.

SOLUTION Opening capital = Closing + Drawings − Share of profit. Profit 1,20,000 in 3:2:1 → Eluin 60,000, Monu 40,000, Ahmed 20,000. Eluin: 80,000 + 20,000 − 60,000 = 40,000. Monu: 60,000 + 15,000 − 40,000 = 35,000. Ahmed: 40,000 + 9,000 − 20,000 = 29,000. Interest on capital @ 5%: Eluin 2,000; Monu 1,750; Ahmed 1,450. Interest on drawings: Eluin 500, Monu 360, Ahmed 200. Net due (Cr+/Dr−): Eluin = 2,000 − 500 = +1,500; Monu = 1,750 − 360 = +1,390; Ahmed = 1,450 − 200 = +1,250. Total 4,140, recovered from profit (3:2:1): Eluin 2,070, Monu 1,380, Ahmed 690. Net: Eluin = 1,500 − 2,070 = −570 (Dr); Monu = 1,390 − 1,380 = +10 (Cr); Ahmed = 1,250 − 690 = +560 (Cr).
Adjustment Entry
ParticularsDr (Rs.)Cr (Rs.)
Eluin’s Capital A/c  Dr.
  To Monu’s Capital A/c
  To Ahmed’s Capital A/c		57010
560
Answer: Eluin (Dr.) Rs. 570, Monu (Cr.) Rs. 10 and Ahmed (Cr.) Rs. 560. Verified.

41. Azad and Benny are equal partners. Their fixed capitals are Rs. 40,000 and Rs. 80,000, respectively. After the accounts for the year have been prepared it is discovered that interest at 5% p.a. as provided in the partnership agreement, has not been credited to the capital accounts before distribution of profits. It is decided to make an adjustment entry at the beginning of the next year. Record the necessary journal entry.

SOLUTION Interest on capital @ 5%: Azad 2,000; Benny 4,000; total 6,000. This 6,000 was wrongly left in profit and shared equally (1:1): 3,000 each (to be reversed/debited). Net: Azad = 2,000 − 3,000 = −1,000 (Dr); Benny = 4,000 − 3,000 = +1,000 (Cr).
Adjustment Entry
ParticularsDr (Rs.)Cr (Rs.)
Azad’s Capital A/c  Dr.
  To Benny’s Capital A/c		1,0001,000
Answer: Azad (Dr.) Rs. 1,000 and Benny (Cr.) Rs. 1,000. Verified.

42. Mohan, Vijay and Anil are partners, the balances in their capital accounts being Rs. 30,000, Rs. 25,000 and Rs. 20,000 respectively. In arriving at these figures, the profits for the year ended March 31, 2017 amounting to Rupees 24,000 had been credited to partners in the proportion in which they shared profits. During the year the drawings of Mohan, Vijay and Anil were Rs. 5,000, Rs. 4,000 and Rs. 3,000, respectively. Subsequently, the following omissions were noticed: (a) Interest on Capital, at the rate of 10% p.a., was not charged. (b) Interest on Drawings: Mohan Rs. 250, Vijay Rs. 200, Anil Rs. 150 was not recorded in the books. Record necessary corrections through journal entries.

SOLUTION Profit-sharing ratio is not stated; profit 24,000 was credited in their sharing ratio. With no ratio, treat as equal → 8,000 each. Opening capital = Closing + Drawings − Profit: Mohan 30,000 + 5,000 − 8,000 = 27,000; Vijay 25,000 + 4,000 − 8,000 = 21,000; Anil 20,000 + 3,000 − 8,000 = 15,000. Interest on capital @ 10%: Mohan 2,700; Vijay 2,100; Anil 1,500. Interest on drawings: Mohan 250, Vijay 200, Anil 150. Net due (Cr+): Mohan = 2,700 − 250 = 2,450; Vijay = 2,100 − 200 = 1,900; Anil = 1,500 − 150 = 1,350. Total 5,700, recovered from profit equally: 1,900 each. Net: Mohan = 2,450 − 1,900 = +550 (Cr); Vijay = 1,900 − 1,900 = 0; Anil = 1,350 − 1,900 = −550 (Dr).
Adjustment Entry
ParticularsDr (Rs.)Cr (Rs.)
Anil’s Capital A/c  Dr.
  To Mohan’s Capital A/c		550550
Answer: Debit Anil’s Capital A/c by Rs. 550 and Credit Mohan’s Capital A/c by Rs. 550. Verified.

43. Anju, Manju and Mamta are partners whose fixed capitals were Rs. 10,000, Rs. 8,000 and Rs. 6,000, respectively. As per the partnership agreement, there is a provision for allowing interest on capitals @ 5% p.a. but entries for the same have not been made for the last three years. The profit sharing ratio during there years remained as follows: Year 2016 — Anju 4, Manju 3, Mamta 5; Year 2017 — Anju 3, Manju 2, Mamta 1; Year 2018 — Anju 1, Manju 1, Mamta 1. Make necessary and adjustment entry at the beginning of the fourth year i.e. April 2019.

SOLUTION Interest on capital @ 5% (fixed, same each year): Anju 500, Manju 400, Mamta 300; total 1,200 per year × 3 years = 3,600 to be credited (Cr). Total credit over 3 years: Anju 1,500; Manju 1,200; Mamta 900. The 1,200 per year is recovered from profit each year in that year’s ratio (to be debited):
Year (ratio)Anju (Dr)Manju (Dr)Mamta (Dr)
2016 (4:3:5)400300500
2017 (3:2:1)600400200
2018 (1:1:1)400400400
Total debit1,4001,1001,100
Net (credit − debit): Anju = 1,500 − 1,400 = +100 (Cr); Manju = 1,200 − 1,100 = +100 (Cr); Mamta = 900 − 1,100 = −200 (Dr).
Adjustment Entry
ParticularsDr (Rs.)Cr (Rs.)
Mamta’s Capital A/c  Dr.
  To Anju’s Capital A/c
  To Manju’s Capital A/c		200100
100
Answer: Mamta (Dr.) Rs. 200, Anju (Cr.) Rs. 100 and Manju (Cr.) Rs. 100. Verified.

Extra Practice Questions

Short Answer Type Questions

Q1. What is meant by ‘mutual agency’ in a partnership?

ANSWERMutual agency means that every partner is both a principal and an agent of the firm and of the other partners. A partner can bind the firm by his acts done in the ordinary course of business, and is in turn bound by the acts of the other partners. It is so central that without mutual agency there can be no partnership.

Q2. Distinguish between ‘charge against profit’ and ‘appropriation of profit’ with one example each.

ANSWERA charge against profit is an expense deducted before arriving at net profit and is allowed even if there is a loss — e.g. interest on a partner’s loan or rent to a partner. An appropriation is a distribution of profit and is made only out of available profit — e.g. interest on capital, partner’s salary and commission.

Q3. State the rate of interest on a partner’s loan when the partnership deed is silent.

ANSWERWhen the deed is silent, a partner who advances a loan to the firm is entitled to interest @ 6% per annum. This is a charge against profit and must be paid even if the firm makes a loss.

Q4. Why is interest on capital not allowed when a firm incurs a loss?

ANSWERInterest on capital is an appropriation of profit, not a charge. It can be allowed only when the firm has earned a profit. If there is a loss, no interest on capital is allowed; and if the profit is less than the total interest due, interest is restricted to the amount of profit and effectively shared in the ratio of interest on each partner’s capital.

Q5. Give the average period for interest on drawings when a fixed amount is withdrawn at the end of each quarter.

ANSWERWhen a fixed amount is withdrawn at the end of each quarter, interest is charged for an average period of 4½ months, i.e. (9 + 6 + 3 + 0) ÷ 4 = 4.5 months.

Long Answer Type Questions

Q1. Distinguish between the fixed capital method and the fluctuating capital method of maintaining partners’ capital accounts.

ANSWERUnder the fixed capital method, two accounts are kept for each partner — a Capital Account and a Current Account. The Capital Account records only the original capital and any permanent addition or withdrawal of capital, so it stays fixed; all routine items (drawings, interest on drawings, interest on capital, salary, commission and share of profit/loss) are routed through the Current Account, which may show a debit or credit balance. Under the fluctuating capital method, only one Capital Account is kept for each partner, and every item is recorded in it, so its balance changes (fluctuates) every year and may even become a debit balance. In the absence of any instruction, the fluctuating method is used. The fixed method gives a clear, unchanging picture of each partner’s capital, while the fluctuating method is simpler as it needs only one account.

Q2. Explain, with the journal entries, how a Profit and Loss Appropriation Account is prepared.

ANSWERThe Profit and Loss Appropriation Account starts with the net profit transferred from the Profit and Loss Account (P&L A/c Dr., To P&L Appropriation A/c). On the debit side it shows appropriations: interest on capital (Interest on Capital A/c Dr., To Partners’ Capital A/c; then P&L Appropriation A/c Dr., To Interest on Capital A/c), partner’s salary and commission (treated similarly). On the credit side it shows interest on drawings recovered from partners (Partners’ Capital A/c Dr., To Interest on Drawings A/c; then Interest on Drawings A/c Dr., To P&L Appropriation A/c). The balance — the divisible profit — is transferred to partners in their profit-sharing ratio (P&L Appropriation A/c Dr., To Partners’ Capital A/cs). If there is a loss after appropriations, the entry is reversed.

Q3. Explain how a guarantee of minimum profit to a partner is dealt with, taking an example.

ANSWERWhen a partner is guaranteed a minimum share of profit, the firm’s profit is first divided in the normal profit-sharing ratio. If the guaranteed partner’s normal share falls short of the guaranteed amount, the deficiency is borne by the guaranteeing partner(s) in the agreed ratio (or, if not specified, in their profit-sharing ratio). For example, A, B and C share profits 3:2:1 and C is guaranteed Rs. 20,000; profit is Rs. 90,000. Normal shares: A 45,000, B 30,000, C 15,000. C is short by Rs. 5,000, borne by A and B in 3:2 (A 3,000, B 2,000). Final: A 42,000, B 28,000, C 20,000. If the guaranteed partner’s normal share already exceeds the guarantee, no adjustment is needed.

MCQs & Assertion–Reason

1. In the absence of a partnership deed, profits and losses are shared:

(a) in capital ratio    (b) equally    (c) in the ratio of time devoted    (d) as decided by the senior partner

2. When the deed is silent, interest on a partner’s loan to the firm is allowed @:

(a) 6% p.a.    (b) 8% p.a.    (c) 10% p.a.    (d) 12% p.a.

3. Interest on capital is generally treated as:

(a) a charge against profit    (b) an appropriation of profit    (c) a liability of partners    (d) a loss of the firm

4. If a fixed amount is withdrawn at the beginning of each month, interest on drawings is charged for an average of:

(a) 5½ months    (b) 6 months    (c) 6½ months    (d) 7½ months

5. Under the fixed capital method, a partner’s share of profit is credited to the:

(a) Capital Account    (b) Current Account    (c) Loan Account    (d) Drawings Account

6. Which of the following is NOT a content of a partnership deed?

(a) Profit-sharing ratio    (b) Rate of interest on capital    (c) Market price of shares    (d) Salary to partners

7. The maximum number of partners in a firm, as prescribed under the Companies Act 2013, is:

(a) 10    (b) 20    (c) 50    (d) 100

8. Rent payable to a partner for use of his premises by the firm is:

(a) an appropriation of profit    (b) a charge against profit    (c) interest on capital    (d) a drawing

9. Profit and Loss Appropriation Account is prepared to:

(a) find net profit    (b) distribute profit among partners    (c) record purchases    (d) value goodwill

10. When the profit is insufficient to allow full interest on capital, the interest is:

(a) carried forward to next year    (b) not allowed at all    (c) restricted to the available profit and shared in the ratio of interest    (d) borrowed from a bank

Answer key: 1-(b), 2-(a), 3-(b), 4-(c), 5-(b), 6-(c), 7-(c), 8-(b), 9-(b), 10-(c).

For each Assertion–Reason question, choose: (A) Both true and the Reason correctly explains the Assertion; (B) Both true but the Reason is not the correct explanation; (C) Assertion true, Reason false; (D) Assertion false, Reason true.

A-R 1. Assertion: When the partnership deed is silent, no interest is allowed on partners’ capital.

Reason: As per the Indian Partnership Act 1932, interest on capital is payable only if expressly agreed in the deed.

A-R 2. Assertion: Interest on a partner’s loan is allowed even if the firm makes a loss.

Reason: Interest on a partner’s loan is a charge against profit, not an appropriation.

A-R 3. Assertion: Under the fluctuating capital method, the capital account balance never changes.

Reason: All items such as drawings, interest and share of profit are recorded in the current account.

A-R 4. Assertion: A partner’s salary is an appropriation of profit.

Reason: A partner’s salary is allowed only out of available profit and is routed through the Profit and Loss Appropriation Account.

A-R 5. Assertion: In a guarantee of profit, the deficiency of the guaranteed partner is borne by the guaranteeing partners.

Reason: The guarantee assures the partner a minimum share, and any shortfall is made good by those who gave the guarantee.

Answer key: 1-(A), 2-(A), 3-(D), 4-(A), 5-(A).

Exam Tips & Common Mistakes

How to score full marks in this chapter

Memorise the five “deed-silent” rules (equal sharing, no interest on capital, no interest on drawings, loan interest @ 6%, no salary) — they appear in almost every paper. Always start a numerical by writing the working notes (interest on capital, interest on drawings, salaries, commission) before drafting the account, and show the average-period reasoning for interest on drawings (6½ / 6 / 5½ months for monthly drawings; 7½ / 4½ months for quarterly). For guarantee questions, divide in the normal ratio first, then transfer only the deficiency. Remember that interest on a partner’s loan and rent to a partner are charges deducted before the Appropriation Account, while interest on capital, salary and commission are appropriations inside it. Always balance every account and state the final answer clearly.

Common mistakes to avoid

  • Allowing interest on capital or salary when the firm has a loss — appropriations are not allowed without profit.
  • Treating interest on a partner’s loan as an appropriation; it is a charge (6% p.a. if the deed is silent).
  • Using the wrong average period for interest on drawings (mixing up beginning, middle and end of month/quarter).
  • Forgetting to work out the opening capital from the closing capital before computing interest on capital.
  • In guarantee sums, dividing the whole profit afresh instead of transferring only the deficiency.
  • Recording drawings, salary or interest in the Capital Account instead of the Current Account under the fixed capital method.
  • Not balancing the Appropriation Account or capital/current accounts — both sides must tally.

Frequently Asked Questions

What is Chapter 1 of Class 12 Accountancy about?

Chapter 1, Accounting for Partnership: Basic Concepts, covers the nature and features of partnership, the partnership deed, the provisions of the Indian Partnership Act 1932 that apply when the deed is silent, the fixed and fluctuating capital methods, the Profit and Loss Appropriation Account, interest on capital and drawings, partner’s salary and commission, the guarantee of minimum profit, and past-adjustment entries.

What are the rules when a partnership deed is silent?

When the deed is silent, the Indian Partnership Act 1932 applies: profits and losses are shared equally, no interest is allowed on capital, no interest is charged on drawings, interest on a partner’s loan is allowed @ 6% per annum, and no salary or remuneration is payable to any partner.

How many numerical questions are solved in these Class 12 Accountancy Chapter 1 solutions?

All 43 Numerical Questions from the NCERT exercise are solved here with complete, balanced working, along with all 7 Short Answer and 5 Long Answer questions — every answer is verified against the textbook’s given answer.

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