Professional Documents
Culture Documents
FINAL ACCOUNTS
Introduction :
Partnership is the relation that exists between or among persons
carrying on business in common with a view to earn profit. In. India
partnership is governed by The Indian Partnership Act, 1932. Section
4 of this Act defines partnership act the relationship between
persons who have agreed to share the profit ol a business earned
on by all or
any of them acting for all.
PersortQ who enter into a partnership are individually called partners,
and collectively, a firm.
A partnership may be formed when a sole proprietor of an existing
business agrees with one or more persons to combine assets and/or
skills. Persons may also start a new business that has not existed
before.
Partnerships are common in wholesale businesses, in small retail
stores, and in personal service businesses. Partnerships are also often
used for professional businesses such as accounting and audit firms,
law offices and medical clinics.
Accounting has evolved and emerged, as have medicine, law and
most oilier fields of human activity, in response to the social, and
economic peeds of society. 'The end of the final accounting process is
a set reports that are called'Final Accounts or Financial Statements.
The following generally constitute the financial statements of a
Partnership firm -
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i) Trading Account.
ii) Profit and Loss Account and,
iii) Balance Sheet.
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1. Fixed Capital Method :
Under this method, for each partner, two accounts are opened. The
first account, Partners Capital Account shows the Partners original
contribution to the Kliiness as capital. This method is adopted when
it is desired to keep Partners capital Account at the original figure.
The balance oi this account is only chanced when there is a change in
the constitution or when n partner draws money from the business
against his cap The other account known as Partners' Current account
is opened to record the transactions, between the partners and me
farm, that is, salary, interest on capital, drawings, and so on.
Under Fixed Capital Method the balance of capital account of each
partner is to be retained fixed and therefore, all the adjustments
regarding interest on capital and drawing, salary, commission, net
profit or loss are recorded in separate account namely "Current
Account". The balances of Capital Accounts and Current Accounts
are separately in the Balance Sheet" of the firm. If Current Account
shows a debit balance, it will be recorded on asset side of the Balance
Sheet and the credit balance shown on the liabilities of me.
Balance Sheet. Hence, it is very important to note that when Current
Accounts are given together .with Capital Accounts of the partners in
the Trial Balance it is assumed to be Fixed Capital Method of
maintaining capital accounts or partners.
Under Fixed Capital Method, the capital and current accounts of a
partner will appear as follows .
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Example
Akash & Badal were partners sharing profit & losses as 3:2
The following provisions were made in partnership deed.
1. Akash to salary Rs.3,000 p.a.
2. Interest on capital to be allowed @ 10% p.a.
3. Interest on drawings to be charged on personal withdrawals
made by partners.
The profit before making above provision was Rs.18,650.
The capital of Akash and Badal were Rs.40,000 and Rs.30,000
respectively and they have withdraw Rs.3000 & Rs.2000 respectively.
The interest on drawing of Akash amount to Rs.200 & Badal Rs.150.
Prepare Partners capital A/c. When their capitals are fixed .
Ans-
In the Books of M/S- Akash & Badal
Partners Capital A/c
Particulars A B Particulars A B
Rs. Rs. Rs. Rs.
To Balance c/d 40,000 30,000 By Balance b/d 40,000 30,000
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By Balance b/d
40,000 30,000 40,000 30,000
40,000 30,000
12,400 6,600
12,400 6,600
2. Fluctuating or Floating Capital Method :
If all entries relating to the partners are made in the Capital
Account itself, the Capita! will he said to be fluctuating. Under this
method a capital account for each partner is opened in the boos of
accounts. All the adjustments regarding drawings, interest on capital./
interest on drawings, salary or commission payable to
partner, . additional capital contributed, net profit or net loss allotted
to the partner etc. are known as Internal Adjustments or Partners' and
are recorded in Capital Account of that partner.
When the partnership firm decides not to keep separate current
accounts tor the partners, all the entries with regard to partners
drawings, salaries, interest and share of profit are passed through the
Capital Accounts of the partners. In such a case, the Capital Accounts
of the partners keep on fluctuating. There is one danger in this
method, if a partner draws more than what he is entitled, regarding
share of profit salaries, etc. there will be. When the partners maintain
the fluctuating capital method, no maximum limit can be put on the
partners' drawings by the division between the Capital Accounts,
Current Accounts.
Example
Joshi and Doshi are partners in a business sharing profits and losses
equally. Their capitals were Rs. 40,000 and Rs. 20,000 respectively.
The partnership deed provided the following terms :
1. Interest on Capital at 5% p.a. should be given..
2. Interest on Drawing at 10% p.a. should be charged for six months
only.
3. joshi is to get a monthly salary of Rs. 1,000.
4. Doshi is to get 1% commission on profits before appropriation.
5. The profits before making above appropriation was Rs. 30,000.
6. The drawings of joshi and Doshi were Rs. 4,000 and Rs. 10,000
respectively.
Prepare Partners' Capital Account when their capitals are
fluctuating.
[ANSWER]
In the books of M/s Joshi and Doshi
Dr. Partner's Capital Account Cr.
Particulars J D Particulars J D
Rs. Rs. Rs. Rs.
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To Drawings 4,000 10,000 By Balance B/D 40,000 20,000
To Interest on By Interest on
Drawings @ 10% 200 500 Capital @ 5% 2,000 1,000
p.a. p.a.
To Balance C/D 57,500 18,500 By Salary 12,000
By Com miss ion 300
Trading Account
Trading account is prepared to find out the Gross Profit and in turn
the percentage of gross profit to Sales. Gross profit is the excess of
sales price over cost or purchase price of goods. Here cost/purchase price
does not mean the price paid for goods to the supplier of goods but it
also considers all incidental expenses incurred t i ll the goods are
received and made saleable, such as carriage/freight on purchases,
wages paid to workers, customs duty, octroi, packing and forwarding
charges. However, expenses incurred on sale are not taken in the
Trading A/c.
It is already seen that the goods account is split up into four separate
accounts viz-
Purchases account to record both cash and credit purchases of goods,
Sales Account to record cash as well as credit sales of goods.
Purchases Returns or Returns Outwards Account to record the goods
returned out of the goods purchases, and Sales Returns or Returns
Inwards Account to record the goods returned by the customers out of the goods
sold to them. Similarly for the goods remained unsold ie. the goods on
hand at the end of the trading year a separate 'Stock Account' is
opened. The stock at the end of the year is termed as 'Closing Stock1.
As this stock is on hand at the beginning of the next year it becomes
the 'Opening stock/ It means closing stock of the last year forms the
opening stock of the current year.
A trader prepares a Trading Account to ascertain the result of buying
and selling of goods i.e. Gross Profit or Gross Loss. Gross Profit is
the excess of selling price over the cost price of the goods sold i.e.
Selling price Less Cost of goods sold = Gross profit
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Therefore, the balances of the above mentioned accounts are taken in
the Trading Account.
Opening stock, Purchases, Returns Inwards are taken on the debit side
of the Trading Account and Sales, Returns Outwards and closing
stock are taken to the credit side.
In addition to above, all expenses incurred on purchases till the goods
are reached at the location of the trader (Le. purchaser) and they are
made ready for re-sale (Such as wages of coolies, freight, carriage,
custom duty clearing charges, packing & forwarding charges etc.) are
debited to the Trading Account because they increases the cost of the
goods purchased.
The balance of the Trading Account is the Gross Profit or Gross Loss
- if it is a credit balance, it is Gross Profit, and if it is a debit balance,
it is
gross loss.
Balance Sheet
All Nominal Accounts are closed by transferring their balances to the
Trading and profit and Loss Account. But Real Accounts and personal
Accounts are closed by carrying forward balance for next year. These
balances are grouped in a separate statement called Balance Sheet. Thus,
Balance Sheet is a statement of the Ledger balances remaining after having
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the Nominal accounts closed by transferring them to the Trading and Profit
and Loss Account.
The Balance Sheet has also two sides; but they are not headed as ‘Dr.’ and
‘Cr.’ sides because the Balance Sheet is a statement and not an account The
left-hand side is headed as 'Liabilities' and the right-hand side is headed as
'Assets'. All Real Accounts and the Personal Accounts with debit balances
are shown on the 'Assets' side, whereas the Personal Accounts having credit
balances, including Capital A/c, are shown on the 'Liabilities' side. The
Balance Sheet is, therefore, defined as a statement of assets and
Liabilities. Since the Balance Sheet is not an account, there is no ‘To’ or ‘By’
proceeding the names of the Accounts recorded in the Balance Sheet.
Adjustments
These are certain additional adjusting entries passed in journal proper
before preparing the final accounts of a partnership firm, to find out
the accurate and exact amount of net profit together with the
appropriate valuations of various assets and liabilities. Following is
the summary of certain adjustments, their accounting; entries and
accounting treatment in partnership final accounts.
b) Closing Stock (Cost or Closing Stock A/c Dr. Shown on the Credit
Market Price whichever To Trading A/c Side.
is lower)
c) Outstanding Expenses Expenses A/c Dr. Added to direct expenses Added to the indirect
To Outstanding Expenses A/c on the debit side. expenses on the Debi
Side.
d) Prepaid Expenses Prepaid Expenses A/c Dr. Deducted from direct Deducted from the
To Expenses A/c expenses on the debit indirect expenses on
side. debit side.
e) income Received in income A/c Dr. Deducted from the
Advance To Pre-Received Income A/c income on the Credit
h) Provision for Doubtful Profit and Loss A/c Dr. Shown on the Debt s
To reserve for Discount on Debtors (To be compared wit
A/c R.D.D.)
i) Reserve for Discount on Profit and loss A/c Dr. Shown on the Debit S
Debtors To Reserve for Discount on Debtors
A/c
Reserve for discount on Reserve for discount on creditors A/c Shown on the Credit
Creditors Dr.
To Profit and Loss A/c
Interest on P's Capita! A/c Dr. Shown on the Shown on the liabilit
Drawings To Profit and Loss A/c Credit Side. way of deduction fro
Capital
Interest due on loan Profit and Loss A/c Dr. Shown on the Shown on the liabilit
taken from Bank To Bank Loan A/c Debit Side. way of addition to B
( interest due on Outstanding Interest on investment A/c Dr. To Shown on the Shown on the asset s
Investment Profit and Loss A/c Credit Side. Current Asset.
interest aue on Loan Outstanding interest on Party's Loan Dr. Shown on the Shown on the asset s
given to Party To Profit and Loss A/c Credit of addition to Party's
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Goods destroyed by Insurance Company A/c Dr. Shown on the credit side 1 Shown on the Shown on the asset s
fire / accident Profit and Loss A/c Dr. with total goods debit side with outstanding claims
(insured) To Trading A/c destroyed by fire actual loss by fire / Insurance Company.
/accident. accident.
Goods destroyed by Profit and Loss A/c Dr. Shown on the credit side Shown on the
fire / accident To Trading A/c with total goods debit side with
(uninsured) destroyed by fire actual loss by fire /
accident. accident.
Goods stolen (i.e. Profit and Loss A/c Dr. Shown on the Credit Shown on the
Loss by Theft) To Trading A/c Side. Debit Side.
p) ii) Unrecorded Sales Sundry Debtors A/c Dr. Added to Sales on the Credit
To Trading Side.
q) i) Capital expenditure Capital Expenditure A/c Dr. To Deducted from Revenue Dedu
included in Revenue Revenue Expenses A/c Expenses on the Debit Reve
Expenditure on th
q) ii) Revenue expenditure Revenue Expenses A/c Dr. Added to Revenue Expenses Adde
included in Capital To Capital Expenditure A/c on the Debit Side. Reve
Expenditure on
Side.
r) Bills Receivable dishonored Sundry Debtors A/c Dr
To Bills Receivable A/c
Sr. No. Adjustment Adjusting Entry Accounting Treatment in
u) i) Revenue Expenses Revenue Expenses Added to Revenue Added to Revenue Shown on the asset side by wav of deduction from
included in A/c Dr. Expenses on the Expenses on the Deferred Expenses.
Deferred To Deferred Expenses Debit Side. debit side.
Expenses A/c
u) ii) Capital Receipts Revenue Receipts A/c Deducted from Deducted from Shown the liability side by way of addition to
included in Dr. Revenue Receipts on Revenue Receipts on Capita! Receipts.
Revenue Receipts To Capita! Receipts the Credit Side. the Credit Side.
A/c
v) Revenue Receipts Capita! Receipts A/c Added to Revenue Added to Revenue Shown on the liability side by way of deduction
included in Dr. Receipts on the Receipts on the from Capital Receipts
Capita! Receipts To Revenue Receipts Credit Side. Credit Side.
A/c
Commission to Profit and Loss A/c Shown on the Debit Shown on the liability side by
working Dr. Side. way of addition to P's Capital
partners as a To P's Capital A/c
percentage on
Gross Profit or
Sales
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Capital Account 2,03,000
Drawings Account . 15,000
Freehold Land and Premises 90,000
Plant and Machinery . 40,000
Loose Tools 3,000
Bills Receivable 3,000
Stock 45,000
Purchases 51,000
Wages 20,000
Carriage 1,500
Salaries 5,000
Rent, Rates and Taxes 2,800
Discount and Allowances 1,500
Bills Payable
National Bank 20,000 3,800
Cash in hand 400
Sundry Debtors 45,000
Sundry Creditors
Repairs and Replacements 1,800
Purchases Returns 40,000
Extension to Premises 7,500
Bad Debts 1,200 2,650
Advertisement 500
Goods Sold
Sales Returns 2,000
Gas and Water _ 800 1,15,000
Furniture and Fixtures
1,200
General Expenses 800
Printing and Stationery 450
Income-Tax 5,000
3,64.450 3,64,450
To Salaries 5000
Add : Outstanding 450
To Rent, Rates 2,800
& Taxes
Less: Pre-paid taxes 200
To General Expanses
To Printing &Stationery
To Advertisement
To Bad Debts
To R. D. D.
To Reserve for Discount on
Debtors
Discount and Allowances
To Repairs Replacement
To Depreciation
Plant & Machinery 2,000
Loose Tools 450
Furniture 60
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To Net Profit transferred
to Capital
1,73,000 1,73,000
55,850
5,450
2,600
800
450
500
1,200
2,250
1,069
1,500
1,800
2,510
35,721
55,850 55,850
Balance Sheet
As at 31st March, 2004
Liabilities Rs. Assets Rs.
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CONCLUSION
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